Saturday, August 11, 2012

The first stocks

My initial stock purchases were made on August 1, 2012. Exactly a 10 days has elapsed between then and the market close yesterday. Here is a summary of what I invested in and what they are worth now.
Company Ticker Bought Price/Share Current Price/Share % Gain
Cisco Systems Inc. CSCO 15.86 17.70 11.60%
Hewlett-Packard Co. HPQ 17.87 19.41 8.62%
JP Morgan Chase JPM 36.06 36.92 2.38%
NRG Energy NRG 19.81 20.88 5.40%
PG&E Corp. PCG 45.85 45.39 -0.99%
Xerox Corp. XRX 6.94 7.17 3.31%

So far, I have a 4.51% return overall. If we compound that 36 times to extrapolate my portfolio's worth in a year, we arrive at a staggering 490% yearly growth!

Like a boss
Ok, while that will never happen, it's certainly an interesting prospect...

Now that we're back to reality, let's talk about something more interesting like why I chose those stocks in the first place. I think one of the best ways to illustrate my strategy is look at some of key financial statistics. Below I have listed both stocks that I currently own and a some hot stocks that I did not buy. Go ahead and take a gander and see if you can notice any patterns.

Company Price/Share Price/Book Price/Earnings
Cisco Systems Inc. (CSCO) 15.86 1.8 11.8
Hewlett-Packard Co. (HPQ) 17.87 0.93 7.0
JP Morgan Chase (JPM) 36.06 0.77 8.1
NRG Energy (NRG) 19.81 0.59 19.1
PG&E Corp. (PCG) 45.85 1.4 24.8
Xerox Corp. (XRX) 6.94 0.78 7.7
Facebook Inc. (FB) 21.04 10.88 121.74
Zipcar Inc. (ZIP) 10.17 1.45 417.79
Apple Inc. (AAPL) 611.21 7.54 14.61
Zynga Inc. (ZNGA) 2.84 1.22 ~200

Let's focus on one column at a time.

Price/Share

This one is pretty simple. The price per share is simply how much you pay for a single share of the company. Different companies have a different total number of shares, so a share of each company represents a different percent ownership.

In this case, I did not even consider buying Apple because the price was simply too high. The minimum amount I could invest in Apple is one share (there is no such thing as fractional shares), which would already run me for over $600.

Price/Book

The book value of a company is the value of all its assets minus liabilities. Roughly speaking, this measures how much the company if it were to sell everything it owns (inventory, equipment, land, etc) and pay off all debts.

The price/book (P/B) ratio is defined as
\[
P/B = \frac{\text{Market capitalization}}{\text{Book value}}
\]

Market capitalization is just a fancy term for what the entire company is worth on the market (i.e. price per share times total number of shares).

A low P/B ratio is generally a good thing. It means that a large percentage of the company's price is backed by real assets and low debt. You'll notice that most of the stocks I own have a low P/B ratio, some of then even less than 1... This means that I bought the company less than what it would be worth if it liquidated everything (roughly speaking).

Price/Earnings

The price/earnings (P/E) ratio is one that you hear about a lot. As you can probably tell by the name, it's simply the price of the company divided by it's earnings (over one year).
\[
P/B = \frac{\text{Market capitalization}}{\text{Yearly earnings}}
\]
A low P/E ratio means that with the current earnings rate, it will earn back what you paid for sooner than a company with a high P/E ratio. Thus a high P/E ratio means that investors are expecting an increase in earnings in future.

Facebook, Zynga, and Zipcar have an obscenely high P/E ratios. At their current earnings, I would have to wait 400 years before Zipcar makes enough money for their bank account to break even with what I paid for. I think it is folly to believe that they can justify a high growth to make up for this.


2 comments:

  1. How are you making your purchases, and what kind of brokerage fees do you have to deal with?

    ReplyDelete
    Replies
    1. Right now I have free trades from my broker OptionsHouse. Once I use up my free trades, OH also has one of the lowest brokerage fees overall ($3.95 per trade) compared other brokers (e.g. Fidelity is $7.95/trade).

      Delete

Obligatory Disclaimer

The author is not qualified to give financial, tax, or legal advice and disclaims any and all liability for this information.