Evaluate your stock's downside risk with five measures

September 1, 2004
Joel M. Blau, CFP

Mr. Blau is chief executive officer of MEDIQUS Asset Advisors, Inc., in Chicago. He can be reached at 800-883-8555 or blau@medquis.com.

Q Is there any way to determine the best time to sell a stock if it has not performed as well as expected?

Q Is there any way to determine the best time to sell a stock if it has not performed as well as expected?

A Gauging how far a stock might fall before hitting its bottom price is certainly a difficult, if not impossible, task. While analysts and experts spend much time forecasting how high the price of a stock is "expected" to climb, very little attention is given to determining the ultimate downside risk of the investment.

There are several possible approaches to calculating a stock's downside potential. The five most common valuation measures for stocks are: price-to-book value, price-to-earnings ratio, price-to-sales ratio, price-to-cash flow ratio, and dividend yield.

Also take into account factors such as a company's fundamentals, any positive or negative events that have occurred since the last earnings report, and a stock's long-term growth potential. Valuation models provide insight for comparisons, and the knowledge of what they represent may assist in making decisions based on analytics as opposed to emotions.

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