When you are looking for a new stock to invest in, is there a series of steps you perform in a certain order, or just a list of several things you look into to analyze it? If so, what are they? For example first looking at profit growth, then at P/E and other ratios?
Based on decades of research and real-world evidence, value is considered one of the main factors (premiums, dimensions) of higher expected returns. And different metrics can define the “value” of a stock. Price-to-Book ratio is one (a company’s capitalization divided by its book value). It compares the market’s valuation of a company to the value of that company as indicated on its financial statements.
The data suggest that over time value stocks tend to do better than growth stocks. Sure, that hasn’t been the case during the last decade, so the market pundits and gurus are posturing whether this is the end of the value premium. Who knows? Maybe it is, maybe it’s not. What we do know is that this stretch of time without seeing the value premium is not that out of the ordinary (value beat growth 84% of the time for every 10-year rolling period). To really consider this period an anomaly, it would have to last a little bit longer.
Now, I know that your question is more about how to pick winning stocks, in other words, how to outwit the thousands of other individual market participants and institutions. And I am stalling a bit because I don’t think that anyone really knows. Sure, look for profitable companies that are well managed. However, what else can you possibly find within all the available company data that may give you an edge? If you can find it, then everyone else can as well, especially the institutions that have limitless capital for market research. To really stand out, perhaps you’ll have to spend time visiting these companies in person, talking with their inventory managers, their sales people, in search for something that hasn’t yet shown up in all the published data. Even then you can’t be sure of a winning bet.
Instead, why not just invest in the enduring power of the market itself. It has rewarded disciplined, long-term investors. Choose risk-appropriate, low-cost index or asset mutual funds (or etfs) to build your portfolio, then you too can become rational and relaxed about investing.