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The stock market is huge with thousands upon thousands of different stocks. Finding the right stocks can be extremely difficult especially in a volatile stock market. Many investors and traders opt for using stock picking services, or join stock trading chatrooms to learn about new stocks. However, many of the best investors use simple strategies to uncover undervalued stocks for which they hold for a long-time. This is more so based off of fundamental analysis, which is to look at the fundamentals of a stock as opposed to its chart trends or news outlook. Here are the 7 simple stock screening strategies you need to start using today to find unknown stocks that are primed for future payoff.
Sales and Earnings Growth
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- Sales and Earnings Growth
- Market Capitalization
- Price Earnings Ratio (P/E Ratio)
- Debt to Equity Ratio (D/E Ratio)
- Current Ratio
- Return on Investment (ROI)
- Insider Buying Level
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Studying the growth of a company’s revenues and earnings in comparison to the current market conditions is a great way to evaluate its performance. For investors seeking the best stocks, a viable strategy is to select companies whose top and bottom lines are growing by approximately 15%. This benchmark is commonly used by many organizations to gauge a company’s performance, and it is considered reasonable. Rapidly expanding companies may struggle to sustain their growth rate and subsequently disappoint investors. However, a growth range of around 15% is achievable and becoming increasingly common.
Investors often view organizations with the highest market capitalization in their respective industries or those with a significant geographical footprint as secure investment options. Such companies have demonstrated their resilience by surviving through the most difficult market conditions. For novice investors, investing in these companies can be the safest approach. However, since these firms are industry leaders, they often come with a higher price tag compared to their competitors.
Price Earnings Ratio (P/E Ratio)
The P/E ratio is a commonly used valuation tool that measures a company’s share price relative to its earnings per share. It is used to determine whether a company is overvalued or undervalued. While there is no precise metric to indicate whether a stock is overvalued or undervalued, a P/E ratio of 15 or less is typically viewed as undervalued, while a P/E ratio exceeding 18 is seen as more costly. However, companies experiencing rapid growth frequently exhibit higher initial P/E ratios, which tend to decline steadily as they mature.
Debt to Equity Ratio (D/E Ratio)
The debt-to-equity ratio is a widely used measure to evaluate a company’s financial leverage or level of risk. It represents the percentage of a company’s assets that are financed through shareholder equity and debt. If a company’s D/E ratio exceeds one, it suggests that most of its assets are financed through debt. Such a company may heavily rely on external funds to boost its financial leverage. It is advisable to select companies with lower debt levels since highly indebted companies are at a greater risk of bankruptcy if unfavorable market conditions emerge.
The current ratio, also known as the liquidity ratio, is a crucial measure of financial health, as it reflects a company’s ability to repay short-term debts or obligations due within a year. Novice investors should steer clear of companies with substantially higher debt than current assets, as firms with lower debt levels tend to be more sustainable. This is because they are not compelled to sell their fixed assets during difficult times, enabling them to keep their operations mostly intact. As a rule of thumb, investors should consider companies whose debt does not exceed 110% of the value of their net current assets.
Return on Investment (ROI)
ROI, or return on investment, is the ratio between an organization’s net income and the amount of investment made. It is commonly used to assess investment performance. A high ROI indicates that the stock is performing well and generating profits that exceed its costs. Typically, an annual ROI of 7% or higher is regarded as a good ROI for a stock investment.
Insider Buying Level
When insiders buy a company’s shares, it can indicate that the stock is undervalued, as senior executives often purchase shares to show their confidence in the company. Therefore, it can be a good idea to search for companies where multiple insiders are buying shares at or near the current market price, as this can lead to long-term profits.
Numerous stock screening criteria are available nowadays, but the aforementioned factors are crucial considerations that investors should keep in mind when making investment decisions.
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