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  1. Member
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    article from WSJ

    Dear All,

    Below is a paragraph I came across from the Wall Street Journal. I am a little confused as it mentioned that investors should consider three strategies: Valuation-focused investing, dividend-yield investing and safety investing.

    Then it goes on to mention Apple which it says might not leap out as a value play. Then goes on mentioning Intel, GE, IBM and Ford. Does the author mean that GE,IBM, and Ford are stocks suited for valuation investing? or he simply means that they are trading at higher prices than they should be?

    Could anyone help explain the article? Thank you very much.

    "Investors would be wise to consider three strategies in this tumultuous environment: valuation-focused investing, dividend-yield investing and, yes, a bit of safety investing.

    In terms of valuation, the run of strong earnings combined with declining stock prices translate into some attractively priced stocks. The S&P 500's price/earnings ratio, based on forward earnings, stood at 13.15 on Thursday, compared with a long-term average closer to 16.

    While a company like Apple might not leap out as a value play, it is trading at 14 times forward earnings after its stock has slid 4% since the sell-off began two weeks ago. Apple is sitting on $76 billion in cash, so a dividend could be in its future. And in the last quarter it sold every iPad it could make, not to mention zillions of iPhones.

    Intel is trading at 9 times forward earnings, and is buying back shares and promising strong revenue growth. General Electric is trading at 12 times earnings, IBM at 13 times and Ford at just 6 times."

  2. konungursvia's Avatar
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    Re: article from WSJ

    Valuation focused investing means buying shares in good companies whose share price is unusually low, because this means it is likely to go up. Yes, he is saying those companies have P/E ratios that mean the stock is underpriced, so they are likely to rise for a long time. Typically a P/E ratio of 25 to 30 is a normal level, so those companies are worth more than their share price would seem to indicate, based on their high earnings.

    Dividend-based buys focus on blue-chip (solid) stocks like Coca-Cola, which pay a regular dividend you can trust, but may not go up significantly in price.

    Safety investing means spending some of your money on solid companies even without good dividends, for stability in your portfolio.

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