Nov. 25, 2022

Looking for a good stock to buy

Looking for a good stock to buy

Investing is about taking the long view.  Whatever you invest in, you must be prepared to hold it for 5 to 10 years, that is the route to success.  Star investors like Warren Buffett and Charlie Munger take this approach.

So if you are investing in company stocks you need to find companies that have good long term prospects.  Now they may be great companies today or they may not be; maybe you think they are undervalued because there is more that they can do.  Either way you are looking for a company that will be prosperous in the long term as that will boost the share price and the value of your investment.

What does prosperous mean in this context? It means the company grows year on year by increasing sales and earnings, it satisfies the needs of its customers who have a high level of loyalty and it continually attracts new customers.  It could be a particularly innovative company, a company that focuses on lowest cost/value, a company that focuses on the best customer service etc.

Take a look around you and you will see companies everywhere.  Think about the products/services that they offer, the price points of those products and what customers think about them. Then think about how the demand for their products/services will change in the future and how well positioned they are to respond to future customer demands. Remember, the internet is your friend here, there are so many reviews, reports and analysis of companies out there (let's face it everybody has an opinion).  But your job is to distil these down and figure out what you think will be successful.

If you're thinking "how can I possible do that I'm not an analyst" then think again!  You're a customer or potential customer of many companies so start there. 

Some of the best examples are the most simple.  Warren Buffet loves Dairy Queen, Coca Cola, McDonalds and Railroads (amongst many others). Dairy Queen gives great customer value and a consistent proposition which many people love; read the same for Coca Cola and McDonalds.  Railroads are essential for getting products from Point A to Point B and the more an economy grows the more goods need to be shipped.  So you can see it doesn't have to be that complicated to start with. And remember you're always thinking long term here.

Once you've isolated some companies that you think might be a good investment you need to get into some Fundamental Analysis.  Fundamental Analysis is a whole separate topic in itself but it basically involves getting into the financial statements and looking at the key ratios within a business to understand if the share price represents fair value.  It covers things like:

  • How effectively is it running?
  • How efficiently is it running?
  • What level of return is it getting on capital deployed?
  • What level of debt does it have and how do debt payments compare to the earnings?
  • Does it deliver high levels of customer service, what are the customer retention levels?

There are other areas to think about as well but this is a good place to start.  Remember, just because a company is not running efficiently does not necessarily mean it's a bad stock. Depending on the price of the shares it might be a great investment because if efficiency is improved over time then so will earnings.

Two of the key areas to look at are sales and profit.  

  • Are sales growing? - is it managing to increase sales of its products/services over time? Is it selling into new customer segments? Is it selling into new geographies?
  • Is it profitable? - after all the costs have been taken into account is the company making money on a per sale basis?

When the financial markets are booming then everybody is talking growth, growth, growth and investors will invest in unprofitable businesses as long as the sales are growing and there is a path to profitability.  As soon as the markets turn then unprofitable companies start to face many questions about their ongoing viability; think food delivery and ride hailing services.

So to find great stocks to invest in you have to do your own research. Sure, some of that research will be reading analysts reports and similar research done by others but you have to go through the process yourself.  After all, it's your money you are investing. 

Only when you understand how the company is performing and what its longer term prospects are will you be comfortable in taking an investment decision.


Useful Links: Simple Ways to Save Money, The Business of Fraud, What is Inflation, How the rich get richer, Fundamental Analysis