How to pick stocks for A profitable portfoliO

2/1/2015

If there was a certain rule or strategy to make you money in the stock market, we would all be rich by now. But the beauty of the stock market is like any market, there are hundreds of ways to make money and they are all different.

Making a profitable stock pick is all about asking the right questions. The main question in this case: What is your investment strategy?

Answering this question while provide you with the tools you need to master for profitable stock picks.

While we at the Indie Investor advocate long-term value and growth investing (essentially a buy-hold strategy), here are also several stock pick strategies that might interest you:

1) The Active Trader

Are you a day or swing trader. Do you have at least several trades per week? Here’s what you should consider when picking a stock:

• Technical Analysis. As an active trader your main concern is the chart. The company behind the stock is almost inconsequential, what matters is market dynamics; price momentum, chart patterns entry and exit points and many other tools for technical analysis.
• Picking and trading stocks with high volatility and volume is KEY to any active trader’s strategy for quick gains in the stock market.
• News alerts also form an important part of the active trader’s stock picking strategies. breaking news related to a certain stock almost always have a great short term impact on a stock’s price.
• Timing might just be the most important of all when selecting a stock for active trading. Are the stock’s chart patterns and technical indicators approaching a bearish or bullish move?

2) The Growth Investor

Not to be confused with value investing, growth investing is a long term investment strategy that focuses on the future. Unlike Value investing, growth investing disregards(although not completely) the current price-value relationship of a stock based on the assumption that the company’s value will grow in the future.

So the question to ask here is: How to pick a company that will grow?

Notice, we said company NOT stock, because as a growth investor you should be picking a company first and foremost. Growth investors are looking for stocks that will double or even triple within a few to several years.

Here’s what to keep in mind when choosing a company:

• Company Management. Is management competent enough to run the business in profit? How effective or ineffective the decisions management makes or does not make? Return on equity (ROE) and return on assets (ROA) ratios can be a good indicator of management’s performance. Remember to compare your results to industry averages. Earnings press-conferences are also a good place to gauge Management’s handling of their own results.
• Young companies are a focus for growth investors, obviously due to their higher potential to grow compared to well established companies. Although risky, young companies in the tech sector and companies that built their own niche in other sectors have the highest growth potential.
• Earnings. To most growth investors, earnings is the driving force behind a stock price’s rise and fall. When picking a stock for growth investment, an investor should look at past earnings of the company and compare them with the industry in order to have a clearer picture of where the company’s future earnings might be headed.
• Profit margins and costs are also important when choosing a stock. No matter how fast a company grows, if they cannot control their costs, that will affect their profit margin, and selling at a loss is something businesses cannot do for long no matter how good their product is.

3) The Value Investor

Value investors like Benjamin Graham and (to a certain extent) Warren Buffett, are still big names

in the investment world.

Put simply, value investors screen for stocks that are selling at a bargain price. The main goal is to find companies that are valuated more than what their stock price reflects. Here are some pointers:

• Book Value vs. Current Price. As a general rule, value investors buy into stocks that have a price lower than their tangible book value per share price.
• Assets vs. Debt is an important part of a value investor’s analysis. While value investors may differ on exact ratios of assets vs. debt or liabilities, the general rule is a company should never have more debt than assets.
• Price/Earnings and earning growth ratios are an important factor in choosing a stock for value investing. These ratios help the value investor determine the intrinsic value of a company in comparison to it’s current stock price.

4) The GARP Investor

This is one of our favorite strategies for stock picking at the Indie Investor. GARP translates to growth at a reasonable price. As another long term investment strategy, it is basically a hybrid of both growth and value investing. This strategy has been made famous by investors like Peter Lynch.

The thing we love most about this stock picking strategy is that it aims for high profit (think 1-5 times the stock’s current price) while being grounded and strict in it’s selection based on value investing principles.

Mastering the GARP strategy is not easy however, as it requires mastering both the value and growth strategies first. And once you master both strategies, you can experiment with different combinations of principles and tactics to produce a profitable stock portfolio.

At the Indie Investor we use different GARP strategies for our exclusive stock picks that our subscribers receive weekly.

Stock picking entirely depends on your investment strategy which in turn can depend on your lifestyle. There are many more investment strategies and tactics that can help you achieve your investment goals and it all depends on you. Be sure to subscribe to our free newsletter to receive quality investment tips and advice.