Tags: stock | picks

Seven Steps for Picking Stock Winners

Friday, 10 Jul 2009 02:56 PM

By Dan Weil

With the stock market so volatile in recent months, many investors are eager to learn methods for selecting stocks that will rise.

Motley Fool, specifically Fool contributor Richard Smith, offers seven steps to picking winners.

It boils down to looking at seven different measures of companies’ financial health:

  • Market capitalization

  • Net cash

  • Enterprise value

  • Free cash flow

  • Historical and projected earnings growth

  • Return on equity

  • Insider ownership

    All these measurements can be found on Web sites such as Yahoo Finance.

    Here’s what Smith looks for in these categories.

  • He prefers small-cap stocks. “A market cap less than $2 billion, so it's got plenty of room to grow,” he writes.

  • “Little or no net debt, because bankruptcy risk is a headache no one needs.”

  • “Long-term growth prospects of 15 percent or better, a history of similar growth and similar returns on equity, because stagnation and inefficient management are no friends to the investor.”

  • “Last but not least, management with ‘skin in the game,’ as represented by insider ownership of 10 percent or better.”

    Smith says, “The stock market's recent revival has thinned the ranks of such prospects. But if you know where to look, you can still find a handful.”

    Be aware, of course, that no stock picking system is foolproof. Start by investing small amounts, and don’t increase your commitments until you’ve seen signs of success.

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