How to pick good stocks : the power of consumerism

Use your own consumer experience to find rewarding stocks

a woman

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How can we pick companies for their long-term ability to stay strong and grow earnings?

The Australian economy is starting to show signs of a comeback with housing and better retail projections, but then there's always something that seems to set it back. Unemployment is expected to rise and the RBA is saying that it may be 2015 or 2016 before real growth is back.

When the economic picture isn't clear, and typical market drivers of consumer spending and business expansion are still moving slowly, investors can turn to stocks of businesses that people still want to use no matter what.

You could start out with brand name companies that you like and use yourself. You have been a consumer far longer than you have been an investor, so use that experience.

I had two market researchers- my sons- try out a local takeaway pizza chain because they were having half price discounts on some of their pizzas. I didn't even eat the pizza with them so as not to influence them.

Later on, I asked them if they would eat that store's pizza again if they had to pay regular price, and they said no, they prefer eating Domino's Pizza Enterprises Ltd. (ASX: DMP). We have a Pizza Hut in the area too, but Domino's still wins out.

It's not a conclusive survey since it's only two people, but unless a glut of new rival pizza restaurant chains sprout up everywhere, then Domino's could be a strong contender for the meantime.

Next would be a kind of business that people can't do without, such as the internet and mobile services. Telstra Corporation Ltd (ASX: TLS) is not the only game in town for this service, but it is the biggest and with the way it is adapting  to the new reality of mobile and cloud computing the growth potential is there.

You want to watch how it invests into these new business areas with all the money it has stored up for a push into the next stage of digital communications and entertainment. That will show you how they can stay up-to-date and relevant, and not a plain service provider selling a commodity.

Foolish takeaway

Investing sometimes isn't about finding the next new wonder that everyone raves about. Yes, good returns can be made from them, too, but then there are those that are all around you also.

You only need one or two good stocks to really bring in good portfolio returns and if their business stories stay the same or improve, then having to find the next great winner may not be necessary because you already have them.

Shares in Flight Centre Travel Group Ltd (ASX: FLT), JB Hi-Fi Limited (ASX: JBH) and realestate.com.au's REA Group Limited (ASX: REA) would have made great selections over the past ten years and required only an occasional trip to the shopping mall or a little web browsing for your market research.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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