As our relationship has progressed, Miel and I have started picking stocks together as a way have a bit of fun on the side. Generally speaking, we use the following criteria when we pick stocks.
1) Name Recognition: We prefer to buy stocks which have a brand recognized for its quality. For example, we bought shares in the hotel chain Marriott International Inc., partly because we had both stayed at Marriotts before and enjoyed the experience.
2) Profitability and price performance: We like to see a three year history of growth in both profitability and stock price. Regarding the first point, the company really needs to be profitable. How can you tell? Well, we think this means it should be 1) pre-tax cash flow positive and 2) needs to have grown both its earnings per share and its post-tax profits in the past three years beyond what could be expected due to inflation. About this second point, we like to see that the price of the stock will move in tandem with its growth in profitability. If the company is profitable, but its share price hasn’t gone anywhere in years, like Microsoft, then we usually aren’t interested.
3) Balance sheet health: The total debt to assets ratio should be less than .5, that is there should be 50 cents of debt, or less, for every dollar of assets. This is a must. In some regards, companies are like people; debt slows their ability to be competitive and to react to changing market conditions.
4) Dividends: We like to see a small dividend payment. (Well, okay, the bigger the better!). More importantly though, dividends are great ways to tell if companies are having trouble or not. Its possible to manipulate balance sheets, (we all know about Enron and Worldcom), so a dividend payment is the strongest single indicator of a companies ability to make profit. In the investing world, there is simply no substitute for money in your hand, period.
5) Other factors: Of course, we look at a ton of other factors, price, analysts ratings, capitalization size, industry, etc.
When its all said and done, usually we just examine the total picture and decide from there. Just to make it, fun we’ll let you know some of the stocks we’ve picked:
Hansens Natural Soda
Marriott International Inc.
US Bancorp
Prudential Financial Inc.
Good luck investing and feel free to drop us a line if you’d like to share finance tips!
-James
