Biggest things you look for in a stock?

[michiganfan9]

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?

[player24]

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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.

[James Boston]

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I generally invest in small camp-mid cap stocks because my income isn't that great at my age

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There's nothing wrong with small-cap and mid-cap stocks, but don't preclude large-cap because of your income. The two really don't relate.

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looks for a company with little competition

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always a plus

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low p/e ratio

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Don't get trapped into thinking low P/E = good stock. It can mean that, but it doesn't automatically.

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a stock that isn't too overvalued

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I don't know if you listened to what I, and several other posters, told you about the book value hang up you had. I saw you continue to post that advice after having it explained to you that it wasn't a very important metric. I'll say it again though. If you're defining over-valued as "market cap < book value," you don't understand valuation. Free cash flow! Learn it, live it, love it.

[michiganfan9]

I'm done looking at book value now

[michiganfan9]

thanx for the post

[michiganfan9]

quote] Dividends can be a sign of strong cash flow generation (good earnings quality), but may also indicate that a company has weak growth prospects.

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can you please explain this

[michiganfan9]

How would you be able to look at a company and classify it as large-cap mid-cap etc?

[michiganfan9]

thanx for the post, i'll start looking at free cash flow a lot more

[r3vbr]

You look at the market capitalization. i dont know the exact line that divides one classification from another buy id GUESS that usually smallcaps are worth less than 500 million, 500 mi - 2 billion would be medium cap, and over 2 billion large cap (i think), plz some other poster correct me if im wrong here

[xtravistx]

What is wrong with a stock having debt? Can you explain your reasoning?

-xtravistx