HOW TO IDENTIFY BEST STOCKS
Nigeria’s equity markets in the first half of
the year did remarkably well, as the NSE All share index returned 20.40%year-to-date
gain, which many investors did not enjoy in their investment.
There was no other reason for this than that
such investors were in the wrong stocks, because they lacked no clear objective
and road map to guide their buying decision. The rising tide of a broad rally,
like the one we experienced in the first half of 2017, will produce plenty of
green arrows in most portfolios. But that is not enough for any investor to
come out ahead of the market’s benchmark index, which should be the goal of
every investor.
With the investment environment changing and
full of uncertainty, a clear plan of action is needed to navigate the murky and
often uncertain waters, by those who desire to make money.
One very important question any investor
desirous of robust returns must ask and answer is: How is your portfolio and how
do you want to select stocks so as to reposition or balance it for
profitability in the rest of the year.
I would like to share the investment process
that we rely on here at InvestData, making use of factors below to build a
winning portfolio. Each one of these factors will help you pick good stocks.
But putting all of them together gives you a significant edge over others in
stock market investing.
1) Valuation- There is plenty of practical evidence showing that
stocks with low valuations will outperform the market over the long haul. It's
not easy to find 'cheap' stocks after the market's impressive run, but we look
for companies that are trading with low Price-to-Earnings (P/E) and Price-to-Book
(P/B) multiples relative to their peers and history.
2) Management Effectiveness - It is very important to get a sense of how effective the company's management is in utilizing the resources available. This can be done a number of different ways. However, our research shows that Return on Equity (ROE) does a good job of capturing this attribute. So we seek out companies generating ROEs that are superior to their industry peers.
3) Recent Analyst Upgrades - Our research also clearly shows that stocks that have recently received a recommendation upgrade from analysts will continue to outpace the market. Most of that benefit is felt in the short run. However, quite often a stock that receives one upgrade is likely to get more in the future, which keeps pushing the stock higher as the quarterly earnings changes or something happen to the stock positively or negatively that could cause up or down share price adjustment.
4) Best Industries- Even the best looking stock will underperform the market if it is in an out-of-favour industry. That is why we overweight stocks from the best industries and sectors. And there is no better guide to choosing the right groups than to focus on the earnings estimate revisions for all the stocks in the industry.
5) Long-Term Attractiveness- We look for stocks with potentials that can transform the company in the future, the nature of its products or service, is it expanding or acquiring new production lines or companies to boost market share. While our preferred long-term indicator is an 'Outperform' rating, we also consider neutral-rated stocks that stand to get upgraded to our preferred rating. The main ingredient behind the recommendation is positive changes in a company's earnings estimates.
6) Timeliness - There is no better timeliness indicator like the technical analysis tools that signals or tells us that now is a good time to get into the stock, combined with the company’s earnings position. There is always a time to position in stocks no matter how solid the fundamental of the stock is. You cannot be in a stock at all times, because there is a time to be in and time to be out. You buy into position using fundamental and technical analysis while you sell using technical analysis.
2) Management Effectiveness - It is very important to get a sense of how effective the company's management is in utilizing the resources available. This can be done a number of different ways. However, our research shows that Return on Equity (ROE) does a good job of capturing this attribute. So we seek out companies generating ROEs that are superior to their industry peers.
3) Recent Analyst Upgrades - Our research also clearly shows that stocks that have recently received a recommendation upgrade from analysts will continue to outpace the market. Most of that benefit is felt in the short run. However, quite often a stock that receives one upgrade is likely to get more in the future, which keeps pushing the stock higher as the quarterly earnings changes or something happen to the stock positively or negatively that could cause up or down share price adjustment.
4) Best Industries- Even the best looking stock will underperform the market if it is in an out-of-favour industry. That is why we overweight stocks from the best industries and sectors. And there is no better guide to choosing the right groups than to focus on the earnings estimate revisions for all the stocks in the industry.
5) Long-Term Attractiveness- We look for stocks with potentials that can transform the company in the future, the nature of its products or service, is it expanding or acquiring new production lines or companies to boost market share. While our preferred long-term indicator is an 'Outperform' rating, we also consider neutral-rated stocks that stand to get upgraded to our preferred rating. The main ingredient behind the recommendation is positive changes in a company's earnings estimates.
6) Timeliness - There is no better timeliness indicator like the technical analysis tools that signals or tells us that now is a good time to get into the stock, combined with the company’s earnings position. There is always a time to position in stocks no matter how solid the fundamental of the stock is. You cannot be in a stock at all times, because there is a time to be in and time to be out. You buy into position using fundamental and technical analysis while you sell using technical analysis.
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