Thursday, June 27, 1996
Doing Your Homework
or
Meet The Mailman At The Door
by MF Runkle

Recently, a stock I own had a huge run up. "It must be overvalued," I thought. I did what I thought was the sensible thing. I sold part of my position. In fact, I felt dumb for keeping some of it when its price dropped somewhat. Well, I had to invest the profits, and my wife had a stock she liked. I wasn't going to be stupid this time. I listened to her, but I did some research too.

I checked out the stock my wife chose a couple of different ways. I used the 2-year PEG method; I plotted the price of the stock vs. its earnings to see if they followed each other; and I used an equation developed by Ben Graham that takes into account earnings, current interest rates, and projected growth. Being the computer geek that I can be, I did all this on my trusty Microsoft Excel spreadsheet. This company my wife liked looked good, so I bought it. This Fribble isn't about my wife's pick though. It's about some surprises I had.

Since I had all these equations in a spreadsheet, it was nothing to download First Call's Earnings Estimates, and check out anything else I could think of. There were some surprises. The stock I sold was still very much undervalued according to all the criteria I mentioned above. Even more so than the stock I bought. Wow! Then I checked out some other hot stocks. Some were good, but a good number were very much overvalued. Seems everybody thought they were hot.

Almost all of my blue chip stocks were overvalued. They probably trade at a premium because of the stability of the companies they represent. Also, the prices of the most overvalued of the blue chips I own have been stagnant for a while now. No wonder. This was getting to be quite an eye opener.

Now, I also decided I needed to get rich quick. So I used some of my cash to buy this one stock I caught on the stock boards. Boy, everybody was enthusiastic about this one. I checked its earnings, and they were negative. Well, that's typical for the early stages of a growth stock. No problem. Did I put it in my trusty spreadsheet? Nah! It wasn't that kind of company. I put in a market order, and could hardly wait until the market opened. The stock went up $2 from what I paid for it by 10:30 AM, and I sold it for $5 below what I paid for it a couple days later. OOOH! People posting to the stock folder insist it's a good company, and it may be, but I felt better backing out. (MF Wired was very sympathetic to me on this. He called me a "moron." My wife called me worse.)

What did I do with my cash? Well, I put it back in the company I sold in the first place. I didn't tell my wife; it wasn't that important. The only one who really made out was my broker in all this. I should have done the same type of analysis on my stock I was selling that I would do on a stock I was buying. I wouldn't have sold, saving me commissions, and invested in a company I knew little about, not to mention saving the losses I had in the stock. Finally, the hype in the stock folders doesn't take the place of analysis. Such informative posts as BUY! BUY! BUY!, or SELL NOW, BEFORE THIS BECOMES A PENNY STOCK! don't take the place of Foolishly checking earnings, growth rates, and so on. No matter what, it's your money, and you have to do your own research. That is the essence of Fooldom. OH NO! My wife is reading my buy confirmation. I think it's time to go cut the lawn.

Transmitted: 6/27/96