Pick Stocks For Maximum Profit

by James Hendrickson on August 20, 2019 · 1 comment

pick stocks for maximum profitSince this is a personal finance blog, I thought I’d share some thoughts on picking stocks for maximum profit. This posting is geared for active investors who are interested in taking more risk to get more return. If you’re into passive index fund investing, this isn’t the article for you.

Here are some considerations that may help you select stocks that are going to perform well.

1) Name Recognition & Personal Experience: One way to get an edge is to buy stock in companies with brand recognized for quality and which you have personal knowledge of. For example, I’ve bought shares in the hotel chain Marriott International Inc., partly because I’ve stayed at Marriotts before and enjoyed the experience.

The advantage of personal experience is you have an on the ground sense of whether a business is growing or not. In the case of Marriott, you can tell if there are people in the lobbies and cars in the parking lot. Leveraging your personal experience isn’t my idea. Peter Lynch made the idea popular in his famous book One Up On Wall Street: How To Use What You Already Know To Make Money In The Stock Market. Famed stock picker Jim Kramer has also historically done on the ground research on the stocks he’s bought.

2) Profitability and price-performance: If you want to pick stocks for maximum profit, buy companies that have a three-year history of growth in both profitability and price.

Regarding the first point, the company really needs to be profitable. How can you tell? Well, 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 under Steve Ballmer, then it makes sense to take a pass. The main thinking here is that price follows earnings. The more profit a company makes the more valuable it should be, all things being equal.

3) Balance sheet health: The total debt to assets ratio should be less than .5, meaning there should be 50 cents of debt, or less, for every dollar of assets. This is a must. Companies are like people, debt slows their ability to be competitive and to react to changing market conditions. Debt also reduces a company’s ability to be profitable by increasing interest expenses it needs to pay.

4) Dividends: Your investment should make a small dividend payment. (Well, okay, the bigger the better!).

Dividends do several things:

  1. They force company management to make good decisions. If managers know they’ll need to make a dividend payment, they’ll allocate their resources in the most efficient manner.
  2. Dividends are a signal of good corporate governance. Company managers can always fiddle with accounting tricks to juice margins, but its a lot harder to fake dividend payments. Either the money is there or it’s not.
  3. Dividends provide you a source of income, so you’ll get cash payments in addition to any appreciation of the stock you own.
  4. Dividends mean share price increases. All things being equal, dividend-paying stocks tend to outperform non-dividend paying stocks by a small margin. This is largely because their earnings are better than non-dividend stocks.

5) Smart Money Buys The Stock:  Commercially available free services such as Yahoo finance will tell you what percentage of a company is owned by institutional investors. What you want is institutional ownership from organizations you think are smart. A note of caution here – if a company is part of an index such as the S&P 500 or the Russell 2000, then index funds will buy the stock regardless of what they think of the company. So what’s important here is which institutional investors are buying the fund. If a good outfit such as Dodge and Cox is buying the shares, that’s a favorable indicator.

6) Other factors: Of course, a ton of other factors are important; price, analysts ratings, capitalization size, industry, etc.

When its all said and done, usually I just examine the total picture and make a subjective judgement based on these criteria. Just for fun, here are some of the picks I’ve made using this approach:

Hansens Natural Soda.Monster Beverage Company
Marriott International Inc.
Prudential Financial Inc.

Here are more great articles on the topic of wealth building:

Nine Ways To Make Extra Money
The Pros And Cons Of Mutual Funds
Building Wealth On $600 A Month
Yes, You Can Buy An Oil Well

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Image source: Free Thinkers.

{ 1 comment… read it below or add one }

1 Rahul September 12, 2019 at 12:58 am

NIce Post.

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