Today I’m going to unpack the secret of how to pick winning stocks more often than not.

Let’s be honest, picking stocks can be a scary thing to do. After all, it’s so easy to doubt yourself once a stock you thought was good – drops into negative territory… Some say losing money on stocks is part of the game. And that’s true.

But the fact is picking stocks shouldn’t be a guessing game. Rather, a well thought out strategy, analysis and sound investing principles can greatly limit your potential losses. While picking the biggest possible winners!

How can you pick winning stocks? Below, we’ll help you start evaluating stocks

Picking winning stocks is as much art as science, and these steps can set you on the right path.

1. Start Simple:

Peter Lynch, Warren Buffett, Ronald Reed — history’s most successful investors have amassed millions (billions even) on the basis of one simple principle: invest in companies you understand and avoid those you don’t.

So, invest in what you understand. If you have expertise in an industry, leverage it.

Curiosity about a new sector is fine but avoid blind investments.

If you invest in the next hot semi-conductor stock, because everyone tells you so – without having a clue or understanding the business – it is a recipe for failure…

2. Spot Strong Players:

Look for companies with robust competitive advantages—be it cost efficiencies, network effects, recognizable brands, or high switching costs.

A company with cost advantages would be like a gold miner with the lowest production costs in the sector – competitors simply can’t beat them… Or a steel producer with an innovative process that saves on electricity costs.

A recognizable brand could be something like Coca-Cola, or pretty much any branded chocolate or cereal on the market. People barely even consider alternatives because they trust the brands.

Investing in these strong players ensures you invest in a company with staying power…

3. Metrics Matter:

Evaluate key metrics like P/E ratio, PEG ratio, PSR ratio, P/B ratio, and Debt-to-EBITDA ratio to independently assess a stock’s value.

A PE ratio helps you compare a stock’s price to the company’s profits. It can then also serve as a measure to compare different companies in a sector to one another… Then, if you use the company’s expected growth rate you can calculate the PEG ratio.
Like the PE ratio, a low PEG could mean the company is undervalued, whereas a higher PEG could mean it’s over-valued.

I also like to consider the price to book value, or net asset value per share. This is a measure that tells us how much all of the assets, minus the company’s liabilities (debt) is worth on a per share basis. If this figure is higher than the share price, the stock is likely undervalued.

4. Check the Past:

We all know past performance doesn’t necessarily guarantee future performance…

But the fact is performance tends to create momentum. And a company with positive momentum is more likely to continue doing well, while a company with negative momentum might really struggle to turn things around.

You can also assess a company’s historical returns to gauge its performance during various market conditions. A company that continued to pay dividends through the 2008 financial crisis and the Covid pandemic would clearly be seen as a very resilient company, and something drastic would have to happen for it to suddenly stop paying dividends.

5. Portfolio Fit:

Consider how the stock aligns with your overall portfolio strategy. Diversify intelligently across sectors for a well-balanced approach.

You don’t want 10 junior miners, 10 small cap stocks and only one Blue Chip stock in your portfolio if you have a low-risk tolerance… Or if you need to use the money shortly for something like a deposit on a house or a car.

The most successful stock investors never stop learning. You start with what you know, sure. But then, as you get more comfortable with investing, you take what you’ve learned and apply it to other sectors. That, in essence, is how you pick winning stocks and build long term wealth.

PS. Want to know what I’m buying in 2024, then subscribe to my Red Hot Penny Shares research advisory here – we’re offering a massive discount to first time subscribers here.

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