Secrets of Picking Winning Stocks
In order to pick winning stocks, all you need is a legal pad, a calculator, and some basic information from either Standard & Poor's or Value Line. Then look up the company you're considering, and the stock is a worhwhile investment, if it passes the following tests:
Evaluate the company's sales figures. They tell how well a company's products or services are selling in the marketplace. What to do...
Look at sales for the most recent year. Then count back five years. If current sales are twice or better than those five years ago, then you know you've got a good, lively company. But if the sales are up less than 50%, look for another company.
Note: A stock that has good potential shows sales growing by at least 10% per year.
Size up the company's earnings per share. Increasing sales really don't mean much unless a company is making money. Increasing profits, which are also known as earnings, ultimately boost share prices. What to do...
Look at earnings per share for the most recent year as well as for five years ago. Have earnings doubled over the last five years? Earnings that double every five years are growing at 14.9% compounded annually.
Give the management a checkup. The two best management tests are pretax profit margins and return on equity. These numbers tell you how wisely a company is targeting consumer markets, how much power it has to set prices and how efficiently it uses its cash. What to do...
Take a look again at either Standard & Poor's or Value Line. Then calculate the pretax profit margin by dividing last year's pretax profits by last year's sales. Then look at the same figures for the company's competitors. You want a company with a profit margin at or near the top of its peers in the same industry group.
The return-on-equity numbers require no calculation. These figures can be found in Standard & Poor's under "Percent Returned on Equity" and under "Percent Earned on Net Worth" in Value Line.
Note: If the return on equity isn't at least 12% to 15%, eliminate the stock from consideration.
Finally, calculate the stock's price history. You may have found a great company, but you need to know whether or not it is worth buying right now. To find this out, compare the current price-to-earnings ratio (P/E) to past ratios from Standard & Poor's or Value Line. What to do...
Make a list of the stock's high and low prices for each of the past five years. Then do the same for the company's P/E.
Next, find the total average P/E for the past five years by adding the average low P/E and the average high P/E and dividing the result by two.
Note: You want today's P/E to be lower than the average. If it is, and the company's earnings are growing by 10% a year, the stock is likely a good one and a good buy!
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Evaluate the company's sales figures. They tell how well a company's products or services are selling in the marketplace. What to do...
Look at sales for the most recent year. Then count back five years. If current sales are twice or better than those five years ago, then you know you've got a good, lively company. But if the sales are up less than 50%, look for another company.
Note: A stock that has good potential shows sales growing by at least 10% per year.
Size up the company's earnings per share. Increasing sales really don't mean much unless a company is making money. Increasing profits, which are also known as earnings, ultimately boost share prices. What to do...
Look at earnings per share for the most recent year as well as for five years ago. Have earnings doubled over the last five years? Earnings that double every five years are growing at 14.9% compounded annually.
Give the management a checkup. The two best management tests are pretax profit margins and return on equity. These numbers tell you how wisely a company is targeting consumer markets, how much power it has to set prices and how efficiently it uses its cash. What to do...
Take a look again at either Standard & Poor's or Value Line. Then calculate the pretax profit margin by dividing last year's pretax profits by last year's sales. Then look at the same figures for the company's competitors. You want a company with a profit margin at or near the top of its peers in the same industry group.
The return-on-equity numbers require no calculation. These figures can be found in Standard & Poor's under "Percent Returned on Equity" and under "Percent Earned on Net Worth" in Value Line.
Note: If the return on equity isn't at least 12% to 15%, eliminate the stock from consideration.
Finally, calculate the stock's price history. You may have found a great company, but you need to know whether or not it is worth buying right now. To find this out, compare the current price-to-earnings ratio (P/E) to past ratios from Standard & Poor's or Value Line. What to do...
Make a list of the stock's high and low prices for each of the past five years. Then do the same for the company's P/E.
Next, find the total average P/E for the past five years by adding the average low P/E and the average high P/E and dividing the result by two.
Note: You want today's P/E to be lower than the average. If it is, and the company's earnings are growing by 10% a year, the stock is likely a good one and a good buy!
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posted by Bob Moser at
3:35 PM
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