Classroom Stock Portfolio +19.79% Per Year Beating S&P 500 (13 Best Dividend-Growth Stocks)-Week 122 

When trying to determine if a stock is over or under-valued, we want to make sure that our methodology is looking at the company’s future and not ONLY the recent past. This is so we can avoid buying a company whose business is about to tank. For example, if a drug company’s main source of profits is a single drug and that drug is going to go off patent, simply looking at the company’s Price-to-Earnings ratio won’t give you a warning sign. So we don’t use a simple formula that looks at past data to determine if a stock is undervalued; we need to look into the future which involves making estimates. And that’s where utilizing the time and effort of “trusted” analysts comes into play. Their full time job is to look at each individual company’s future outlook, something we obviously can’t do since we start with a database of 6,700 companies. And I say “trusted” analysts because many analysts are NOT independent and are simply courting companies with “buy” ratings on their stock in order to earn that company’s investment banking business (one such analyst company notoriously has a “sell” rating on only 0.4% of the stocks that they cover; when everything is a “buy,” then that company’s ratings are worthless). We are always tweaking our methodology, but for valuation, we currently use the target prices of independent analysts (preferably multiple analysts employing multiple philosophies, such value and growth-at-a-reasonable-price) and combine that with the company’s risk profile to determine the company’s margin of safety (ala Warren Buffett and Benjamin Graham). Margin of safety is important because we’d rather invest in a low-risk stock that is 10% undervalued rather than a high-risk stock that is 13% undervalued. And of course, from there we do a deep dive into the company’s accounting practices to look for red flags/accounting irregularities to hopefully avoid frauds like Enron. And we look at dividend sustainability, growth potential, buy-backs, etc.