Use MGIs and MRIs to pick stocks

Financial analysts use these ratings to gauge the value and the growth of a company’s stock. Here you can learn and apply these rating systems to help you manage your own portfolio!

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Apply ratios that financial  experts utilize

The MRI, or Marpep Risk Index, combines two long-established and widely used ratios: the price to earnings ratio and the dividend yield. The MRI is the number you get by dividing the p/e by the dividend yield. Use the MRI to find value between income stocks. Generally speaking, the lower the MRI, the better the value. If you want to buy a bank stock, for instance, the bank with the lowest MRI represents the best value.

You should hold some stocks with low MRIs in your portfolio because they help to reduce your risk in market setbacks. The MRI is a useful, investigative starting point. It is not a one-signal buy-sell index; it should be used in combination with other financial measures—debt load, cash flows and growth in sales, earnings, dividends and so on.

Keep in mind that you can’t calculate MRIs for companies that are losing money or that pay no dividends. That’s a good thing because money-losing stocks that pay no dividends expose you to more risk. Such stocks generally suffer more during stock market setbacks.

The MGI, or Marpep Growth Index, helps you spot undervalued growth companies. The MGI is a stock’s historical compound rate of growth in earnings over recent years divided by its current p/e ratio. If the resulting number is above 1.0, the company should be thought of as being undervalued.

In other words, the company’s recent rate of growth exceeds the current stock price multiple of its earnings. Alternatively, if the resulting ratio is under 1.0, the stock is trading above fair market value, or is overvalued relative to its expected growth rate. A MGI of 1.0 suggests that the stock is fairly valued.

You cannot calculate MGI’s with companies that are losing money, of course. But where losses arise from one-time items that have no lasting impact on a company, you can adjust for what the underlying earnings per share would’ve been.

This is an edited version of an article that was originally published for subscribers in the October 28, 2022 issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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