Stock Picking Strategy - What Works

Financial Plan & Invest

One of the most important factors when it comes to success in stocks trading is picking the right stock price. Determining the right stock price allows you avoid over-priced stocks and to jump at the opportunity when you discover an underpriced stock. So, which is the best stock picking strategy?

One of the most effective strategies when searching for a highly-rated stock that has a good momentum and a price that is reasonable is buying stocks from companies that have a low P/E ratio. A company that has a low P/E (price-earnings) will make more profit for each dollar invested. Market statistics over the years have shown that the market punishes stocks that lag behind and rewards those that show strong potential for profitability. You should, however, note that this is not written on stone. The market has gotten different stocks wrong by making this assumption. Once you make this consideration, do proper analysis of the fundamentals to ensure that what the market predicts is actually feasible.

Another effective stock picking strategy is picking shares that pay high dividends. The purpose of investing in the stock market is getting a high return. This, other than stock price increase, comes in the form of dividend. If a company consistently pays out a high dividend, the market will respond and will reward the company.

Consider the book value of the company you are considering and go for the stock if you find that the company is priced below this value. The book value is basically the net asset value as per the accounts. This is a good way of determining the worth of a stock for a company whose stock is otherwise difficult to decipher. You should have a strategy that seeks out companies that have undervalued their assets.

Consider going for small caps as opposed to blue chip companies. There is a saying in the investment circles that elephants do not gallop. This simply means that blue-chip companies that dominate the industry are mature and there is a very low possibility of profits that advance rapidly (and consequently a low probability of share prices that advance rapidly). On the other hand, small companies attract investors because their prices have not stabilized and there are many unknowns. You should always keep in mind that the higher the risk, the greater the returns.

Some people subscribe to stock picking newsletters, but this is a blind way of doing things since you will not have done any analysis of the stock.

Consider broker downgrades and upgrades. Brokers have the training and experience necessary to predict the direction a particular stock will take and you should consider the rating downgrades and upgrades they give. You should be on the lookout for a downgrade or an upgrade within the last four weeks.

Consider the PEG ratio of the stock. The PEG ratio is gotten by dividing the P/E ratio by projected Growth rate. This allows you to compare the stock's relative valuation irrespective of its growth rate. If the PEG is less than 1 or equal to one, you expect a higher return on investment compared to when the PEG is greater than 1.

Another important stock picking strategy is the use of fundamental analysis tools. There are several such tools, both online and offline. Do not be guided by emotions when picking a stock. Consider views by experts from the likes of NAIC (National Association of Investors Corporation). Consider using strategies that have been tried and tested over time, but you should customize them to fit your particular circumstances and strengths/weaknesses.

Other important considerations to make are the strength of the historical earnings growth, the strength of the forward earnings growth, and whether management is controlling revenues or costs.