Every expert investor will tell you that if you want to succeed in this industry, you have to learn how to identify the winning stocks in the market first. According to studies, most of the gains in the stock market in the last few decades actually come from only a handful of stocks. Also called outliers, these stocks beak all of the records and are so powerful that it’s a must to have them as part of your portfolio.
But the question is: how do you find tomorrow’s winning stocks? Here are a few tricks to keep in mind.
Look for a Stock with Excellent Fundamentals
It’s a no-brainer: if a business is doing good, then it’s most likely to have winning stocks. There are two fundamental attributes that a good business should have: growing earnings and growing sales. These characteristics are a good sign that a business is running on a strong foundation and will have winning stocks for a long time.
Look for High Book to Market (B-M) Ratios
One of the most popular methods for choosing unpopular stocks with winning potentials was developed by Joseph Piotroski. While teaching at the University of Chicago in 2000, Piostroski did a research about companies with high book to market (B-M) ratios or those with stocks that had book values that were higher than the values accredited by investors.
He revealed that these stocks are great investments because they have the potential to grow exponentially once they are recognised more by the market.
To choose these kinds of winning stocks, Piotroski suggests that you look at cash flow from operations, return on assets (ROA), debt to asset ratio, net income, outstanding shares, gross margins and asset turnover ratio.
Look for Good Performance
Another important factor when looking for tomorrow’s winning stocks is good performance over the long-term. This is reflected in their charts where their stocks should be trending higher and even reaching new highs over the years.
Although there can be pullbacks in the market influenced by fluctuations in the economy, winning stocks will continue to rise year after year and because they already have a good foundation to work with and this is backed by their excellent technicals.
Look for Continuous Demand
This is an obvious fact: big investors will tend to put their money on top stocks. So the final factor that you should look for unusual institutional trading activity. Big investors will not just buy shares from stocks they don’t believe in.
They’ve been in this business long enough to understand what it takes to be a winning stock and you can get a hint from them in building your own investment portfolio. Be on the lookout for stocks that the smartest investors choose to put their money into and take that opportunity to join their success.
The Takeaway
Investing in winning stocks may take some time to master. But if you practice these skills and be smart enough to know where you’re putting your money into, it will be easier for you to spot tomorrow’s winning stocks before everyone else.