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Finding the best stocks to buy doesn’t need to be hard or time-consuming. You simply need to know what to look for.
This chapter will walk you through the process of what to look for in a stock and how to quickly search for stocks with the potential to grow. After all, here at Money Morning,we believe you control your financial future, and investing in stocks is part of reaching financial independence.
The Dow rose 265% from March 2009 through March 2019, but some of the best stocks are up 658%, 1,208%, and even 2,328%. Learning how to find these winners could be the difference between working past retirement age and funding the retirment of your dreams.
This lesson will show you how to find winning stocks like those for the next 10 years. Just take a look at some of our standout stock recommendations…
- Coca-Cola Consolidated Inc. (NASDAQ: COKE) popped 100% from Oct. 30, 2018, to May 2019. The Dow is up just 6% since then.
- Kratos Defense & Security Solutions Inc. (NASDAQ: KTOS) is up 209% since November 2014. Broader markets are only up 50% in the same time.
- Galapagos NV (NASDAQ: GLPG) skyrocketed over 650% higher since we shared it with readers in April 2012. A Dow ETF would’ve brought you a mere 104% gains in comparison.
The “secret” to finding these stocks is simple: They’re excellent companies trading at value prices that pay off when you hold them over the long term.
To find these businesses, we look for “must have” companies that serve six “Unstoppable Trends” laid out by our Chief Investment Strategist, Keith Fitz-Gerald. These are:
- Scarcity & allocation
- War, terrorism, and ugliness (also known as defense)
The Unstoppable Trends are backed by trillions of dollars that Washington cannot derail, the Fed cannot meddle with, and Wall Street cannot hijack. And they will never go out of demand. The world will always need medicine, energy, and defense. Technology is now a fact of life. A growing (and aging) population is a reality, predictably fueling industries from long-term care to medical devices.
Finding the best companies operating in these Unstoppable Trends is a recipe for success.
For example, Becton Dickinson and Co. (NYSE: BDX) taps directly into two Unstoppable Trends: medicine and demographics. Becton Dickinson makes single-use medical supplies for hospitals and long-term care facilities. And as our populations ages – more Americans are entering retirement than ever – long-term care facilities and elder care are in serious demand.
Once the Baby Boomer generation first entered retirement age in 2011, Becton Dickinson stock climbed 175% in the following eight years. That shows you just how powerful these trends are.
Here’s another example from the demographics trend. Since 1980, the United States’ population has grown by more than 100 million people. Since 1995, its economy has doubled. A rising population combined with a growing economy fuels consumption. And someone has to take care of all the waste that sort of growth creates.
Enter Waste Management Inc. (NYSE: WM).
The company isn’t the flashy Silicon Valley outfit dominating the headlines. But the world needs its trash collected. And that’s turned Waste Management into a multi-billion-dollar company. In fact, it made nearly $15 billion in sales in 2017 alone.
That rewarded shareholders with over 250% gains between 2011 and 2019.
Similarly, global defense spending adds up to more than $1 trillion a year, and it’s not slowing down. It’s not pleasant to think about, but security threats are an eternal reality. That’s why we call it the trend of war, terrorism, and ugliness.
And that’s why the stock of one of the leading global defense firms, Lockheed Martin Corp. (NYSE: LMT), jumped more than 350% between 2010 and 2019, more than doubling the average market return. That’s not even factoring in Lockheed’s healthy dividend payment.
Now that we know the trends to follow, let’s look at how to find the leaders in those industries.
While there are a seemingly endless number of criteria Wall Street uses to evaluate stocks, we’re going to focus on the most important four.
You can find these numbers for free at MoneyMorning.com, Yahoo! Finance, or even through your brokerage account.
The first number to look at is whether the company is turning a profit.
Profits are what’s left over once you take the company’s revenue – the total amount of money the company makes – and subtract out expenses.
Companies losing money are riskier than companies that have shown their business is successful enough to make money. To find out whether the company you’re looking at is profitable, look for “net income” on the stock’s financial sheet. If it’s positive, then the company is making more money than it spends, which is a great sign the business is on the right track.
If the company has no net income or if it’s negative, then we’ll wait for the business to prove it can operate at a profit before we buy.
Second, we want to invest in companies that are growing their profits. We don’t want to buy a company that couldn’t repeat the success of just one good year. We want one that has proven it can be more successful over time.
To see if the company is growing its profits, check for positive earnings per share (EPS) growth over the last five years. That’ll rule out any “one-hit wonders” or companies that grew too popular too fast.
The third metric to look for has to do with the value you get for the price you pay.
A great company could be so overpriced it’s simply a bad deal to own. Whether you’re shopping for a new car, a new computer, or a new phone plan, you’re going to do your research to make sure you’re getting the best deal. The same is true for stocks.
But it’s not as simple as looking at the share price of a stock. The share price is determined, in part, by how many shares are available on the market. Instead, we want to find a metric to make sure the stock is a good value.
And the price/earnings ratio, also called the P/E ratio, is a great place to start. The P/E ratio is calculated by dividing the price per share of a stock by the earnings per share. This tells us how much each dollar of the company’s earnings costs to investors. So the lower the ratio, the better the value. More importantly, we can compare the value of a company to competing companies, the company’s sector, and the overall market.
For example, the P/E ratio for the S&P 500 in May 2019 was 21.59. If the company you’re looking at has a P/E ratio of 40, nearly double the broader market, then it might be overpriced. It’s a lot like buying a car and paying over sticker price just because you like the color.
But you’ll also want to compare the company’s P/E ratio to its competitors and to its specific sector. Some industries have higher or lower P/E ratios than others, so you want to make sure you’re doing a fair comparison.
For instance, the healthcare industry had an average P/E ratio of 27.3 in 2019. At the same time, the financial industry had an average P/E of 15.3. Make sure you’re comparing apples to apples.
Lastly, we’re also looking for stocks that are being tracked by analysts on Wall Street.
This means the company is big enough to merit attention from investment banks. It’s a simple way of weeding out scam companies and ensuring the firms are transparent enough to share their financials with analysts.
This is an alternative to just targeting large-cap companies (those with market caps over $10 billion), because then you’d be missing out on the small- and micro-cap companies. And sometimes those are the ones that make us the most money.