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Everything about Stock Picking in Bullet Points


Everyone wants to pick quality stocks at low price, so she can make money in stock market. There are multiple theories on how to pick stocks and multiple indicators can be used. There are no sure ways to pick stocks, but you can consider following indicators to short-list stock.

  • P/E should be low indicating stock is running at low valuation. It is preferred that P/E is close to the lowest in the history of the stock or at least in past 5 years.
  • Dividend payout should be high indicating that company is making enough to pay good dividend.
  • P/B should be low. If you can find a stock for which price is less than book value, it would be a value pick. Else, Price/Book value should be at least less than 2 (P/B < 2).
  • Upgrades/Downgrades - Try to find stocks that have gone through a number of upgrades from financial analyst in last 4 weeks, and no downgrades.
  • P/S should be low. Preferably, Price per share should be less than Sales per share (P/S < 1).
  • PEG should be low. It should be ideally < 1, or at least < 1.2.
  • EPS growth - EPS should be increasing 15 to 20% every year at least for past 5 years.
  • Change - Look for changes such as change in management or launch or new product or service. Change should be positive.
  • Common shares outstanding should be low.
  • Leadership Position - Company should be the leader in the industry or at least in the top 3 leadership positions.
  • Institutional ownership – Generally, High institutional ownership is preferred. However, High institutional ownership also means that the company is already on the radar of everyone and may be overvalued. So, consider low institutional ownership stock as well if other factors age good (Peter Lynch, for example, only looked at low institutional ownership stock).
  • Trend - Company with bullish trend is preferred.
  • Insider trading activity – You can check Insider trading activity. Company with insider buying is preferred whereas with insider selling should be avoided.
  • Put/Call ratio should high, should be at least > 1.5.
  • FCF/Sales should be high, at least > 5%.
  • ROA should be good, at least > 10%.
  • ROE should be good, at least > 15%.
  • Dividend yield should be high. It is preferred that yield is close to the highest in the history of the stock or at least in past 5 years.
  • Market Cap - If you are looking for growth, you should prefer small cap over mid cap and mid cap over large cap. But this is very subjective, and you can find potential win in any segment.
  • Debt should be low. D/E should not be more than 35%.
Not all the factors should be considered for all the picks, but these factors can be a good start and then you can refine these factors to find your own winning strategies.

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