HOW TO CHOOSE WINNING STOCKS

Examining strategies for finding good stocks and avoiding bad ones. We will also explore the art of stock picking and selecting stocks based on strategic criteria, with the aim of achieving a good return

I walked into a store recently and saw some lovely clothes hung up for sale. I noticed how crowded the building was and managed to edge my way through to the main sales rack. As I picked a few shirts, I headed to the payment till and paid almost half of what I would pay for them normally. Oh what sweet sale. As I walked out of the store, I realized that I needed to invest in this company, at least it would give me the opportunity to rake in some good dividend with such crowd trooping in daily.

As I got back home that afternoon, I discussed the idea with a few friends. Yes I got the idea ready, but was I mentally and financially equipped to carry on with this investment? Did I have a solid strategy in place? According to Peter Lynch, the legendary American investor, ‘’strategy doesn't mean you should buy stocks in your favorite retailer, just because you like shopping at their store. You should never buy any stock without doing homework on the underlying businesses fundamentals’’.

We will examine some of the most helpful strategies for finding good stocks and avoiding bad ones. We will also explore the art of stock picking and selecting stocks based on strategic criteria, with the aim of achieving a good return. It is safe to say that there is no guaranteed strategy to picking the best stocks and there is no secret recipe anywhere, but following a carefully crafted strategy would put you ahead of others.

The first strategy is Fundamental Analysis. This is the foundation of investing and some would say that you haven’t started investing till you do a solid fundamental analysis. This analysis serves to answer basic questions, such as: Is the company's revenue growing? Is it actually making any profit? Is it in a position to beat out its competitors in the future? Is it able to repay its debts? Is management trying to manipulate its books? The various fundamental factors can be grouped into two categories: quantitative and qualitative. The quantitative arm is capable of being measured in numerical terms while the qualitative arm relates to the quality or character of the stock.

Neither qualitative nor quantitative analysis is better than the other. Instead, good analysts merge both together and consider qualitative factors in conjunction with quantitative factors. Take Nigerian Breweries for example, they manufacture Maltina and Amstel Malta. When examining its stock, one would look at their annual dividend payout, earnings per share, and many other quantitative factors. However, no analysis of Nigerian Breweries would be complete without taking into account its brand recognition. Who doesn’t know Maltina or Nigerian Breweries? Any random investor can actually start a business selling malt, but only a few companies are reputable and recognized by citizens. Nobody truly knows the true worth of Nigerian Breweries, but at least you can be sure that it is an important factor that has contributed to its growth.

Also, the intrinsic value of a stock must be considered when looking out for stocks to invest in. The intrinsic value of a stock is its price based solely on factors inside the company and this eliminates the external noise involved in market prices.  For example, the condition of the economy moves market prices. The intrinsic value of a stock, attempts to remove all external influence and values a company on its own merits. Internal factors like a firm's products, its management, and the strength of its brands in the marketplace determines its intrinsic value. The calculation for measuring intrinsic value would be discussed in further tutorials.

Do you now see why one shouldn’t jump in to invest in the clothing store stated above? You may see a lot of customers trooping into the store, but does that make it fit for investment? Fundamental analysis has a very wide scope as well as valuing a company. This involves time and effort, hence you should be in no rush to dive into any investment. Researching on what company to invest in, not only involves predicting cash flows, one must also consider other qualities of the company such as its qualitative factors. This would be discussed in our next tutorial.