Ask the Fool

Valuation Shortcuts

Q: I may never get around to mastering all the math needed to figure out if a company is over- or undervalued. Are there any shortcuts? — G.H., online

A: First, understand that while there are lots of calculations that might lead you to be confident of a stock’s intrinsic worth, that worth will still be an estimate. A handful of smart stock analysts are likely to come up with different numbers for any company they study, because they all make divergent assumptions, such as the company’s growth rate.

That said, one simple measure is the price-to-earnings (P/E) ratio, which divides a company’s stock price by its annual earnings per share (EPS). A low P/E ratio suggests a low valuation, though it’s often best to compare a company’s P/E ratio with those of its peers and with its own five-year P/E range.

An even rougher approach is to look at market capitalization, or market value, which represents the total value of all of a company’s shares outstanding. Tesla, for example, recently had a market cap of $92 billion — more than Ford’s $36 billion and General Motors’ $51 billion combined. If that sounds unreasonable to you, given your expectations of the other companies’ futures, you’d consider the company to be overvalued.

Q: Where can beginning investors like me learn about upcoming initial public offerings (IPOs)? — H.L., Collierville, Tennessee

A: New investors should steer clear of IPOs. Even seasoned investors might want to avoid them — at least for their first year or more on the public markets.

Newly public companies tend to be quite volatile at first. University of Florida professor Jay Ritter has found that on average, IPOs underperform the market in their first three years.

Fool’s School

Women’s Financial Edge

When it comes to investing, women are generally less confident than men. One study by Merrill Lynch and Age Wave found that while the vast majority of women were confident about paying bills and budgeting, only 52% expressed confidence about investing — compared with 68% of men.

That’s a shame, because women are likely to be better investors than men. A 2016 survey by Fidelity Investments found that only 9% of women thought they would outperform men at investing; yet when Fidelity looked at 8 million customers’ accounts, women were found not only to save more, but also, on average, to earn higher returns.

Saving more is a great way to build wealth faster, but it’s not the only reason women do well with money. Women also trade less frequently; Fidelity found that men trade 55% more often. Frequent buying and selling of stocks is rarely wise; it suggests a low level of conviction about various companies’ prospects and a lack of commitment to them. Impatiently jumping around, hoping to earn profits quickly, is more like gambling than investing.

It’s important for women to take the time to learn more about money management and investing: At some point, many women will be on their own — financially and otherwise — as single people, divorcees or widows. They (and men) might start with books such as Jean Chatzky’s “Money 911: Your Most Pressing Money Questions Answered, Your Money Emergencies Solved” (Harper Business, $17), “Smart Women Love Money: 5 Simple, Life-Changing Rules of Investing” by Alice Finn (Regan Arts, $26) and “The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns” by John Bogle (Wiley, $25).

My Dumbest

Investment

Don’t Sell Good

Companies

My dumbest investment moves of the past decade were selling my shares of Microsoft at $33 and my shares of Take-Two Interactive Software at $15. The lesson I learned? Don’t sell good companies, stupid. — M.J.J., online

The Fool responds: With Microsoft shares recently trading near $166 and Take-Two Interactive shares near $129, those sales are understandably painful — in retrospect. But think back to before you sold them. What was your reasoning? Did you expect much less growth from them? Did they seem rather overvalued? Had you found much more promising investments into which to move your money? Those can be good reasons to sell a stock, so don’t kick yourself if any of them applied.