How do you find winner stocks?
What are some important things to look at when deciding to pick a stock?
Here are some of my ideas that I have used over the years and I am glad to share them with you
It’s tempting to load up on stocks in today’s hot industry or sector — for instance, energy or China stocks. In days past, that strategy worked because once in favor, industries often remained strong for a year or longer. But today’s market, dominated by computerized trading, moves much faster. An industry could turn cold overnight.
Thus it’s important to diversify your holdings. Avoid investing more than 20% of your funds in any one industry or geographic sector.
IGNORE GURU PREDICTIONS
Everywhere you turn you’ll find some guru predicting which way the overall economy, energy prices, interest rates, the value of the dollar and numerous other factors are headed. History will prove half of these experts wrong, but you don’t know which ones. Instead of trying to predict the unpredictable, focus on the fundamental outlook for your stocks. If you do a good job with that, the other factors won’t matter.
AVOID CHEAP STOCKS
Sure, we all want to quit our day jobs — and the quickest way to do that is by loading up on a stock selling for pennies a share that soars to $100 or more. But the odds of hitting that home run are about the same as winning the lottery.
Stocks changing hands for less than $5 per share, often termed “Penny Stocks,” trade for those prices because most market players see fundamental problems ahead. Avoid stocks trading for less than $5 per share.
FOLLOW BIG PLAYERS
Because institutional investors such as mutual funds and pension plans generate huge trading commissions, they have access to information that you will never see. If these big players don’t think they can make money on a stock, they don’t own it. Thus, it makes sense to piggyback on their efforts and avoid stocks that the institutions don’t want.
Institutional ownership, the percentage of a company’s shares owned by these big players, typically runs from 40% to 95% for in-favor stocks. Pick stocks with at least 40% institutional ownership.
Thanks to flexible accounting rules, a firm can report earnings when, on a cash basis, it is really losing money. Thus, it’s necessary to check cash flow to confirm profitability.
Cash flow is the amount of cash that actually flowed into or out of a firm’s bank accounts. Since it must reconcile to bank balances, it’s not as easily fudged as reported income.
For this check, all you need to know is that cash is flowing in, not out. The price-to-cash-flow ratio will only be positive if that’s the case. So, insist on a positive cash-flow ratio
Some companies have exciting stories to tell but have yet to report a profit. For many such firms, profits are always just around the corner. Alas, in the end profits drive share prices. Perpetual money losers are apt to break your heart.
However, positive income isn’t enough. You’ll do best by sticking with companies that can finance growth from profits rather than by borrowing or selling more shares. Both of those alternatives diminish the value of existing shares.
You can use return on equity (net income divided by shareholders equity) to determine whether a firm is sufficiently profitable to finance growth. A firm can’t internally fund annual growth more than its ROE. For instance, a 10% ROE firm can’t internally fund more than 10% annual earnings growth. To qualify as a growth candidate, most investors look for at least 15% expected earnings growth, and often more. Require a minimum 15% ROE, and increase that minimum for faster growing stocks.
From management’s perspective, there’s nothing wrong with borrowing money as long as borrowed funds can be profitably invested. For instance, it would make sense to borrow at 6% if a firm could use it to generate a 10% return.
Nevertheless, high-debt firms complicate life for investors. For starters, significant debt means that you’ve got to scrutinize financial statements to assure yourself that the firm has enough cash coming in to service its debt. Further, should interest rates rise, the higher debt-servicing costs will cut into earnings.
Rather than analyzing balance sheets and worrying about interest rates, it’s simpler to avoid high-debt stocks.
The total debt-to-equity ratio adds up both short- and long-term debt and compares that total to shareholders equity (also known as book value). Firms with no significant debt have zero ratios, and the higher the ratio, the higher the debt. Consider ratios below 0.5 as low-debt and avoid firms with D/E ratios above 0.5.
STRONG PRICE CHART
Weak share-price performance compared with that of the overall market signals that clued-in shareholders may be dumping their holdings ahead of bad news that hasn’t yet hit the wires. Consequently, you’ll do best buying stocks that are outperforming the market.
Relative strength compares a stock’s price performance to all U.S. listed stocks. A 90 RS means that a stock has outperformed 90% of all stocks over a specified period, while an RS below 50 signals that the stock has underperformed the majority of stocks.
Stick with stocks with minimum 75 relative strength over the last six months, and higher is better.
Rising share prices usually go hand in hand with strong earnings growth. However, fast growth attracts attention, everybody piles on and eventually share prices reach unsustainable levels.
The most widely used valuation measure is the price-to-earnings ratio, or P/E, which is the recent share price divided by the last 12 months’ per-share earnings. However, the historical P/E doesn’t mean much for a stock whose earnings might grow by 50% or even double this year.
For fast growers, the forward P/E, which is based on the current fiscal year’s forecast earnings instead of historical earnings, is a better choice.
While there’s no hard-and-fast rule, forward P/Es above 40 signal high risk. So stick with stocks with forward P/Es below that level
Whether you’re trading or investing here are some important items you will definetly need
1 – A written sound trading/investment plan with rules that will not only help you but more importantly protect you, mostly from yourself.
2 – Sufficient trading/investment capital. Use your own money, there’s no need to go into debt so that you trade/invest.
3 – A written money management program in place. Remember never invest 100% of your capital into any one security and never have 100% of your capital invested.
4 – A full and complete understanding of the rules & regulations of the industry.
I hope I have been of some help to you, good luck I know if you follow these rules you will be successful.
Stock Market Prediction For Week of March 3 2014