Stansberry Research

Three Tips for Building Your Best Portfolio

Dr. David EifrigStansberry Digest

Editor's note: You can still protect yourself in difficult markets...

Investors have suffered a brutal year as out-of-control volatility continues to throw the markets into disarray. But some desperate investors have refused to flee stocks amid this ongoing chaos, running the risk of ruining their portfolios...

That's why Income Intelligence editor Dr. David "Doc" Eifrig says it's critical that investors have access to the best information available in order to protect their portfolios during this ongoing uncertainty...

In today's Masters Series, adapted from the October 20 issue of Doc's free Health & Wealth Bulletin e-letter, Doc explains why investors must be detail oriented in order to have success in the markets... shares three metrics that he uses to identify the best buying opportunities... and details how you can use those metrics to separate overvalued stocks from underrated ones...  


Three Tips for Building Your Best Portfolio

By Dr. David Eifrig, editor, Income Intelligence

Jim Ricci is a legend of California's wine country...

His family has a vineyard in northern Sonoma County's Dry Creek Valley. And virtually any day you drive by, you can find Jim hiking along the rows of grapevines, poking around in the ground or inspecting the leaves and the blossoms. He wants to make sure the conditions are right for the growing season.

Growing grapes shouldn't have to be so difficult. (And not a lot of other growers work so hard.) After all, in principle, grapevines are pretty hardy. Just stick them in the ground and water them occasionally, and they thrive most anywhere. Depending on the variety, grapevines can survive incredibly extreme temperatures and even droughts. Grapes grow in Arizona, Minnesota, North Carolina, and even Florida.

But the key to nurturing vines that yield lots of high-quality, great-tasting grapes is effort and attention. Without care and watchful actions in the vineyard, lots of money can be lost.

It's especially true if you're interested in making great wines.

For example, clearing out old vines is important. Dying vines often harbor diseases that get spread around by vineyard bugs like the glassy-winged sharpshooter. One bacterium that gets transferred by this bug's bite is Pierce's disease, which slowly kills off neighboring vines. I've spent time walking the vines as well, watching and learning how to identify the signs of a sick vine that needs to be taken out before it can infect others.

Jim also watches the weather... If it's too rainy, he'll stop the drip irrigation and add sulfur to the plants to prevent rot. Or if the grapes aren't getting enough sun close to harvest, he might clip leaves that sheltered the bunches during the hot summer, so the fruit warms up and finishes maturing.

Not even dirt escapes his attention. For example, every other year, he tills the ground between the rows. That allows weeds to grow in the off year, recycling nitrogen into the soil.

The attention to detail is what helps ensure the wines made from his grapes are consistently high quality. It's why I've used Jim for years as the grape grower for my own wine label, Eifrig Cellars...

At Stansberry Research, my team and I monitor the portfolios across our five investment newsletters with the same kind of watchfulness that Jim applies to his grapes. And we tailor our strategies to the facts and data that reveal what's happening in the economy and the stock market. And sometimes our investments need pruning.

If you want to maximize your returns... you have to walk the vineyard.

I've said many times that you shouldn't put more than 4% to 5% of your portfolio into any one position. And you should take a look at your portfolio to check if any of your investments make up too much of your portfolio.

But some readers have asked how to evaluate which stocks are really worth trimming down.

I look at three specific metrics we use to pin down the value of stocks.

One of the simplest metrics is the price-to-earnings (P/E) ratio. That's the stock's price per share divided by its earnings per share. The P/E is often what you'll read about when professionals consider a stock. A lower P/E often means you're getting a good price. A high P/E means the stock is expensive. I compare a company's current P/E with the market average, the stock's long-term average, and its competitors' valuation.

Next, the price-to-book (P/B) ratio is the stock's price per share divided by the book value per share. Book value is determined by subtracting liabilities from total assets. We divide that by the number of shares outstanding to get the book-value-per-share number. Think of it as the corporate equivalent of net worth.

The P/B is useful for valuing an asset. If a stock trades for its book value, we'd describe that as buying at "1 times book" or "1x book." If you can pay less than 1 times book, you're getting a bargain. For example, at 0.8 times book, you're buying a dollar of assets for 80 cents.

On the other hand, when P/B is greater than 1 times, you're paying more than the "net worth" of the company's assets. That's not necessarily a bad deal. But if you start paying 3 to 4 times book value, you're entering dangerous and rarefied air. You're paying extra for dollars of assets that may not be worth that much.

The third key metric to watch is the price-to-cash-flow ratio. That's a stock's share price divided by its cash flow per share. Cash flow is a measure of profitability that eliminates a lot of the assumptions that make up earnings. It measures the real dollars hitting the company's bank account.

When you check your stocks against these three ratios, you can see which ones are overvalued and may need to be pruned. They're even a good place to start when you're first looking at what stocks to buy next.

These metrics are a simple yet powerful tool that anyone can use without going through hours of research on every stock.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig


Editor's note: In 40 years as a financial pro, Doc has successfully navigated every crisis you can imagine... from the dot-com bust... to the 2008 financial crisis... and the COVID-19 pandemic. But now, he's coming forward with the most important new idea of his life...

You see, Doc has identified an industry that has been hiding in plain sight. It has outperformed the broad market through every market crash of the last 30 years. But if you don't act now, you'll miss out on the biggest gains. Catch up on the full details here...