When embarking on the business selection process to find stocks with high growth potential, We must be very careful not to choose the "worst" companies.
What are the characteristics that define this type of company and why should they be avoided?
The company depends on a single market:
If the number of activities carried out by the company is very limited, this indicates that it depends on a…restricted market.
If this does not really pose a problem (although...) in a favorable economic climate, this can quickly become a hindrance to its development in the event of a crisis.
Just as an investor must diversify his investments, A company must diversify its activities, even if they belong to the same industry, they can affect several sectors at the same time.
If one of the markets starts a long-term downtrend, this will not necessarily be the case for others.
Similarly, one should prefer a company who operates internationally : if sales do not meet targets in one country, they may exceed targets in another, and the company's accounts will still be balanced.
The company is heavily indebted:
For a business to function properly, it is not just about generating enough profit to cover loans, but also to have significant room for maneuver.
The goal of any society is "simple" (even if the means to achieve it are sometimes much less so): it must develop.
Which is obviously impossible. if she spends more money than she earns (or if she owes more money than she earns, which actually amounts to the same thing and can lead straight to bankruptcy).
This is why special attention must be paid at the level of indebtedness of the companies we choose.
External growth is not going as planned:
We are talking about external growth when a company decides to buy other companies to accelerate its growth.
These mergers and acquisitions sometimes go very well, and sometimes...not at all.
Obviously, we cannot know in advance whether this type of operation will be a success or not.
But monitor corporate financial news that interest us can be a good way to know whether or not it is the right time to invest.
If the last operation of this type went badly for the firm, Better to abstain and wait to see if she recovers from her failure, or if, on the contrary, it rushes towards a new range of problems.
If, on the contrary, it plans this type of operation in the near future, It is necessary to study all the financial data of the company carefully., to assess the risk.
Ensure that the company can withstand bad operation will prevent us from investing at the worst time.
To finish…
Remember that the selection of value must be rigorous and follow a precise plan.
The stock market already represents enough risk to allow investing in companies which do not meet all the quality criteria that an investor may seek.
It is not a question of "condemning" certain companies, but of waiting for the figures to be in line with the goal of any wise investor: grow your assets and maintain a balanced portfolio.
And it is entirely possible to change one's opinion over time: a business considered risky a few months (or years) ago, can change economic policy, and take a direction favorable to its development.
If so, investors will be there to support it…
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Good morning!
very good article!
For my part, here is my quick checklist to eliminate the majority of companies.
1- The balance sheet: debt to equity below 0.75 and cash as much as possible.
2-Profitability: significant net margin for the sector of activity and growth + return on shareholders' equity greater than 15%
3-The company must generate, on a constant basis, free surplus funds (after investments in fixed assets).
4-3-year growth greater than 12% and 5-year growth outlook greater than 12%.
So with these 4 basic reference points, you will eliminate at least 75-80% of the companies analyzed, the balance will have to be analyzed in more depth.
Martin
http://www.investir-a-la-bourse.com
Good morning,
I mainly remember what you say in the last paragraphs, namely that we should not necessarily forget a company that does not meet our strategy immediately. Some companies may be young or recently taken over and do not yet meet the standards that we can set for ourselves. Personally, this does not prevent me from following them regularly to integrate them in a while.
Regarding debt, this is a point that I find key: I prefer companies that generate cash to those that squander their fortune, even if the balance sheet is neutral or almost neutral. I would also allow myself to add the distribution ratio, which, when it is very high, can be the sign of a poorly managed company.
So many factors to consider!
Good morning
I am interested in the Neopost stock which offers a yield of 8%. Do you know its strategy and do you think it can be integrated into a portfolio at the moment?
Ludovic
I don't know Neopost, but as usual I am wary of stocks that pay such high dividends.
For me, there is only one criterion: historical chart analysis (price action in the past) and the use of technical analysis indicators (price action at the moment).
Next, select the stocks that have the highest probability of continuing to rise.
It's not more complicated.
But very often stocks that go up also end up falling. Momentum is a strategy that can be used when trading in the short/medium term, but not in the long term. On a longer horizon, it is the fundamentals that matter.
It's true that stocks that go up eventually fall. Well, not all of them :-).
In trading and even in investing, gains on one stock pay for stagnation or losses on 9 others.
But I want to say that the stock market is not a casino, nor even – contrary to what films about traders would have you believe – a story of fabulous deals.
Conversely, the long-term investor stays on certain values for a long time. This is because managers of multi-billion funds cannot sell their lines every three months.
We, small investors, with lines of 100k max, can practice swing trading or trend following.
The trick is to surf the trends. It's the silver surfer :)
For example, I have screeners that detect the stocks that are most likely to go up (strongly). A year ago, some stocks were in the lead. Some fell back after a nice rise, others continued.
But new ones have emerged.
Short term indicators allow you to exit on time (except for a bearish gap at the opening).
In investing we talk about sector rotation, I talk about the rotation of "nuggets": stocks that are going up. Overall, I trade on stocks that are going up all the time. It's like a conveyor belt of nuggets.
It's a little more complicated than keeping for the long term (which I also do on growth stocks), but it's more profitable (we sometimes see an increase of 40% in the session).
Actually, I'm chasing momentum.
I see "fundamental analysis" strategies more as weapons of large funds. The managers of these funds cannot tell their wealthy clients: "we invest on the basis of moving averages". That is not serious 🙂!