The correct way to pick stocks will vary from person to person depending on who you ask. It seems everyone has perfected some strategy to pick the best stocks. Yet statistics show that most people are very bad at picking stocks with stock market averages earnings a much better return than the vast majority of stock pickers. However, there are a few steps and evaluations you can take to increase your likelihood of stock selection success.
The first criteria to filter your stock picks through is outstanding debt. Debt isn’t always a bad thing, but too much debt is. Just like we all have credit scores based on past financial activities that indicate our credit worthiness, a company’s debt is a type of credit rating for a stock. For the same reason lenders don’t like to lend money to high credit risks, you shouldn’t like to invest in companies with large amounts of debt.
Another quality to look for when selecting stocks is consistent growth. If a company’s earnings are up and down and unpredictable, it is very likely its stock selection will follow the same unpredictable nature. One time exceptions to earnings such as reorganization, opening a new plant, or an extraordinary expense may hurt earnings for a quarter or two, but overall the company should be consistently expanding its earnings per share. If the company’s earnings are not growing, it is hard to expect its stock to grow.
Finally, a couple other things to consider when selecting a stock are company management and competitive advantage. These two items are much more intangible and difficult to evaluate but they do justify some attention. When looking at management see what qualifications and experience they have. Also keep an eye out for innovation and new ideas from within the company. Does the company have an advantage over competitors? Could another company enter the market easily? These are just a couple of questions to think about when considering a company’s stock. While there is no guarantee of success in the stock market, a person can put the odds in their favor by carefully evaluating each potential stock selection.