AAII Guidelines for Adding and Removing Stocks Part 2

Last weekend I shared Part 1 of the recent AAII articles on selection and timing criteria for adding and removing stocks. This weekend I bring you Part 2 below.  As always you will need to be a member of AAII to access the full article, which I assume you all are, and it may be worth joining just for this mini-course on the key elements of trading.  Enjoy the weekend.  

9-1020 AAII Buying and Selling Part 2

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	AAII Investor Update THURSDAY, SEPTEMBER 10, 2020
	Dear Member, Last week, we started the conversation about guidelines for determining when to add and remove a stock. We’re going to continue the conversation this week with a focus on investing styles. Specifically, we’re going to address value, size and growth investing. (Part 1 includes a list of the broad characteristics successful stock investing strategies share. If you missed it, you may find reading it to be helpful.) Value investors seek to buy stocks trading at a perceived discount based on one or more metrics. Perhaps the most commonly used metric is the price-earnings (P/E) ratio. This ratio is simply the current share price divided by earnings for the last four quarters (aka, trailing 12 months or TTM). There are several other valuation measures, including the price-to-book (P/B) and the price-to-sales (P/S) ratios. Some strategies use just one valuation measure. AAII’s Price-to-Free-Cash Flow screen is one such strategy. It requires a stock’s price-to-free-cash-flow (P/FCF) ratio to be below its five-year average price-to-free-cash-flow ratio and the industry median. No other valuation measure is used by the screen. Others combine two or more valuation measures. AAII’s Model Shadow Stock Portfolio requires qualifying stocks to have a price-to-book ratio no higher than 0.90 and a price-to-sales ratio less than 1.2. The deletion rules for the portfolio require a stock be removed if its price-to-book ratio rises to three times the initial criterion. Under the current rules, this would be a price-to-book ratio of 2.7. The ratios are periodically adjusted to reflect prevailing market conditions. The philosophy never changes: Buy when the stock is really cheap, sell it when it is no longer a deep value stock.