Nowadays, a lot of free software or programs on the internet can help you to find new investment ideas but most interesting results are produced when you select the criteria yourself. I suggest the following 4 basic and fundamental items:
1. A reasonable valuation
Buying at the right price! There are plenty of ways to define “value” but nothing is there’s simpler than the price-to-earnings (P/E) ratio.
The lower the number, the less money you’re paying for every penny the company earns.
2. Great cash flow
Companies that bring in loads of cash are attractive. Use free cash flow, which is the amount of money a company has after it pays all its normal costs of doing business.
3. Low debt
Use the debt-to-equity ratio to identify how much long-term debt it has. The higher the percentage, the more debt the company has.
Search for companies that have a total debt to total equity ratio under 20%. You will even find out that some companies have ratios of zero, indicating no long-term debt at all!
4. Solid profit margins
Analyse how much of a company’s revenue becomes profit. The bigger the number (percentage) the better!
Are you after growth stocks? Search for companies that have reported at least 5 straight years of double-digit sales gains or a certain rate of profit increases over the last years.
Looking for strong dividend paying stocks? Then search for above-average yields (e.g. measured by the S&P 500), adequate dividend coverage from cash flows and strong dividend growth over a 5-year period.
Additionally search within a particular sector, industry, company size, or region and then dig deeper into the individual companies themselves. Stock screens shouldn’t be the sole step to measure. But they’re a great way to get ideas with the characteristics you like. Find investments that have strong momentum by specifying share prices at or near new highs. Identify what companies have confident managers, who are buying large amounts of their own companies stocks. Insiders know more about their company than outsiders. You can follow the leaders.
There are so many possibilities. I encourage you to start digging into these companies and the information you find could be very profitable.
Sven Franssen