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.

[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

[BadBoyBenny]

What he is saying is that when a company pays a dividend, they are effectively saying that their shareholders could get a better return on their money than if they reinvested it in their business.

[michiganfan9]

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

[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

[James Boston]

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What is wrong with a stock having debt?

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Nothing, as long as it's managable. And you don't want, IMO, stock in a company that is too leveraged.

[michiganfan9]

I just prefer stocks that don't owe any debt. It shows that they will never have to worry about it and are profitable in my eyes.