Before You Buy: Ways to Assess Stock Performance

When you make a major purchase, you want to be sure that what you’re buying is worth the price. The same is true for stocks—especially for investors that are taking a long view. 

So, before you buy, do a little homework and ask yourself these questions:

• What do you know about the company or industry?
• Is it an older, established company or a start-up? 
• Is the company profitable, or does it seem to be in trouble?
• Does the company pay dividends or reinvest its profits?
• Does the stock have a high growth rate?
• If the price is low, do you know why? Is it because investors and/or advisors expect poor earnings in the future?
• Is the stock trading at a discount, and if so, why?

Now that you’ve answered these questions, it’s time to get a little more specific. 

Consider total returns

Some investors are tempted to evaluate a stock based on its returns from the start of the year. But that’s not the most accurate method. Put simply, it’s too short a time. Instead, research its performance over different periods, including:

• year to date (YTD)
• 52 weeks
• average annual return
• 5-year average annual return

Compare the stock’s performance to the overall market

If a stock has generated a 10% return, is it a good investment? That depends. Compare its return to the rest of the market with market indexes (Dow Jones Industrial Average, S&P 500). If this stock’s returns are on average less than the returns of the major market indexes, you may want to evaluate the risk of betting on one stock rather than a market-tracker. 

Compare it to the competition

You’ll want to know if the stock is doing as well, better or not as well as others in the same industry. Even if a stock is outperforming the market, it could be underperforming compared to competitors, and that could be a red flag. 

Tip: Make sure you’re comparing the stock to similar competitors. For example, don’t compare a small company to a large one with a much longer history.  

Two simple tools that may help are:

• Stock symbol lookup at marketwatch.com 
• Comparison tool at barchart.com

Enjoy easier investing

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