Re: Biggest things you look for in a stock?
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Now i'm 16 and love to invest. I generally invest in small camp-mid cap stocks because my income isn't that great at my age. I usually look for a steady increase of gross profit, looks for a company with little competition, low p/e ratio and a stock that isn't too overvalued. stocks with free cash flow much greater than their debt (hopefully they have none). And last dividends. I like a stock that gives out dividends because it shows that usually thye are not struggling to bring in cash. What else should I be looking for?
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Congratulations on getting such an early start.
For point of clarity, small-mid cap refers to the size of the company measured in net worth. There is no need for you to avoid large-cap equities because of your limited income. Also, companies with steady increase in earnings do not generally trade at low P/E ratios. These companies, referred to as growth companies, will usually trade at a premium P/E ratio.
You are right to focus on the level of competition. Competitive sectors, with few exceptions, provide limited opportunities for sustainable earnings growth. Probably the worst investments involve growth-oriented companies in highly competitive, mature industries. If there are lots of competitors, the overall market growth is low, and every company is pursuing growth - run in the other direction.
Look at earnings quality by focusing on cash flow as opposed to GAAP earnings. Many companies are forced to invest in physical plant and working capital to an extent that earnings do not translate directly to cash flow. Dividends can be a sign of strong cash flow generation (good earnings quality), but may also indicate that a company has weak growth prospects.
Whatever you do, remember that diversification is the only free luch in investing. Do not concentrate your holdings. I advocate a core-plus strategy in which a chunk of your portfolio is invested in a market index fund....and you selectively overlay individual stock positions which you have carefully researched.
Good luck.
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