A question that crops up from time to time is how can a retail investor find good stocks. In my opinion – most retail investors are better off buying mutual funds than individual shares because the chances of your beating a professional fund manager are low. That said, there are a large number of people who do buy shares directly (including me) and they need some sort of a filter to alert them to good stocks. With over 1,300 shares listed on the NSE – you should have some guidelines that help you narrow down the good ones.
In this post, I’m going to talk about some aspects that make me interested in a company. These are things that tell me hey – this thing can be good. That’s important – these indicators will make me interested to go and read the annual report of the company, and find out more about them. So, in that sense these measures will help in narrowing down the universe from a few thousand to a more manageable number.
Here are five such indicators that I use.
1. Great products: This is really obvious but somehow doesn’t get talked about that often. When you are buying a share in a company – you are betting on the future prospects of the company. The future prospects of the company depends on how good their products are and how much they can charge the customer for that.
When I see a good product I’m interested to know who makes it and if they are listed or not. When I see my sister in law admonish me for getting the wrong brand of glue, or my dad waiting for a week to get his car battery replaced because his brand is not availableÂ – I’m interested in finding out who makes these products, are they listed, are they making money? Are they profitable etc.
2. Lots of cash and little debt: This is another obvious sign of a company doing extremely well, and more often than not also means that the company will be able to ride out tough times when they eventually do hit it. I say that because most businesses are cyclical and it is inevitable that they hit a rough patch at one time or another. Companies with a cash cushion are much better placed than others in these times.
Also, when the stock market crashes, and everything comes down, there is a good chance of some of these stocks becoming really cheap.
If I hear about such companies then I’m always interested to carry out more research into them.
3. CEOs and founders buying shares: Â CEOs and founders buying shares of their own company is definitely a positive, and something that makes me take notice. If they are willing to put their own money in the company’s stock by buying it from the stock exchange then that must mean that they think that the shares are undervalued, and this piques my interest and makes me look deeper.
4. Doing something unusual: When a company does something unusual that always catches my eye – this could be a company refusing to give guidance to equity analysts despite all the pressure, or a bicycle company holding a cross country bike rally, a company going out of its way to help an employee, or even a company with a really funky name.
It takes a lot of courage, passion, and creativity to break the mold and do something new – these are all signs of a good company, and if I find a company doing something that goes against the grain of conventional wisdom – that really interests me as well.
5. Long history of dividends: If a company pays out dividends steadily then that’s a good sign as well. It shows that the company has a good capacity of generating earnings, and also has a benevolent outlook towards shareholders. This is also a very popular way of finding stocks, and you will find entire websites devoted to picking stocks this way.
As you can probably see, these indicators reflect my belief in long term investments, and holding shares for very long periods. These are ways to find good companies that make great products because that’s the type of investing that works for me. It gives you great comfort in the time of panics Â because you know that people still continue to buy the products of your companies, and usually such companies have been around for decades, and some even a century or longer and that helps you from panicking too. And of course, when the tide turns and times are good – these companies are rewarded by the market for their good financial performance.