So many people get caught up when they see an “exciting” stock.
They think they’ve stumbled onto the next Starbucks and aggressively buy up a lot of shares.
Sounds like a good plan, right? After all, we want to buy stocks at a low price, before they take off.
Well, yes…and also no.
You want to find a great price, definitely! But when it comes to risk-free investing, you only want to invest in companies that have proven their worth.
Today, I want to share a very simple method to gauge whether you’re making a smart investment. You’ll learn how to to use the financial data available to you (for free!) to make safe, low-risk decisions…and avoid buzzy opportunities that gamble your money.
People could avoid so many bad deals if they only knew this free valuation tool exists…
Tesla or GM: Which is the better investment?
To see this strategy in action, we’re going to explore two popular car companies: Tesla and General Motors.
Before we start, let me ask you a question…
Which company is a better investment: Tesla or General Motors?
It doesn’t matter if you have no experience or knowledge of the stock market! Just go with your gut. Which company do you think will make you more money, as an investor?
Hold onto that answer and let’s get into it…
The free analysis tool and key financial figure you need
The tool we’re going to use to compare potential investments is finviz.com (stands for “financial visibility”.) Finviz is a free financial analysis software anyone can access and it’s such a powerful platform.
You can search for any stock and see key financial figures to help you understand the health of the company. Here’s the finviz.com report on Apple:
Now I know this chart looks overwhelming but stick with me! Because we’re only interested in one figure today: the P/E ratio at the top of the third column. See it?
This stands for Price/Earnings ratio, which shows the price vs. the earnings (or profits) that a stock makes in a year.
Essentially, it shows how much you would have to pay for every $1 of earnings.
Let’s say you buy Apple stock for $153.31. And at the end of the year, you’ve made $12.15 in profits. That would give you a P/E ratio of 153.31(price) /12.15(earnings) = 12.62.
P/E ratio also tells you how many years it would take to get your initial investment back (given no increase or decrease in the earnings %).
It makes sense when you think about it: If your investment earns $12.15 every year, it would take you 12.62 years to make back your initial $153.31 investment in Apple stock.
This information is extremely valuable as an investor! Because it’s a powerful sign about whether an investment is a risky opportunity.
The smaller the P/E ratio, the more quickly you’ll get your money back. But a stock with a very large P/E ratio should be approached with caution...
Tesla: Savvy Choice or Risky Investment?
A lot of people love Tesla...and I understand why! It’s a company with a bold vision who is doing some very exciting things in the automotive industry. But that doesn’t mean it’s a good financial investment.
Remember what I said in my last blog post about not investing emotionally? Let’s explore that here...
It’s very hard to value a company like Tesla. It’s a $54billion company but at the moment, it’s still not making any profits and is actually losing about $800-900 million per year.
Let’s check out Tesla on finviz.com...
You’ll notice there’s actually no P/E ratio. That’s because Tesla’s earnings are negative. You can’t calculate how long it would take to make your money back...because you’re not making any profits yet!
Personally, I wouldn’t even consider Tesla any further at this point, because I always recommend that you invest in a company that’s already profitable. So I wouldn’t bother to go any further.
But for the sake of this exercise, let’s look at the next important financial figure…
Which is the Forward P/E ratio, right below P/E ratio on the chart. This is next year’s Price/Earnings ratio. It projects what will happen to the P/E ratio if the stock price stays the same.
Tesla’s Forward P/E ratio is 50.44.
This means that if Tesla does manage to eke out a profit next year (and we can’t even be sure it will,) it will take you 50.44 years to get your initial investment back.
I don’t know about you...but I want to make my money back in my lifetime, not 136 years. Plus, 136 is a long time — a lot can happen to change the financial picture.
What this tells us is that, while Tesla is a very buzzy company, it doesn’t have a high level of safety for investors.
If you want a less risky investment, let’s take a look at another car company...
What about General Motors?
Just like Tesla, General Motors is an automotive company that also costs $54 billion.
Remember how with Tesla, it didn’t have a P/E ratio for this year, because it’s not profitable yet? And the Forward P/E was 50.44?
According to finviz.com, GM has a P/E ratio of 5.97 this year and is just 6 next year.
What that means is, at the current rate of return GM is making, it’ll take you about 6 years to get your money back. And next year, it’ll also take you 6 years because GM is expected to make a similar profit next year.
That’s very good news!
6 years is not a very long time to make your money back, when it comes to stock. Plus, the Forward P/E ratio is lower than this year’s, which shows the expectation of future growth.
Both of these figures suggest that GM is a rather safe opportunity, as an investor.
So...which stock would you choose?
Let’s say we each had $54 billion dollars and we wanted to buy a car company.
Which would you choose: Tesla or GM?
Okay, that was a trick question — because it’s risky to buy a stock based on one factor alone!
(I further studied GM using the valuation calculator inside the Blueprint program...and it solidifies what finviz tells us: GM was a great, safe stock choice that day.)
You don’t have to fall for the hype, like everyone else, and end up making risky investments in the wrong stocks.
When you start to understand financial figures and know about free tools like finviz.com, you’re on your way to making safer, smarter investments.
Coming soon, I’m going to share an incredible resource to help you create real-life financial freedom without taking silly risks. It’s no hype, just real investment strategy so you can invest and trade just like a hedge fund manager. Click here to join The Freedom Trader free live masterclass and be the first to know about it!