Business: Risky Business: How I choose my stocks

By Jeff Lipsey

Just because I am a business major does not automatically make me the best in the world in everything business related. So when I decide to recommend a stock for my Stock Pick of the Week and purchase a stock for my own portfolio, I look at a few factors that help my decision.

The first thing I consider when looking at the firm is the amount of cash the company has on the balance sheet. I am a long-term investor; I invest with the intent of receiving dividends that act as interest payments as well as earn a capital gain. The amount of cash a company has on hand directly relates to the ability of the firm to pay dividends. If a firm doesn’t have the cash to pay the dividend, then they must borrow the money to pay or neglect to do so entirely; both are not good signs.

Secondly, I like to look at the amount of debt a company has in relation to the equity. I don’t like to have the profits owed to me, the shareholder, given away in the form of interest. The smaller the debt/equity ratio the better, however, the size of the firm also matters.

Another thing I look at when choosing a stock is the Price/Earnings (P/E) Ratio. For those who do not know, the P/E Ratio is simply the Market price of the stock divided by the earnings per share. The lower the P/E Ratio, the better and when taken into consideration with other measures, this ratio can be very effective in determining the value of a stock.

I also like to do some non-monetary research as well. By looking at the inherent risks of the company, I am able to determine if the results that occurred previously are still able to occur in the future. For example, an inherent risk in my Stock Pick of the Week would be the regulatory issues that face Congress. If Congress ever decides to ban online gaming, or even make the law more clear, then PartyGaming could face huge losses in the United States. The chance of this happening is considered an inherent risk, and in regards to my recommendation, I don’t think it is very likely.

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Finally, I like to determine the future potential that this stock will actually go as high as the company will say they will. This itself is a rather subjective measure and involves a lot based on market demand, competition, quality of product, management and even the price of the product.

A stock does not have to have everything I listed above for it to be an investment-quality stock. Also, other factors exist that can help you choose your own portfolio, such as the length of investment and the amount of risk you are willing to take. Obviously, you can use other ratios and measures to determine whether or not to purchase a stock, the ones that I listed are what I use in determining my recommendations. On every stock purchase, I encourage research on your own and not just listening to the ‘analysts.’

Stock Pick of the Week

I feel bad recommending yet again another online poker site, the second in three weeks, but I can’t help myself. This week I am talking about PartyGaming (PRTY.L), parent company to the largest online poker network: Party Poker. On Tuesday, PartyGaming stock dropped 33 percent after news that future growth will occur at “rates lower than substantial rates previously experienced,” according to their press release. Considering that revenue itself is up 89 percent this year and PartyGaming has a profit margin of 36 percent, the stock dropped too much too fast to accurately value this company. I believe this company is now significantly undervalued and recommend a buy. Current price: $106.

Jeffrey Lipsey is a senior in Business. His column appears on Thursdays. He can be reached at [email protected]