Part 1 – How to value a stock price to see if it is worth buying that has worked for me

[0:02] good morning everyone my name is jeremy forrest with premiere pro wash and seal and today we're going to do something a little different i've had videos showing how we wash or how we seal and those kind of things but something that's very important to me is investing i as an individual i have been buying stocks for over 20 years and i know right now the market's kind of volatile and a lot of people are either really scared or they're interested in buying stocks so i thought that i would put

[0:32] together something that hopefully helps you value a stock whether it's a good buy today or not i see a lot of people they get on facebook or they get on any of these social media platforms and they'll see a stock that once was a hundred dollars and now it's fifty dollars and so they just assume that's a good buy they buy it and they hope the price goes up that's not investing that's just hoping and i've been a victim of that myself

[1:03] and i've made money that way and i've also lost money that way but i want to show you a way to value stocks that whenever i apply this principle i've always done very well and just to give you a little synopsis of my performance if you look at history they say that only 12 of mutual fund managers or money managers are able to beat the stock market over a 10-year period or more

[1:35] in essence that means that 88 of people will not beat the stock market over a 10-year period or more i've been investing for over 20 years and i have personally beaten the market over that period by a few percentage points so i think i have some validity although i'm not a financial advisor i do want to admit that i have no financial training i do have an mba degree but that doesn't mean that i have financial training i've done a lot of reading i read every

[2:06] single day something about investing i'm a huge warren buffett fan so i'm definitely a value investor and this is something i came across over 20 years ago and quite honestly i haven't seen it since i haven't seen a video on it i haven't seen a book about it i cannot even remember where i saw this it was something to do in regards to warren buffett i do remember that i found this piece of information over 20 years ago at a barnes noble in

[2:37] wichita falls when i was stationed there and when i saw this for the very first time a huge light bulb went off because many of us again we see a stock that's 50 percent of what it was four months ago and we think that's a buy and so we run out we we spend our life savings buying that stock and we're essentially hoping that it goes back up i want to open your mind up to a different way of valuing and again when i use this principle it has rarely rarely ever failed me so

[3:10] let's get started you'll see that i have a bunch of numbers up here the 1 through 10 on the top row that represents uh the number of years so one year one year two year three and so on so when i'm looking at a stock if i have interest in it there's several things besides this that i look at obviously ceo and management is very important but when it comes to the metrics before i dive deeper into other

[3:41] important metrics this is one of the first things i do to see if that stock or that business is even worth investigating into so one of the things i look at is i look at the last 10 years of earnings per share growth that's eps and so when you see 10 years ago year one this had earnings per share of three um the second year 3.5 4.03 and so on you see it incrementally climbing and that's

[4:12] that's that's positive that's a that's a trait that warren buffett looks for as well you want to see earnings per share you want to see it consistently rising i don't want to see 3 here 2 2.5 here um four dollars a share here back to two dollars a share that's too inconsistent for me i'm not saying you can't make money buying into a stock that way i'm just sharing with you my preferences i prefer to see that

[4:43] earnings per share consistently growing over that 10 years and growing at a healthy rate i don't like sporadic growth i do understand like during pandemics and things like that on year 10 closer to 2020 or 2021 that earnings per share might have shot down but i can take a year or two where it shoots down but again i don't want to see it every other year as sporadic i like to see it uh consistently climbing so if

[5:14] you look at this it goes from three dollars a share ten years ago to ten dollars and 48 cents a share ten years later if you break that down over the last 10 years the earnings per share growth has been roughly 13.32 so that's that's good especially for a well-established business that's what i'm after i'm not after small businesses speculative uh stocks i am now because i've built my dividend

[5:45] i've built my foundation so i can be a little bit more riskier than i will then i would be when i first started out i believe strongly in building a strong dividend foundation of a portfolio versus going out buying high-growth stocks i did it opposite i built my dividend portfolio and now i'm using that money to kind of tinker around with a little bit more riskier stocks but my foundation 100 is in deep value uh dividend stocks so

[6:15] from one year one to year 10 we had a earnings per share growth of 13.32 then i'll break that down a little farther i want to see if that stays consistent over the last five years the earnings per share growth has been 11.39 percent and over the last three years that earnings per share growth has been 9.10 so i see that in the last three five and 10 years i've got growth earnings per share growth somewhere between 9 to 13

[6:47] that's good like i said it's consistently growing it is as you can see slowing down a little bit over the last five years five years it was 11.39 the last three years it's been 9.10 so um roughly around 10 10 earnings per share growth uh is what i will calculate later on down here this next row of numbers you can see the pe and this is what is just really mind-boggling to me

[7:17] pe stands for price per earnings and when you see a company that's got a pe of like 100 or 150 or even 80. i see people all day long on social media encouraging their friends and family to go out and dump all their money into these high growth stocks with pes in the 80s in the hundreds i've even seen in the three 400s that's not for me um i'm not saying you

[7:49] can't make money that way but i'm not willing to spend that basically when you got a pe of a hundred that means you're willing to spend a hundred dollars for every one dollar that company makes you there are there are a few teslas out there in the world that ten years ago that might have worked but i like the percentages in my favor um i actually prefer companies with a p e less than 20 but for demonstration purposes i just want to show you what

[8:19] this means so over the last 10 years you can see they've had a pe this company has had a pes from as low as 21 to as high as 30. but if i look at the average over the last 10 years the pe has averaged 21. broken down a little farther out there over the last five years it's averaged 24 and over the last three years it's averaged 21. right in line with the 10-year average so that tells me that i

[8:51] can realistically expect that this stock will sell um for a pe somewhere around 21. now putting this all together how do i know if the business or the stock i'm looking at today is worth buying and for me i'm not a day trader i've never bought a stock with the intention of selling it within a year again it goes back to my warren buffett philosophy i believe in long-term value so i always have the mindset that when i

[9:21] personally buy stock i'm buying it to never sell now is that realistic no i've bought and sold plenty of stocks but that is my intention usually when i sell is because that stock has increased in price way beyond when i anticipated it so i take my profits in but anyway how do i know if this stock that i'm interested in today is worth buying let's say that the stock price today is

[9:52] 125 well if i look and today's in 2022 it's got an it's got an earnings per share of 11.74 i take that 11.74 now and i project out 10 years with an estimated growth of 10 so i like to be a little conservative you can see that the earnings per share has ranged between nine and thirteen

[10:23] so i didn't use 13 i didn't use nine i use ten so if we start out right now at earnings per share in today's dollars at 11.74 and over the next 10 years if i achieve the same growth rate as the history of this stock somewhere around 10 percent i can guess that 10 years from now i can i can realistically guess that the earnings per share of that stock will be

[10:53] 30.45 so it'll grow from 11.74 now at 10 year growth of around 10 earnings per share it's going to be about 30.45 now with that 30.45 i look at the last 10 years of the pe price to earnings and you see over the last 10 years the pe has averaged 21. over the last five years it's been up to 24

[11:25] and again at the last three years i like to do this to make sure there's consistency um i don't want to see the last three years it's it's it's 35 and eight it's it's too inconsistent so i like to see that this is pretty consistent between 21 and 24. so in the last 10 years pe has averaged 21 in the last three years it's also averaged 21. so i can realistically assume that 10 years from now as long as we continue to grow our

[11:56] earnings per share growth rate at around 10 percent then i should expect a a earnings per share at that 10 years from now at 30.45 well when i multiply that by 20 because again i like to be a little conservative that tells me 10 years from now i'm sorry i multiplied it by 21. uh that 30.45 times a pe of 21 gets me a future value of that stock at

[12:28] 639 okay that sounds pretty good but is it worth investing in for me if you know about the history of the stock market you know long term it gives you an average of around 11 percent so i'm not going to invest in an individual stock if it can't return me at least 11 because if you can't then i might as well just invest in the index um so i like a margin of error so that's why for me 15 is my minimum

[12:59] i'm looking for a return over 10 years of at least 15 that way i get a little bit of margin of error and that has worked very good for me so again going back 30.45 future earnings per share times an average pe of 21 equals 639 dollars 10 years from now today that same stock that i'm interested in it sells for 125 so i use my little calculator you can do

[13:30] this online there's lots of calculators out there a compound interest calculator that will uh speed this up for you but if i take today's price at 125 and 10 years from now i'm estimating it's going to be somewhere around 639 that tells me that i should expect around almost an 18 return on my money year after year if that stock pays a dividend then those dividends are just icing on the cake let's say that they pay a four percent

[14:02] dividend and you reinvest that dividend over that time then you can realistically expect maybe 19 or 20 over the next 10 years into that stock again if you reinvested the dividends which is something that i strongly advocate all right so 17 72 17.72 percent over the next 10 years it's definitely got my interest again this isn't the only thing i go off of but it has met one of my main criterias so now i can dive uh deeper into that stock

[14:35] and start you know looking at the financials and whatnot but let's pretend that the stock instead of selling for 125 today it's actually selling for 265 well if i take the price today of 265 dollars and i project that in 10 years from now it's going to be worth 639 dollars what does that average out per year and i already did the math but it averages out to 9 a year

[15:05] so for me that's a no-go again when the market returns 11 um there's no sense in me investing into a business or even looking into investing into a business that's only gonna return nine percent my margin of error what i'm looking for minimum of fifteen percent so there's more to it than this but i hope that if you take this little bit of information that i've given you that this will at least give you an idea

[15:36] of how to value a stock because that's probably the thing that i see that lacks the most on social media is people are just out there guessing and they're buying a stock because morningstar gave them a high rating or again they see that it's 50 of what it once was and they rush out and they spend a lot of money buying that stock but they had no idea how to value it this isn't a perfect system but again it has worked very very well for me i wish i knew the book i have looked and searched for that book over and over

[16:07] over the last 20 years i haven't seen any videos on this um but if it helps you near as much as it helps me then that's the success so i hope you enjoyed this video i will break down some more criteria that i'm looking at when i'm looking at a stock if i have some interest in that thank you