The first step in choosing the right stocks is to build a pool of stocks you are interested in. This way when you do more in depth research you have eliminated a large number of companies before you started and have less work to do.
Part of this is for diversification, you will want to invest in muliple companies so if one loses money you still are ahead overall, bigger companies are lower risk, but usually cost more. Depending on how much you are starting with you can build over time and invest in just one to start. I also recommend starting out with companies that are your long term goals first, then go short term.
Find 10-20 companies that you use their products or know of their products. Then start eliminating ones that dont fit the criteria here or your orginal goals.
The first elimination I would do is price, if you cant afford ten or more shares it is too expensive, this is because the dollar change you would need to make money plus the cost of your trading fee from your broker would be too high.
The elimination for people just starting would be companies that are not profitable, even though this eliminates a lot of good buys, it lowers risk by a lot.
At this point see how many companies your left with.
Here is my starting list:
yum foods(KFC, taco bell)
and my eliminated list(assuming $500 per stock)
I am making the assumption to sell when it reaches its 52 week high, this may or may not be attainable on some or all of these, but its a decent strech goal, i probably would end up selling when i reach half to 2/3 of what i estimate the potential at.
Last edited by darkangelism; 07-12-2008 at 07:42 PM.
I will now do individual analysis of the stocks from my previous post.
YUM YUM BRANDS INC
the first thing I will look at is the current price which is ~36 and compare it to the 52 week low and high and try and see where it is relative to it potential price here that is ~28 to ~42, so i would set my sell goal at around the 52 week high. If i bought $500 worth of stock I would have 13 shares and if it reached $42 i would have made $78 which is about 16% which is a reasonable return if it reaches that in the next year. The next thing I look at is if it pays a dividend, and it does 2.2% so if i hold for a year and it gets to $42 a share then i will make an 18.2% return.
Next I will look at its historical pricing, see if it was ever really high and if i could make way more by holding it longer, in this case no, it usually traded a lot lower in the $10-$20 range, because of the fact that it historically traded lower I will look at the price to sales ratio and price to earnings to see if its overvalued now. In this case the P/S is 1.56. If this is under 3 thats usually good. P/E is 19.49 and under 25 is considered good, so that is also fine. The next indicator I check is the PEG ratio which is a modified P/E which accounts for growth, a good PEG is 1 or lower, here it is 1.6, which is a little high, meaning that it probably wont have a upside much higher then my $42 goal.
So overall it would be a good buy until it reaches $42 then sell, and would hopefully do that within 6 months to a year.