The most successful investors will never invest in a stock based on emotion or without doing intensive research. You won’t always have someone to guide you when investing. Also, you might not want to always depend on your broker to tell you what to do. So, having a checklist of things to look for is crucial to success.
A good stock picker checklist should include some of the following key points:
- Fundamental stock ratios
- Industry trends
- Debt to asset ratio
- Brand impact
- Competitive edge
- CEO and insider behaviour
Then, each point should have subcategories that need to be checked.
In this article, we are going to take a deep dive into choosing winning stocks. The stock market can be a brutal place for people who do not do their research. That is why I recommend that you keep reading so that you have a better understanding and have a better chance of choosing winning stocks.
For those that came for the free stock picker checklist, here it is:
Fundamental stock ratios
Before we do anything, there are 3 key stock ratios that you need to know about. If you can master your research on these 3 things, you will be on the right track to making good investment decisions.
So, let’s get into it.
For this, you need to look at the difference between the Gross earnings vs net earnings. Then you need to consider how much profit is reinvested into the company. Just because a company has a high annual revenue, that does not mean that the company is profitable.
At the same time, just because a company is profitable, does not mean that those profits are managed properly so when it comes time to get your dividends, you might not get as much as anticipated.
Working Capital Ratio (Sustainability)
This refers to the sustainability of a company through its ability to pay all of its liabilities. This includes but is not limited to; Salaries, debt, and all of the company’s running costs. A company should be in good financial health before you even consider investing in them.
Similar to the “working capital ratio” this has to do with a few factors. These factors include the companies annual revenue vs its expenses. You have to look at a company and how they handle their short term and long term debt obligations.
Industry trends, as the name would suggest, is not specific to any company but it is rather specific to certain industries. There is a lot of data that you can extract when you know the trends of an industry. We will cover a few of the important trends to look out for. For now though, let’s take a look at exactly what an industry trend is.
An industry trend is a series of events that happen within each industry. There is not just one trend to look out for. Some trends might include: How the cost of manufacturing fluctuates throughout the year, what the price of the product or service does each year, and most importantly, how the consumer behaves year around and when they are most likely to buy.
If you use these trends to establish your data points on a stock, you can make better-informed decisions. You can also anticipate what the stock will do at certain times of the year.
Trends are heavily influenced by a lot of factors. Anything from politics to supply and demand can be one of these influences. It is also important to note that certain trends can affect others, for example, as obvious as it seems, the cast to manufacture influences the price for the consumer, and ultimately, that influences the behavior of the consumer.
That is the reason why I chose the 3 trends that I’m going to talk about in the rest of this section. They are some of the most heavily intertwined trends that we can use to extract data from.
During each year, the cost to manufacture or even the cost to run a business fluctuates. If you remove things like politics which are less controlled than most factors, you can use this to determine how your stock will do throughout the year.
Being able to predict whether the running cost of a company will increase or decrease at certain points in the year will help you prepare for when the cost does increase. If you are prepared and you know that the cost of running will increase and then after a short while decrease, you might not end up making emotional decisions.
Using the price as a data point for whether or not a stock is good to invest in can be very tricky, especially in certain industries. For this section, let’s take a look at the cellphone industry because this industry has one of the most fluctuating price points throughout the year.
If a mobile phone manufacturer releases a phone in February, you will find that the mobile phone industry brings out new devices every year.
The price of these devices increases every year and I’m talking about flagship devices. You can actually go back and analyze the percentage at which mobile phones increase every year. So, pick a company like Samsung. See what devices they launched and at what price. Calculate the percentage of their annual price increase.
Apply that analysis to any industry and you will be able to estimate the growth of a company and the industry that they are in.
The most important data point for us to use in terms of trends is consumer behavior. In my opinion, this can make or break a stock and you should know exactly what you are looking for in terms of consumer behavior as a trend. Luckily this isn’t as tricky as some other trends because the consumer is either going to buy the product or not.
Using consumer behavior as an indicator of a company’s potential growth is not just about looking at which point in the year consumers are more likely to buy. When considering buying a stock and using consumer behavior as an indicator, you need to look at how many new customers, clients, or consumers a company is bringing in every year.
For this, we can again look at the cellphone industry and we can once again use Samsung as our example. You have already looked at the price increases of their annual flagship devices but now you want to look at how many people bought their products.
You should not stick to flagship devices for this. You want to see how many customers the company has attracted each year and determine how much they are growing as a company.
Price to Earnings & Price to Book Values
You want to determine if the company is expensive when it comes to the earnings it makes throughout the year.
Take a look at the industry leaders and some low level companies in the space, you will find some have high P/E & P/B ratios and others are very low. Realistically, you want to find a company with the lowest ratios, this indicates that the company is cheap compared to its earnings.
But a low P/E or P/B ratio doesn’t mean value. But it is a good place to start when looking for undervalued companies.
Debt to Assets
This section is actually heavily connected to the solvency that we were talking about above in this article. Debt-to-asset is an important data point that we can use to determine the profitability of a company but what exactly do we mean when we say “debt-to-assets”?
Let’s say that you want to invest in a hotel chain, everything might seem great when you come across a company that has a few hotels scattered across the United States. The one thing you need to look at and especially when it comes to property is how did that company finance its assets such as new hotels?
If a company is swamped with debt, that alone is not such a bad thing. It is how they handle that debt that is extremely important. If a company needs to constantly take out loans in order to sustain itself or to gain new assets that might mean that they are not doing so well.
If a company is in a lot of debt and continues to take out more debt, we should never just assume that the company is not doing well. We should start to look at how they pay that debt back. So, if a hotel chain has just financed a new location by taking out a loan, let’s go back to their previous location and see how fast they were able to pay that one off before buying the new one.
Debt-to-assets also leans heavily into profitability. Remember, if a company’s annual revenue is $20 million but the amount of debt that they need to pay back is $15 million a year, that means the profit won’t be so great until that debt is paid off.
You could invest in a stock if you are anticipating good returns once the debt has been paid off but if the company keeps taking debt and they have been doing so for the last 10 years, you should be a little bit wary of that company. If the profits are still high enough even with the debt that they have incurred, that is not a bad thing.
The Brand & Competitive Edge The Company Has
Another way to ensure that you are going to pick winning stock is to simply look at the brand and the competitive Edge that the company has within its industry. Let’s place some emphasis on the word “industry”. Let’s take a quick look at what we mean when we say look at the brand and the competitive Edge that the company has.
The best example to use when talking about the brand and competitive Edge would be to use Amazon. I know that it might seem like we are just taking the easiest company to use as an example but we need to understand why Amazon was or is such a great investment.
Everyone knows who Amazon is and what they do. That is their brand and to determine their competitive edge, let us look at some of the reasons why they have a competitive edge in E-commerce.
Amazon offers convenience, easy and cheap shipping, great prices with lots of specials. That is their competitive edge. They were able to get into this position by constantly reinvesting their money into the structure of the company.
Now, perhaps you want to invest in a company that isn’t as established as something like Amazon or Tesla and perhaps you want to invest in a smaller company that you think might come up. How do we determine their brand impact and competitive Edge? Let’s use something within emerging technology like AR which stands for Augmented Reality.
Determine the Brand Impact And Competitive Edge Of A Company In An Emerging Industry
Buying stock in an emerging industry is hit-or-miss and this is one of the biggest risks you can take as an investor. Before you decide that you want to invest in an emerging industry, make sure that you know what you are doing.
You have to do the proper research and you should only invest money in an emerging industry if you are willing to lose that money if that industry does not take off.
Analyzing the competitive Edge that a company has in an emerging industry requires a lot of research and often, there is not a lot of data to analyze in smaller industries. So you will need to be prepared to spend a lot of your time hitting dead ends in your research.
When it comes to an emerging technology like Augmented Reality, we know that Apple is busy developing its apple glass which would simply be a pair of glasses that act as transparent monitors. If we don’t really want to invest in Apple but still want to invest in AR, we can take a look at the companies that are developing apps for that technology.
We can look at which company is developing the most apps, which one of those has the best reviews, and who has the biggest foothold in this industry.
You can use everything we have learned in this article so far like fundamental stock ratios and industry trends to help you with your research in this department. You can also look at which company has the best clients.
This company is an example for the article and should not be considered fact.
We can use the AR company “Zappar” as an example. They have worked with established companies such as Warner, Coca-cola, and Sony. They offer an innovative service that makes it easy for consumers to engage with a brand by using a simple scanner on their mobile phone.
Zappar managed to raise $3.75 million in 2017 after they tried to raise only $87,000. So, that tells us that people trusted their brand and their ideas.
So, here’s what we know and what we have to work with:
- They have established themselves with big companies.
- They offer an innovative service.
- They were able to raise money from a well-respected London based investment firm.
With that information, you can determine whether or not the company is worth your time in terms of further research. Please note, this was just an example. I cannot tell you whether or not this is a good investment. I was just highlighting a quick research method that you can use to determine if you should spend more time researching a company.
What The CEO’s And Insiders Doing?
You can also look at what is taking place with the company concerning the individuals within the company. That being said, we must remember to look at what the heavy-weights of that industry is doing. This would be the CEO’s, insiders, and board of directors.
Things that you can look out for is whether or not a company is buying or selling shares, are they planning for growth, are they hiring or firing people, are there any structural changes within the company taking place, and finally, possibly most importantly, are they releasing any new products and/or services?
Let’s take a look at these data points a little bit more specifically
Is The CEO Planning Any Structural Changes?
Structural changes within a company can refer to any number of things. These things can include: Change of location in terms of state or even country. It could include the hiring of new divisions within the company.
It could also include the acquisition or merging with new companies, and finally, it can include the hiring and firing of key players within the company.
Are The Company Leaders Selling Or Buying Shares?
If you noticed that some key people within a company such as the CEO or members of the board are selling their shares, this should be an indication that they are not hopeful for the future or at least, the immediate future.
If these key people within a company are buying new shares, that means that they expect the company to grow within the immediate future or even long-term. So, this is a very good indication of whether or not a stock is a good investment but as I like to iterate with almost every section, do not just rely on this piece of information alone.
Is The Company Releasing New Services Or Products?
If a company is releasing a new product or service, this is often a good thing, especially within industries such as electronics, gaming, E-commerce, and media.
Once you have determined whether or not a company is releasing a new product or service, it is up to you to do your research and to use your knowledge of that industry to determine if the product or service is an innovation. You can also refer back to previous sections of this article to see how the company has benefited every time they have released a new product.
The Stock Scorecard By Chris Race
I have developed a scorecard for stocks that comes from years of experience and also tried-and-tested methods of determining a stock score.
The scorecard has 60 topics that you could use to determine the score of a stock. If it scores highly, then it is likely a good investment. If it scores poorly, you should re-evaluate which stock you want to invest in.
Of the 60 topics in the scorecard, I have chosen three that I determine to be very important. Let’s take a look at those three.
Get our Free Stock Scorecard
Is The Company Growing Within Its Respective Industry?
How fast is the company growing within the industry is something that, if you catch on quickly enough, can make you a lot of money. Let’s use a little example within the e-commerce space.
Amazon has for the longest time been the leader in the e-commerce industry but if you were to take a look at Shopify a few years ago you would have seen that they were experiencing rapid growth Today they are considered one of the leaders within the e-commerce industry.
So, just because an industry already has its leader, it does not mean they will not get a new competitor. It is always good to take a look at some of the up-and-coming companies within any space.
Does The Company Innovative Services And/or Products
This point may seem very simple at first. It really is not. Some companies have launched spectacular products and very innovative services in the past that has led to their success. This does not mean that they will always do so.
It is not just about what the company has launched in the past, we need to look at what products and services they are currently offering, what is their flagship service or product, and finally what they have got in the pipeline for the future.
With some industries, it’s very easy to determine this because they release products annually. Based on history, companies like Apple dial NVIDIA have all consistently launched products that are way better than the previous versions. All you have to do is learn a little bit about the industry and check to see if their future products will also improve on the previous product.
How Competitive Is The Industry
If an industry is very competitive, this could be either a good thing or a bad thing depending on your research skills.
If a market is too competitive, you could find that after making an investment in one company, the other one launches a better product or service than the one you’ve invested in. This might mean that, for the short-term, your stock won’t do so well until the company that you have invested in fights back with a better product or service.
Some people thrive when investing in a competitive market but others tend to invest emotionally with companies that they have some form of an attachment to.
When investing in a competitive market, you have to do your research and you have to take a look at what these companies have in the pipeline, again you can refer to everything that we have spoken about in this article to determine which company within a competitive market is best suited for your investment.
That brings us to the end of this in-depth look at what you should do if you want to pick winning stocks. I guess if I had to summarize it, it all boils down to doing a lot of research and never invest until you have gone through everything thoroughly.
Investing without doing your homework is often known as blind investing or, investing based on emotion and this is a very quick way to slow down your growth.
I know that the promise of investing is to make our money work for us and that is true, it is just that pre-investment that can be time-consuming. Then once you have made your investment, all you have to do is a little bit of checking up on the company.