So many times when I tell people that I like to invest in the stock market, the first thing they like to ask me is, “which company will be the next big winner,” as though there is some formula that spits them out. I continue to answer their question by stating that you cannot just happen to wonder across a stock of that caliber, but rather you have to be on the hunt for one.
What many non-investors and even new comers to the stock market fail to realize is that everybody has their own preferences. In short, this means that different investors mainly tend to stay around stocks that fit their criteria. It can be compared to a mall. Just because someone may like to go to the mall, that doesn’t mean they like to go in every store.
However, eventually this got me to wonder, how do you go about finding the next big winner? Although I may be able pick a stock that can run good for a month or two, I have never been able to get a stock from the junk pile and ride it to the beach, but it looks like my luck is changing. Just the other day I wondered upon an article on The Motley Fool. It basically outlined what kind of criteria these investors use to find “the next home run stock.”
It also goes on to state that these type of stocks are usually never publicly labeled as speculative stocks or surrounded with tons of hype, but instead these stocks are usually strong from the second they enter public markets.
You only need to train yourself to look for disciplined, conservatively run small businesses.
This all seems good and well, but what exactly do I train myself to look for.
What I look for
Every day in Hidden Gems, we track down the following:
- Founders with large personal stakes.
- Financial statements that are easy to read.
- A solid asset base with little or no debt.
- Price ratios that significantly undershoot growth rates of free cash flow.
- Dominant positioning in a profitable niche.
- Plenty of room to grow.
If you’re inclined to think that every small-cap stock is doomed to have a larger competitor stomp it out, I ask you to return to my list of strong performers above. Each rose from obscurity because of sound financial management and shareholder-friendly practices. The free markets gave them plenty of maneuvering room.
Now don’t get too ambitious. If it was really as easy to find the next winner as it is to read this article, then everyone would have their own private jet. You might have to research over hundred of stocks before you find the ones you like.
As a safety tip it is also good to remember, that you don’t want to invest all your money into these long-term “risks.” Sometimes it might take a couple years before these stocks decide to pan out, and other times.. well.. you might have just been wrong.
You can read the rest of the article, at The Motley Fool.