With the markets getting clobbered over the last year, traditional methods for measuring the value of a stock have been thrown out of whack. That doesn’t mean you can’t rely on those indicators, but it does mean you need to keep certain things in mind.
Let’s take dividends as an example. Many companies have slashed or completely eliminated dividends to keep more cash on hand to weather the downturn. Does this mean their current dividends should be used to measure their future income streams? Of course not.
It’s better to isolate this period from your analysis and look, instead, at a company’s historical dividend payments. Take a look at what the company has paid out over the last five years or so. If it has a steady and/or increasing dividend – with the only blemish being the most-recent quarters – then it is probably safe to assume that once the economy gets turned around, its dividend stream will return to normal.
Don’t forget that we are in the midst of the worst market in decades. Strange things are happening, but it will eventually return to normal. Don’t miss out on long-term investment opportunities by focusing too much on current conditions.
[Ed. Note: Finding fundamentally strong companies is a good way to prosper despite the market's condition. But you can also make money on companies that are ready to crumble. Learn how to spot the "red flag" signals that could predict (with as much as 92 percent certainty) when a company's stock is going to tank.]
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