7 Steps For Finding Winners

1. Look for companies with a pattern of earnings growth over at least five years and a habit of reinvesting at least 35% of earnings in the expansion of the business. The reinvestment rate can be determined by comparing earnings per share with the dividend payout. The portion that isn't paid out to shareholders gets reinvested in the business.

2. Look for companies with P/E ratios ranging from around 10 to about 14 when the market is down. When the market is high, look for P/Es lower than the market and lower than other companies in the same industry.

3. Look for a pattern of rising dividends supported by rising earnings, and a dividend yield in the neighborhood of 3% or 4% to generate income to reinvest in the company.

4. Look for stocks selling at a price no higher than 1.3 times book value per share.

5. Look for a return on equity that is consistently high compared with other companies in the same industry or that shows a strong pattern of growth. A steady return on equity of more than 15% is a sign of a company that knows how to manage itself well.

6. Stick with companies whose debts amount to no more than 35% of shareholders' equity.

7. For the most part, stick with stocks with betas of around 1.0. Whenever you assume the risk that goes with an oversized beta, it should be in the expectation of an oversized reward.

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