Stock selection is definitely more of an art than a science. When screening stocks – going through the thousands of potential companies and deciding which to buy – I typically use price history, earnings growth, dividend growth, return on equity and return on sales, and a general description of the company to make selections. These are the factors that are most important to me in my buy-and-hold style. This is because I’m looking for stocks I can hold for ten or twenty years and see them double every five or six years.
I first of all look for companies that are growing and have a lot of room to grow. One of the easiest ways to find stocks that are growing is to just look at the multi-year price history and find those that are increasing in a linear manner for five to ten years or more. I also want companies that are obviously well-managed, which is shown by regular earnings and dividend growth and a good return on equity. Finally, I look at the company description because I want to select stocks in different industries. More specifically, I try to find the best stock in each industry and buy stocks in several different industries.
All right – so now you know how to screen stocks, but where can you find information such as earnings? The internet is obviously a wealth of information, but more and more of it is becoming a paid service. Still, there is a lot of information out there for free. Sites such as Yahoo give basic current stats, although I don’t know of any site that gives several quarters of earnings, P/E ratios, etc… any more. You really need to be able to look back for several years to see how the company has grown and how it is priced currently relative to where it normally trades.
A great publication for the long-term investor is the Value Line Investment Survey (www.valueline.com). I tend to use the print version, although there is an online version that I’m sure is also useful. I like Value Line because it gives full-page descriptions on each stock including a price graph, stats going back several years, and a review of the company. It also screens stock, assigning a value for Timeliness, Safety, and Technical. Here, buying stocks with a 1 of 2 for Timeliness and at least a 3 for safety would be recommended in general. Value Line costs quite a bit (about $800 per year), but it is worth the price because one will make far more in investments than the subscription price for a moderate-sized portfolio. For someone starting out, most libraries also have Value Line subscriptions. Given that you’ll only need to research new stocks every few months at most, this would be a good way to go initially.
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For getting investment ideas – which stocks at which to take a closer look, publications such as The Wall Street Journal, Barrons, Forbes, and Money can be useful. You need to be careful though in that many stocks will jump in price just because they are recommended in one of these publications. The price will normally fall back within a couple of weeks after the jump, so perhaps a good strategy would be to wait a couple of weeks after the issue comes out before buying in. The publications also periodically have articles on ways to invest, although I’d avoid taking anything you read by itself on faith. It is better to read a lot, and then make your own decisions.
Another possibility is simply going to the websites for the companies and looking for annual reports and data they provide. This, however, doesn’t give you the ability to screen several stocks, looking for the ones that stand out. If you get a tip from a magazine, however, you can go to the company website and find annual reports to get more information.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.