How do you choose good stocks? What do you look for?
If you just follow the share price movement, but don't know much about the company behind the stock, then you're at the mercy of the market. If you gained a little, those gains could be easily taken back on bad news or market worries.
If the prices fell, there's no promise they have to go back up. They could even go lower, sometimes for reasons unrelated to that stock in particular.
You should pick your stocks as if you were going to buy the whole business. What kind of business would you want if you had billions of dollars to spend? For me, I would want a company that
– is very profitable
– has a great brand name or is well known for some particular product or service
– is financially sound without heavy debt
– is growing at an above average to high rate.
Just by these four "must haves", you would have screened out probably a big majority of stocks already.
Here are two companies that meet this test and could be very promising stock picks.
— SEEK Limited (ASX: SEK)
The job placement and search website seek.com.au operator is the clear market share leader in this business category. With earnings regularly growing around 20% annually and steady cash flows, the company's cash position is almost as big as the long-term debt it has ($323 million vs $379 million), so it's very financially strong. With a well-known brand name, it is usually the first job search destination for most job hunters. SEEK meets all of the four points.
— Slater & Gordon Limited (ASX: SGH)
The network of law firms covering personal injury law and property conveyance has made a good name for itself as a steady, growing business. It operates law practice brands like Trilby Misso Lawyers, Conveyancing Works, as well as Russell Jones & Walker and Claims Direct in the UK. It has net profit margins around 15% and earnings have more than doubled since it listed in 2007. Its financials are solid and it continues to grow through acquisitions across Australia. Consensus forecasts are for earnings to rise around 14% annually over the next two years. This pleasing stock ticks all the boxes as well.
