Any stock that consistently makes you money is a good stock. These could be high quality blue chip stocks or they could be growth stocks. What factors should you look for when contemplating buying shares of a publicly traded company? Which fundamental ingredients might help a stock appreciate in value during volatile markets?
Institutional Support
Institutions such as banks and hedge funds have enormous amounts of investment capital at their disposal. These large businesses typically buy up a large amount of shares and hold for a prolonged period of time. Institutions will also research the stocks with due diligence before accumulating shares.
Strong institutional support will reduce the amount of available shares and provide confidence to other investors. Any company with institutional ownership over 50 percent could be considered strong. When institutions are increasing their position the share price should rise further.
Earnings
A company without positive earnings will have its share price based purely on anticipated future income. This will create a more volatile share price. Positive and steady earnings will allow the share price to grow at a steadier pace. Earnings that increase annually will continually boost valuations thus drawing the attention of value investors.
Debt to Equity
Many companies carry debt. Investors typically do not get overly worried if the business also has a large asset base. When debt levels rise above equity levels the company could be in danger. A slight jump in interest rates or a lowering of credit rating could be the straw to break the camel’s back.
A good stock should have a low debt to equity ratio. Buying stocks with less than 80% debt to equity would be a good rule of thumb to follow.
Price to Earnings
Warren Buffett often picks stocks with low price to earnings ratios. If the price to earnings ratio is 10, this means the share price is 10 times higher than retained earnings. If this trend continued, it might be reasonable to assume that the share price would also appreciate 10% per year as the net value of the company increases.
Relative Strength
Relative strength of a stock is determined by comparing the price action over time against a common index such as the Dow Jones Industrial Average. Good stocks should exhibit strong price movements in relation to market averages. This means they accumulate faster than an average stock in bull markets and fall less than their counterparts in bear markets.
Return on Equity
A good company should be able to use their equity to make more money. If a business merely sits on their cash and assets without utilizing them fully, this could hurt share prices.
Each sector and industry will have differing ratios when comparing return on equity. Just make sure that the company you are thinking of buying has a return on equity ratio that at least par with the sector average.
Rounding Up a Good Stock
There are many more components then just these when considering what makes a good stock. But if you find a stock that has fundamental strength in earnings, low debt, priced low, incredible price strength when compared to the market, they make good use of any equity and the institutions are accumulating, you just might have a potential winner.