I realize that, for a number of reasons, I haven’t made many posts lately that specifically deal with investing. My bad.
To make it up to my readers, I’ll go through a run down of some of the characteristics that make for better investments than others so that when you make your own investment decisions, you can have them in consideration. This isn’t a conclusive list that all your investments have to meet, just some guidelines on what to look for.
1. Low price to asset ratio
Look for a company that is trading at less than or close to the book value of its assets. Even better if its trading close to the value of its net current asserts (i.e. Cash, short term securities, accounts receivables and inventory, less any current liabilities).
2. Low price to earnings ratio
This is one metric almost every investor should know already. When you buy stock, you’re investing in future earnings. Assets are only useful as a way to generate earnings. So you want to buy stocks that are cheap in comparison to the earnings you’re expecting. PE Ratios of 17 and less are a good proxy although naturally exceptions exist.
3. Significant Insider Purchases
If top executives and insiders in a company are loading up on their stock? It’s generally a good sign. They know a lot of things that investors don’t so if they’re buying, you’re probably okay following their lead.
4. Small capitalization companies
Smaller companies usually grow faster, have room to get bigger and are more nimble than larger companies who don’t have much more room to go. So all things being equal, a $100m company with solid fundamentals will turn out better than a $100 billion one.
5. Higher Growth Companies
Companies that are growing faster will make better returns than stable, blue chip, stocks although the latter has benefits for a defensive investor. So companies with high growth in revenues, five year average earnings growth of higher than 20%, and expected forward growth of higher than 30% tend to drive outside returns in the short to medium terms. Eventually though, all growth slows so the company’s margins has to also make sense in order to sustain its value once growth slows.
So there’s that. Look for companies that have one or more or those characteristics, do your DD and flourish.