How to Buy GOOD but CHEAP Stocks

Home | Finance | Stock Market Investing


How to Buy GOOD but CHEAP Stocks

By: Joelle Chan

Many investors love to buy cheap stocks, but as Mr O'Neil (Founder of nvestor's Business Daily) puts it: "Stocks are cheap for a reason". In many (but not ALL) cases, investors try to buy stocks on the cheap without realizing that they're buying stocks of a corporation mired in problems with slowing earnings, sales growth and shrinking market share. These are bad characteristics for a stock to have, cheap or not.

However, although most cheap stocks are priced at their value, many savvy value investors (read: Warren Buffett) have still successfully made fortunes investing in CHEAP BUT GOOD stocks. So how did they do it? Below are some guidelines for smart value-investing (i.e. buying good stocks cheaply)

Buy a business, not a stock.

When evaluating a stock, see yourself as a business owner, not a stock investor. Only buy businesses that you understand. Warren Buffett is well known for ignoring the 1999 surge in technology stocks, refusing to buy stocks in dot.com companies because he couldn't understand the business. Only when you understand the business, can you effectively evaluate important questions like: Is the company's stock cheap because it is losing market share? Is the new product offered by a rival company going to negatively impart your business?

Buy stocks in companies that have a proven track record.

This includes a consistently good EPS, sales, equity and free cash flow growth rate. Generally, we want to see the above growth rates consistently above 10% for the last 10 years. In addition, we want to see a long history of great ROIC (above 10% for the last 10 years). We should also insist that ROIC is either going up, or at least remaining the same.

Buy stocks that have a big MOAT

A moat is a 'protective shield' that a company has that prevents other companies from invading their territory. Examples of moats include

- Brand name: The company has a very strong brand name that makes it difficult for other companies to claim their market share. An excellent example is "Apple", with its group of die-hard fans.

- Secret: The company has a patent or trade secret that makes competition illegal or very difficult. Example: 3M.

Buy stocks with a good and honest management

Characteristics of honest management include admitting their mistakes (if they did not produce results for a quarter, they should acknowledge it and explain how they intend to rectify it) and accepting a reasonable compensation for their work. A CEO that takes home $40 million a year when the stock price dropped by 50% is not our type.

At this point, you may be wondering: If a company has such an excellent record and characteristics, why is the stock cheap?

Most of the time, these companies stocks are cheap because of a temporary problem (such as missing EPS estimate for one quarter) or because the overall market is bearish. At times like this, you can normally buy the stocks cheaply, preferable at a 50% discount.

Article Source: http://www.find-investment-advice.com

Joelle has invested in the stock market for more than 5 years and has successfully used various investment strategies to consistently make money from the stock market. She offers free top quality investment tips at how-to-invest-in-stocks.blogspot.com/

Please Rate this Article

 

Not yet Rated

Click the XML Icon Above to Receive Stock Market Investing Articles Via RSS!
Additional Articles From - Home | Finance | Stock Market Investing
Sign Up for a free account or learn more.
 
Submit Articles
Member Login
Top Authors
Most Popular Articles
Submission Guidelines
Article RSS Feeds
Blog
Contact Us
Privacy Policy
Terms of Service
Adsense Websites
Bankruptcy Help
Chocolate Recipes
Ebay Selling
Mortgages
Payday Loans
Video Ipods
Weight Loss

Best Health Articles
Find Affiliate Advice
Find SEO Advice
RSS Feed Directory
Currency Trading Guide
Link Directory

Powered by Article Dashboard