Three Tips for Building Your Best Portfolio

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 'em in the ground and water them occasionally, and they thrive most anywhere. Depending on the variety, grapevines can survive incredibly extreme temperature 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 (P/CF) 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.

That's what my longtime friend and colleague Dan Ferris does for his subscribers...

Dan is our resident value-investing expert. He identifies the best values in the market – the stocks trading at a ridiculous discount to what the underlying businesses are actually worth. And his track record speaks for itself... Dan's readers are holding multiple triple-digit winners, with one of his best picks sitting at 800%-plus gains.

Last night, Dan released a major warning that we could see a big move in stocks. According to Dan, it will take most Americans by surprise... and could ravage millions of retirements... But not if you're prepared.

Click here for all the details on what you should do next.

What We're Reading...

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

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
October 20, 2022