Being able to find the great stock that makes your portfolio is all a process.
The first person who tells you that he has a system for picking stocks is likely the first one who will lose all of his money in the market. Getting a great stock for your portfolio is not a science. If it was, then all of the great investment banks and traders on Wall Street would never have to take a risk. They would always be able to make profits no matter what. We know this is not true, and we realize that picking the right stock is more of an art than anything else.
The Initial Steps
The first part of finding the perfect stock for your portfolio is to know what you are looking for. Obviously, you want to look for something that is going to provide great returns for your portfolio, but there may actually be other preferences that you have when it comes to which ones you pick. For example, you may choose to not invest in companies that sell cigarettes or alcohol. It may just be something as simple as wanting to purchase a stock that is selling below a certain price level. In either case, you should use something known as a stock screener such as the one provided on Yahoo! finance. Using a stock screener like this will help you to narrow down the choices that you have to make.
What Things to Look for
Obviously, everyone has their own style when it comes to how they like to invest their money. At the same time, there are certain factors that should almost always be examined by investors. These important factors have been shown to have a huge impact on how the company will perform over the long term time and time again. Things such as P/E (price to earnings) ratio, total debt of the company, P/S (price to sales) ratio, forward growth projections, and records of past earnings performance are all things that should be looked at individually in order to find the great stock for your portfolio.
P/E Ratio
The price to earnings ratio is important because it gives you an idea of how much the company earns in comparison to the amount that it is earning. A high P/E ratio may mean that the stock is overpriced. At the same time, a low P/E ratio may indicate that the stock is undervalued. If the P/E ratio is lower than the forward earnings percentage, then many investors consider this to be an undervalued stock, a possible buying opportunity.
Total Debt
In this situation, you obviously want your stock to have as little total debt as possible. If the stock has no debt, then this is the best situation possible for continued growth and returns to investors.
P/S Ratio
This is just another indicator of an overvalued or undervalued stock. It is a comparison of the price of the stock versus the amount of sales per share the company is able to make. Once again, the lower the P/S ratio the better in almost all cases.
Forward Growth Projections
These are simply the opinions of experts who follow the stock. These are their best estimates as to how much the stock will grow per year. The best growth projections indicators are those that are for five-year periods of time. Shorter periods of time than that are too unpredictable. Longer periods of time are equally unpredictable. Comparison of forward growth projections to P/E ratios is vital, but remember that these are just opinions.
Records of Past Earnings
Records of how the company has done with earnings in the past are key to investors in a number of ways. They tell how the company has met (or not met) experts opinions in the past. Likewise, they can give an indication as to how the growth of earnings will continue in the future. Are the experts’ opinions on the mark or not? These records can often paint a clearer picture.
Final Thoughts
As mentioned above, picking a great stock is not a science. Although these five pieces of data are helpful in picking a stock, nothing trumps experience and patience. You learn more each time you invest, and the smart investors store this information away for future use.
