Question:
Your analysts probably have more sophisticated information used when evaluating stocks, but for us average guys who like to look at information, do you have any opinions about various rating services/systems, such as, Value Line or Yahoo Finance? When I click on “analyst opinions” on Yahoo, it gives me a numerical score, or at Schwab, where they give a letter grade of A B C D E to individual stocks?
I’ve also read an article recently that related that EMC had “fallen from grace” among investors. Do you folks still have EMC rated as a strong hold?
Answer:
When you are using an outside source for an opinion on a stock, you should always check to see what the information being provided means. The good thing here is that most information providers will define their ratings or rankings to make it somewhat clear what they represent.
In this specific case, you want to know about Value Line, Yahoo Finance and Schwab.
Taking them in order, Value Line provides a large amount of information. We actually use their Safety and Financial Strength ratings to narrow the pool of approximately 9,000 stocks available on all stock exchanges down to what we call our Henssler Universe from which we then build our recommended portfolios. For a specific stock, the Safety Ranking will be from 1 to 5, with 1 being the best rating (safest), while the Financial Strength Rating ranges from A++ (best) down to C (worst). The safety rating is derived from the Financial Strength and the stock’s Price Stability.
Financial Strength is just as the name implies a measure of the financial position of the company. Low debt or the ability to easily service its debt, high levels of working capital, solid earnings potential, etc would be the attributes of a financially strong company. Again, using the financial strength and safety ratings, we choose a universe of companies considered high quality. If you just want the opinion of Value Line on the potential for price appreciation, that is provided in the body of their report opinion and stated plainly, something like, “We believe this issue has the potential to outperform its peers,(the market, etc.).”
As for Yahoo Finance, the Analyst Opinion is a third-party source, which is Thomson Reuters. The Thomson rating is a numerical score from 1 to 5, the lower the number, the better, which actually reflects the average analyst opinion on the stock. If one of the analysts polled by Thomson rates the company a “Buy”, it gets a 1 rating from that analyst; a “Sell” opinion would offer a 5 rating. Once all opinions are made, the numerical average provides the rating you see in Yahoo Finance.
As for Schwab, they provide a large amount of information including S&P Star rating (1 to 5, higher the better) which reflects the S&P analysts’ opinion for timeliness, a couple of specific analyst opinions including Ned Davis (Buy, Hold, Sell) and Argus 12 (Buy, Hold, Sell) and a Reuters Research Opinion (Sell, Underperform, Hold, Outperform, Buy), all of which seem pretty straight-forward.
We do not use the Yahoo Finance’s nor Schwab’s analyst opinions.
As for EMC Corporation (NYSE: EMC), we recommend buying the company at this time. The company is a leader in storage devices. We believe their growth potential will come from the continued build-up for cloud computing, data center expansion and their product replacement cycle going forward. EMC has lost some favor, but, in our opinion, that looks like a buying opportunity, as the P/E, at 19.4 is below the five-year average of 22.14. Additionally, earnings are expected to grow by a little better than 14% in the next three to five years, which is better than the past five years, which saw earnings grow by 12%.
Question:
My teenage son is a HUGE Nascar fan. One of the ways we support his interest AND try to teach him about investing is by purchasing him shares of stock for the company that sponsors his favorite driver – Matt Kenseth. Last year Kenseth’s sponsor was Best Buy (and you know how they did for the year). This season Kenseth’s new sponsors are Husky and Dollar General. Of the two, which is the better investment? These are for my son…the time horizon is out there.
Answer:
Husky is a line of hand tools, pneumatic tools, and tool storage products. It is the house brand of The Home Depot (NYSE: HD), where it is exclusively sold, so in this case, we will address Home Depot. The company has had quite a run with the housing market, first with homeowners remodeling and repairing their homes in lieu of selling, then with the purchase of foreclosures that made renovations affordable. Currently the company looks relatively expensive; however, it is expected to grow by 16% in the next three to five years. Home Depot meets our financial strength criteria.
Although, looking at the numbers, Dollar General (NYSE: DG) looks to be more attractive, except Dollar General does not meet our financial strength criteria. One could argue that our financial strength criteria isn’t everything, considering “low quality” stocks outperformed “high quality” stocks all last year.
Over the long term, we still recommend Home Depot from a financial point of view, as we believe an investor should seek the company with the best financial strength. However, that is not to say that Dollar General is a bad company. It merely does not meet one of our first criteria.