Looking for the best stocks to invest in can be time-consuming and challenging, especially if you’re new to the investing world. But there are several tips you can use to find companies that are high quality, strong, and represent good investment opportunities. Following these tips will ensure that you find the best stocks for investing, whether you’re looking to buy shares today or sometime in the future.
Trends in earnings growth.
Some stocks can be overvalued simply because they’re not growing at all. Take a look at how much earnings are increasing. Are they growing steadily, or are they stagnant? A company’s earnings growth is a good indicator of how well it’s doing in its market and shows its potential for long-term success.
Company strength relative to its peers.
Measure a company’s financial performance and ratios against those of other companies in its industry. This can help investors gauge how well a business is performing compared with its competitors. For example, if Company X had net income of $100 million last year, but many other businesses in its industry had net incomes of $250 million, you might wonder why Company X isn’t raking in cash like its competitors.
Debt-to-equity ratio in line with industry norms.
The debt-to-equity ratio is important because it shows how much your business is leveraged. A business that has more debt than equity isn’t as well protected from downturns in its industry and could be more vulnerable if new competition emerges or a key customer leaves. A healthy debt-to-equity ratio will be approximately 50%, but there are a few exceptions—many industries, such as utilities, have ratios of 100% or more.
Price-earnings ratio can give an indication of valuation.
If a stock has a price-earnings ratio of 20, it means that investors are paying $20 to buy $1 in earnings—or, in other words, they’re expecting huge growth. If a stock has a P/E of 100 (or if its P/E is higher than its growth rate), then it may be overvalued and thus less attractive.
How the company treats dividends.
A solid dividend yield is a sign of a great stock, but it’s not everything. Companies that consistently raise their dividends offer another clue as to whether or not they’re on solid ground. The list below shows you some stocks that are currently paying healthy dividends and are also raising them regularly—or have raised them in recent years. If a company doesn’t pass any of these tests, then you might want to move on.
Effectiveness of executive leadership
This is an area that everyone wants to know about, but it’s also one of those subjects where little information is available. For example, let’s say a company’s executive leadership consists of two equal CEO’s and a chairman. Does one CEO stay home more than the other? Does one call most of the shots? How often does he or she even show up at work? You won’t get those answers from a stock chart.