301 investing: evaluating an investment takes time and patience. Here's how to find out what you're buying before you commit. (Investing Part 3 Of A Series).

INTUITION. IT'S WHAT SEPARATES THE MEN FROM THE BOYS, OR shall I say, the women from the girls? Either way, intuition is vital in decision-making--something Jami Smith knows well as an avid investor. At 25, she has maintained a well-heeled portfolio since 1997 by trusting her instincts.

"I've learned to trust my intuition based on the literature I've read, and fundamental and technical analysis," says Smith, the administrative assistant of the Money Matters for Youth Camp, in Detroit, a non-profit organization that teaches youth about investment banking. "If I get a gut feeling that a stock I own is not going to meet my goal, I am compelled to cut my losses before it significantly affects my account."

Instinct served her well on September 7, 2001, when she decided to take the money and run from International Game Technology (NYSE: IGT), the Reno, Nevada-based maker of slot machines. Smith bought the stock at $14, and sold it at $56, gaining an astounding 300%.

But her investment choices are based on more than a gut feeling. She looks at relative price strength, which "lets me know what value the market places on a stock. So, if the market isn't fond of a stock, it has that opinion for a reason."

Smith also looks for earnings of 30% or more, and ROEs (return on equity) of 17% or more. She chooses such high numbers so "that I'm selecting companies in the top 20% of the industry," she says. She admits those numbers are a bit ambitious, but, "at my age, I can afford to be more aggressive; I have confidence that the market will rebound."

With the sluggish economy, however, she has taken a more conservative approach by holding 75% of her portfolio in fixed-income accounts, and 25% in stocks, such as Jabil Circuit (NYSE:JBL) and Coach (NYSE: COH). Until recently, her portfolio was aggressive, with 75% in stocks and 25% in fixed income.

It takes time, patience, and education to evaluate a stock. So, it's important to uncover as many facets about a company as you can. That's where stock analysis helps. We'll show you how to look at the underlying business, such as its products and competitors, decipher the company's performance via numbers, and decide for yourself if it's a buy, hold, or sell.

KNOW FOR YOURSELF

Smith started investing at 18. But before she got into the market, she educated herself. To begin, she bought The Wall Street Journal Guide to Understanding Money & Investing by Kenneth M. Morris, et al (Fireside, $15.95) and Investing for Dummies by Eric Tyson (Hungry Minds Inc., $21.99). "I bought the books so I would be informed. It's one thing to have a professional tell you something, but you have to validate that information by knowing it for yourself." Smith employs an investment advisor but has her eyes wide open about all her investment decisions.

THE FUNDAMENTALS

Stock analysis may not be for everyone, but it's important to understand what you're investing in. Think of it as a fact-finding mission and consider these components:

The Product. A company's product is its lifeblood. "Talk to the company about their new products, walk through their stores [if possible], or get in on their next conference call," advises Kurt Brunner, a portfolio manager at The Swarthmore Group in West Chester, Pennsylvania. "It's important for people to know what they are buying; you don't just want to throw money at the wall."

In August 1999, Smith bought Mattel (NYSE: MAT), maker of Barbie and Matchbox cars. With Christmas quickly approaching, the timing was right, "plus, they had a lot of new products coming out, which I thought would be interesting to children," she says. It turns out that her prediction was right; Mattel gained 13% between March and October 2001.

Investors should also consider this: Is this a unique product? What does it offer? Who is the intended audience? The more you know, the better you'll feel about the investment.

Competition. Do a careful examination of the company's competitors. Does the competition have a leg up on your prospect or vice versa? To decide, take a look at the last few earnings reports and see what the income statement and balance sheet look like. Experts say companies like Dell Computer (Nasdaq: DELL) are well respected. It's a low-cost provider that purchases inexpensive, high-quality products to assemble PCs. On the other hand, Compaq Computer Corp. (NYSE: CPQ) makes a lot of its own products, so it has to incur the expense of doing so.

Management. Are the names behind the company running a tight ship? Check out how long the CEO, chairman, and other key employees have been at the company. "There are companies out there with wonderful products, but they've completely mismanaged their organization," says Eddie Ramos, a vice president and portfolio manager at Brown Capital Management in Baltimore. Look at Apple Computer, for example, he says. "They started the computer revolution, grew the revolution, then Microsoft came along with a more powerful operating system and people left Apple en masse."

Some signs that management is faltering are restructuring, company executives selling off shares, or key employees jumping ship. Bead the business section of newspapers for the scoop.

Industry/Sector. Our experts say look both ways before you cross into buy territory.

"A lot of people look backward," says Donald Cassidy, a senior research analyst at Lipper Inc. in Denver. "You have to look into the future [as well], and say, `What can hurt this industry?'" For example, the airline industry is one to watch. Even in good times, airlines have interest on debt to pay off. This leads to higher operational costs and a higher break-even point than in other industries, which depresses profits, even if half of their fleet is not flying, as the case has been since September 11 with American Airlines, a subsidiary of AMR Corp. (NYSE: AMR).

"I would advise a new investor to stick with industries that are familiar to her," says Iva Funderburg, the senior equity research analyst at Alpha Capital Management in Detroit. "Once she develops a successful strategy, such as purchasing companies with accelerating growth and low P/Es (price to earnings ratio), that strategy can easily be exported to other industries." See www.hoovers.com for company and industry profiles.

THE FINANCIALS

Reviewing the financials of a company will provide performance evaluations. Always compare them over a few years or a few quarters. Try Standard & Poor's stock reports (www.personalwealth.com). Here are some key terms:

Balance Sheet. Assets = Liabilities + Shareholder's Equity is the formula that explains the setup of this document. A key is "to make sure that the total debt is not rising as a percent of total assets," says Cassidy. For example, "Look at receivables and inventory to make sure they are not growing as a percentage of total sales, which would mean customers are not paying their bills, and maybe that some inventory is outdated, like with Lucent Technologies (NYSE: LU)." You can order a free annual report from a company's investor relations department, or go to www.freeedgar.com.

Income Statement. This information tells you how much money the company is making. "Look for the cost of goods sold as a percent of sales: You don't want it to be rising," says Cassidy. A lower ratio means the company earns more on each sale. "Also, look at the R&D (research and development) expense as a percent of sales and hope it is not dropping; that would mean the company is saving resources at present, but may not have enough sharp new products in a year or two." Look at the company's 10-K (annual financials) or 10-Q (for the most recent quarter) statements for financial details.

Earnings Growth. This figure is the net income growth of the company; the higher it is, the better off a shareholder is. Brunner suggests that you look at a company's sales growth, as well as its operating expenses: Are rates increasing or decreasing? Are costs rising or falling? You want to choose companies that have a long-term record of earnings growth, or products that are in markets that hold future growth. Also, get hold of reports from reputable analysts to compare their estimates. But watch out, says Cassidy: "Hold is a code word for sell."

These basics will get you underway in stock evaluation. Check out the charts for your prospects on www.bigcharts.com to see how they've progressed over time. Stock analysis can be a pretty demanding process, but now that you know where to start, you can take your intuition along with the key clues you uncover, and design a portfolio that you can be thankful for.

LOOK IT UP!

BOOKS

24 Essential Lessons for Investment Success: Learn the Most Important Investment Techniques from the Founder of Investor's Business Daily by William J. O'Neil (McGrawHill Professional Publishing, $10.95)

Mastering Fundamental Analysis by Michael C. Thomsett (Dearborn Trade, $26.95)

Select Winning Stocks Using Financial Statements by Richard B. Loth (Dearborn Trade, $19.95)

WEBSITES

www.msn.com www.bloomberg.com www.valueline.com

ORGANIZATIONS

Investment Alliance, 707-571-2311 This group helps individual investors become more knowledgeable through various investment research programs. Check out their stock screen software.

New York Stock Exchange; www.nyse.com 212-656-3000 Known as the Big Board, NYSE is the largest stock trade. It offers a lot of literature about investing in stocks.

Securities Industry Association; www.sia.com 212-608-1500

Represents the securities industry in lobbying activities and educates the public about the stock market.