Being able to quickly find good investments is a key skill of an investor. The best investors can sift through the clutter of the market to find 5 to 10 good investments and ignore the rest. But it takes a certain knowledge to be able to do this.
With nearly 19,000 publicly traded companies in the United States, trying to find 10 good investments can be time consuming. Fortunately, there is a simple way to sift through the data. You’ll be able to throw aside 90% of the stocks on the market and focus your attention on finding the best of the best.
When I first began investing, I struggled to find great investment ideas. My last post showed you the tools I use to find those ideas. But once you’ve found a company, how do you know if they’re worth looking into?
That’s where the formula below becomes handy. Finding a business that’s flying below the radar, then checking their charts is not enough. You need to know quite a bit about the company before you start buying stock. However, there are a few things you can look for right away that will tell you if the stock is even worth considering.
This is how I find good investments quickly and weed out the rest.
SEC Documents – Once I find a company of interest, I find their SEC documents and look for the latest earnings reports. I prefer starting with the annual report and then adding in the quarterlies. For example, I mentioned DaVita Healthcare Partners in my post about finding great investment ideas. You can find their SEC documents on their website. Or you could look them up on the SEC EDGAR site.
Return on Equity – The first thing I look for when trying to find good investments is the return on equity. What I mean is, how well does the company employ capital. To do this, I reduce the growth of the stock price by the growth of the market. For example, Apple has grown over the last year by 50% while the Nasdaq has grown by 22%. That’s a 38% return on equity.
Owner’s Earnings – The next key metric to look for to find good investments is owner earnings. This is net income +(depreciation – capital expenditures). For this number, you’ll have to dive into the earnings reports mentioned earlier.
Profit Margins – Look for above average profit margins to find good investments. Higher profit margins means the company has some protection against market conditions. This number can be easily found on Google Finance.
I’m currently putting the finishing touches on a resource guide that will show you exactly what to look for when you dive deeper into a stock. Sign up for my newsletter on the top right so you can get this resource for free, otherwise, you’ll have to pay for it.
These few quick measures will help you find good investments quickly. If you find a company and any of these metrics are out of whack, you can toss it aside. If all of these metrics are favorable, you’ve likely found a company worth researching.
What would you like to learn in my free resource guide?