6 Steps to Picking Better Stocks

Avoid Overpriced Stocks

All too often, by the time we hear about a stock, we’re too late to the party. That’s why paying attention to valuation is important. Although the price/earnings ratio (P/E) is the most popular valuation gauge, price/sales (P/S), which compares share price to the last 12-months per-share sales instead of earnings, is more reliable. Stick with P/S values between three and five if you’re looking for growth stocks (e.g. Netflix (NFLX)), or below two if you want to invest in beaten-down value stocks. You can find the price/sales ratio for most stocks in the Valuation section on MarketWatch.

Got Cash?

“Operating cash flow” is simply the cash that flowed into, or out of, a firm’s bank accounts resulting from its basic operations. It’s much harder to fudge cash in the bank numbers than reported earnings, which are subject to all sorts of manipulation. Check per-share operating cash flow in MarketWatch’s Valuation section. Stick with stocks with positive numbers, meaning cash is flowing in, not out. For this test, the amount doesn’t matter.

Trading Volume

Stocks go up when mutual funds and other institutional buyers pile in. However, since they’re buying hundreds of thousands of shares at a time, these big players need high trading volume stocks. Look for stocks with at least 250,000 shares trading daily, and those trading more than one million shares daily are your best bests. You can see the trading volume in MarketWatch’s Overview section.

Get Noticed

Your stock’s great growth numbers will go unrewarded if nobody notices. Stock analyst reports are how many investors, especially institutional buyers, learn about a stock. Thus, sufficient analyst coverage is necessary. You can see how many analysts are covering a stock in MarketWatch’s Analyst Estimates section. It’s okay to buy stocks with at least four analysts making buy/hold/sell recommendations, but more is better. Look only at the number of analysts, not whether there are more buys than sells, etc.

Strong Fundamentals

You’ll always do best by focusing on stocks with solid fundamentals, which includes items such as profitability, financial strength, etc. Rather than analyzing all that on your own, growth stock guru Louis Navellier will do the heavy lifting for you. Simply enter your stock’s ticker into his Portfolio Grader and check the Fundamental Grade. Stick with stocks graded A, B, or C.

Got Growth?

Stocks that have racked up consistently strong sales growth numbers are your best bets for future price appreciation. Again, following our work smarter, not harder, mantra, let Morningstar do the analysis. From Morningstar’s home page, enter your ticker symbol and scroll down to the Premium Analyst Report section. While most items require a Premium subscription, Morningstar displays a Growth Grade at the bottom for most stocks. Your best bets are stocks graded “A” or “B.”

These tips will help you pick better stocks, but following them doesn’t necessarily mean that you’ll make money. Many other factors come into play. Do your due diligence. The more you know about your stocks, the better your results.

For tips and information on the best utilities and dividend stocks from Harry Domash, please check out Dividend Detective.