Stock picking can be more of an art than an exact science. Now you can use stock screeners, many for free online, to sift through hundreds or thousands of stocks. But that just narrows it down.
You still need that human element to go over the short list. Mainly because you have to figure out what a company is going to do in the future. It's not rocket science though.
Five years ago in the depths of the GFC, if you had
> eaten pizza from Domino's Pizza Enterprises Ltd. (ASX: DMP),
> jumped online to find a hot property on realestate.com.au (operated by REA Group Ltd (ASX: REA) and;
> booked a flight through Flight Centre Travel Group Ltd (ASX: FLT),
you could have bought stock in each company and your share price gains would have been 596%, 583% and 253%, respectively.
You don't have to be a financial whiz or have your nose stuck in charts and financial statements all the time to find good, growing companies.
Here are three ways to make your searches simpler.
1) Circle of competence
Stick with easy to understand businesses that you may have some personal experience in using. If you are a doctor who's chasing oil stocks, you've got less of a chance to succeed than if you follow CSL Limited (ASX: CSL). It is a biopharmaceutical that has grown its earnings per share more than five times in ten years. It is forecast to grow earnings an average 15% annually over the next two years, so you still have the opportunity to benefit from this great stock.
Look around you. What products or services do you use a lot? That may help you find the next Domino's or Flight Centre.
2) Steady and growing earnings
Make sure a prospective stock has earnings that are steadily growing. Occasionally a company could have a bad year, but the more stable the earnings growth in the past, the better chances it may continue the trend. Here, look at the past ten years of earnings for Ramsay Health Care Limited (ASX: RHC)-
| Ramsay Health Care | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 |
| Earnings per share (cents) | 29.7 | 44.9 | 54.8 | 60.7 | 74.1 | 84 | 101 | 116 | 136 | 164 |
Source: Morningstar
Not all stocks will be this good and steady, but they are out there. Unless something drastic happens, more likely than not, this company will probably maintain its rise. The company is the largest private hospital operator in Australia and is growing overseas as well. More patients means more business.
3) Low debt, high earnings
All businesses use debt to leverage growth. The question is "how much debt is too much?" I compare a company's long-term debt with its earnings – not equity. If its long-term debt is more than five times its net profit, then repayments could become too heavy on the business.
Some debt is okay, but like individuals who buy houses, cars, boats, etc., it all comes down to how much you make each month and how much you can afford to pay. Companies are no different.
SEEK Limited (ASX: SEK), the operator of the job search website seek.com.au, has about $380 million in long-term debt. However, in FY 2014 it made $170.6 million in underlying net profit. Comparing the two, that is 2.2 times debt to earnings, so it is relatively safe. Theoretically, it could pay off all its long-term debt in less than three years. Even now the company is a fast grower, putting its debt to work. It could be a good investment for a number of years to come.
It's interesting to find out about new stocks. It can be slow at times, but slow and safe is better for your investing. It's your future wealth you are creating.
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