Stock Picking: An Investment Strategy

Identifying quality stocks is one way to approach the markets. Think of it as a bottom-up strategy. When looking at stocks,  one should know how to identify them and measure their value. From a professional standpoint, there are two major approaches to analyzing companies: growth investing versus value investing.

Growth Stocks

Look for CAN SLIM qualities in these stocks. CAN SLIM represents high earnings growth potential for future prospects and sound management principles. This can basically boil down to the following:

  • Financials
  • Potential
  • Management

Value Stocks

That leads us to the value stocks. Investing in value stocks is mostly a matter of analyzing the financials of a company and lining that information up with the price of the stock. Lower-priced stocks are more desirable for value investors so long as the company's value is deemed higher than the price. The major take away points to remember for value investing are that the company's balance sheet and income statement should be stable. The price of the stock should also be stable, and for the most part, there should be a good hidden value in the company. For instance, there could be a new project, merger or acquisition that will bring additional wealth to the company. If this addition can be clearly passed down to investors, and the addition also succeeds, then the company can be considered a value stock.

Financials

Many analysts and investors who are starting out may think that a company's financials are the most important factor for an investor. That couldn't be further from the truth. The financials are mainly for the accountants and those investors who are able to analyze what's going on with the company in relation to the financial statements. When it comes to the financials, focus on the three major statements, which are the income statement, statement of cash flows and balance sheet.

Potential

For potential, think marketing, products and services. Any company that is able to market itself and expand globally or nationwide will have the steam to generate high gross revenues. Any company that executes well on its vision of a business plan will also have good potential. For the most part, potential for the company relates to potential for the industry as well as for the general market.

Management

When it comes to management for investors, the bottom line is the only bottom line. If the management has conflicting interests or has situational problems, then value investors should be wary because the company will not be focusing on the financial line items of the balance sheet or income statement. Be cautious of companies that are only special purpose companies. They may look like a good value play or growth stock, but they are a special purpose company for the interest of something other than the investing public. Also be cautious of those companies that are not providing good products or services as a going concern. If they simply have good financial statements, there may be underlying problems with management or no prospects for growth.

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