Let’s face it. Making money in the stock market in this economy is not easy. The swings in the market can make or break you. One day the market is up 200 points then the next day it's down 150. How can you profit in this market? Some people say day-trading but to me that’s way too risky. The best way I have found to make money is this market is to do your homework. You have to do your RESEARCH! That’s the secret!
These days everyone and their brother are claiming they have the secret when it comes to making money and more specifically the stock market. I’m not going to sit here and waste your time with "secrets", just plain easy to understand concepts that I personally have used in the past.
Here are my steps to money making stock picking:
I use various information sources to do my research including yahoo finance, msnbc, thestreet.com, etc. but my favorite is yahoo finance. The way they organize their information is extremely easy to navigate and understand. The have latest news, financials, quarterly and annual reports and much more. Once you have gotten comfortable with yahoo finance click on the investing folder at the top of the page and scroll down to the industries page. Here you a quick snapshot of what industries are performing good and which ones are performing bad.
Pick an industry that you like. What are you interested in? Me personally I like big industry's like oil and automobiles. I can relate to those industries. I would be a fool to try and buy a stock in a semi-conductor industry. I don’t have the slightest clue about semi-conductors or micro-chips. Etc that’s like blind man trying to find his favorite book. Yeah I know what you’re saying... What the difference? Just pick a stock that’s moving right? Wrong!! This is how people lose Johnny’s college fund along with everything else they ever had. Bottom-line, you need to be able to understand how this company makes money!
Now is the time to pick a good performing industry that you understand. Me personally I look for an industry that is not overvalued (low price to earnings or P/E ratio) and that has a great long term growth rate. That’s what were going for here. Long-term. I wish we could just buy a stock and sell it in 30 days and make a profit but in this market it’s just too risky. Now that you have figured out a good industry now you have to find out which companies are the best. I use the same screening process as I did when looking for an industry (low P/E and strong growth rate). Pick 5-7 stocks that fit the criteria.
Once you have narrowed your search down to 5-7 stocks now you have determine the best of the best. You need to go through every bit of information you possibly can about each prospect. That means all there financials, news, website, press releases, forums, everything! We don’t have the luxury of having a guy on the inside so you have to gain any legal edge you can. I suggest you first start by reading through all the financials. Key Statistics will give you a quick snapshot of a company’s success or failure. Here are some documents you must read through:
All Quarterly Reports
Things to look for. Is this company making money? Do they have a lot of debt? Are there sales down from last year? I know some of this may seem obvious but you have to ask these questions. Look at each company as if they were a friend asking to borrow money. If the company is losing money and is in debt up to its eye balls would you lend them your hard earned money? You may say “sure I would, this is my friend”, Wrong! The odds of getting your money back is slim and none. I don’t mean to be a dick but you have to approach these stocks that way or you will lose.
Operating Margin: greater than 10%
Quarterly Revenue Growth: at least 7%
Price-Earnings (P/E): Less than 25
Debt: Obviously the smaller number the better. However, some industries normally carry higher debt than others
Current Ratio: at least 1.0 ideally 1.5 and higher.
This ratio will show you how well the company can service its debt. A current ratio of 1 means that the company makes enough money to pay all its debts, anything lower means either it has too much debt or not enough income. The higher the ratio better.
Competitors. This is where you can get a quick look at how your company fares compared to its direct competitors. You want to make sure that this particular company is at least keeping up with the pack but ideally outperforming the competition.
Look at analyst recommendations. Analysts can make or break a stock and its stock price. If an analyst comes out and says its recommends Wal-Mart as a strong buy, you better believe that Wal-Mart’s stock is going to go through the roof! On the other hand if an analyst recommends Wal-Mart as a sell then you better watch out if you’re a stockholder. Ideally you want to look for a stock with an average analyst recommendation of less than 2.0. The closer to 1.0 the better but between 1.0-2.0 is good.
Final step. Charts. Some people only use charts to trade stocks. To me this is idiotic. How can you invest your hard earned money on a single chart? You need to know the whole picture and that is why you need to know all including a companies chart patterns. When looking at a companies charts you first want to look at the 3 month, 6 month and 1 year chart. You want to see where the stock is currently as compared to where it was in the past. If the stock is trading much higher than it has in the past you better make sure you know why and make sure it is going to continue. We don’t want to “Buy high and sell low” so do your research. Try not to over-analyze these charts. Look at these charts as more of a visual aid that confirms all your research.
Once you have gone through all this information you need to start eliminating weak companies until you feel confident in 1-2 stocks. Now you’re ready to invest intelligently.