Narrow your focus
When you decide to invest in the stock market, how do you refine the huge list of available equities down to just the most promising candidates? First, you keep in mind something that professional analysts must remember: Investing always requires weighing potential risk against potential reward. Analysts use certain criteria in an effort to focus their stock selection process. In broad terms. they generally weigh three issues: fundamental business factors; the tecimical position of the stock; and intangible factors that may provide a sense of how reliable a stock may be. You can use these same criteria when fine-tuning your market picks.
Fundamentals
Business fundamentals are the first factor to consider. For example, does the company have a projected earnings growth rate substantially better than the 7 percent typical of U.S. publicly held corporations? Is the company first or second in its industry in terms of market share for its products and services? If not, is it gaining market share against its larger competitors? Is the company the lowest-cost operator in its industry?
Technical Factors
Next come the technical characteristics of the stock. Technical analysts seek clues to a stock’s future performance by charting its historical price and volume action. Questions they ask themselves include: Is the stock in along-running uptrend? Are there signs that it might be building to a peak from which it is likely to fall? Is the firm’s industry sector in or out of favor? Has the stock been displaying above-average relative strength compared to the broad market? Finally, does the stock trade in enough volume to make it relatively easy to buy and sell?
Don’t Forget the Intangibles
Determine whether the stock reflects the aura of a winner. For example, does the company have a growth record that can capture the imagination of other investors? Does it seem likely it will attract institutional buyers? Can you live with this stock through the downswings most stocks have from time to time? On a more objective level, is the stock widely followed by Wall Street analysts, or is it watched by only a few firms, possibly making it more vulnerable to an analyst’s downgrade? Finally, you need to consider the stock’s performance history. What were the causes of any large sell-offs over the past decade? Were they related to company or industry developments or the consequence of general market weakness?
Take Valuation Into Account
Is the stock you’re considering just a trading vehicle, or are there enough positive answers to the previous questions to suggest that it may have the potential for an enduring rise? If your answer is the latter, but the stock’s price/earnings ratio (PIE) seems too high, there’s another factor to consider. The further into the future you can project a stream of growing earnings, the more likely it may be that the stock could trade at a high P/E ratio for an extended period of time and, quite possibly, outperform many issues that appear less expensive.
This information is for general guidelines only. Many stocks won’t measure up to these standards, but taking these criteria into account may provide the potential for rewarding investments. Consult a financial advisor for further guidance.
Any particular investment should be analyzed based on its terms and risks as they relate to your specific circumstances and objectives.
