9 factors to look at when selecting stocks

Fundamental and technical characteristics are important when examining stocks. However, here are an extra 9 factors to consider when selecting a stock.

Ownership: When executives of a company own a large portion of shares in a company, shareholders can see that there is a vested interest with the executives of the company to do well. It is also worth looking at whether the executive compensation is dependent on the performance of the business they are running.

Growing Industries: Look for stocks in industries which are still growing and have further growth potential. These stocks have potential to get carried upwards due to this growth. Investing in mature industries will see limited growth but earnings may be more stable and predictable.

Low Cash Reserves: Growing companies are always using excess cash to expand their business. If a company has a lot of cash sitting on its balance sheet it may mean that they are struggling to find further areas to invest in because the company has grown already to the maximum capacity.

Buy Backs: This is a good sign the company’s earnings and revenues are growing so rapidly they are buying back their shares. The buyback will increase the share price which therefore means shareholders have better value for their shares by the increased earnings per shares (earnings remains the same, whilst shares on issue goes down).

52 week high: This shows that the stock is displaying upwards momentum. Investors have confidence in the stock as they feel the company has strong growth prospects. This positive momentum is a good indicator that the stock can continue this trend.

Low Debt Levels: There is a direct correlation between the volatility of a stock and the amount of gearing they have. The more debt, the more volatile the stock is. If a company has higher debt levels than others in the same industry, then it could be much more vulnerable if interest rates are raised.

History: Look for stocks that have previously displayed strong performance. Although past performance does not always reflect future performance, it will give an idea of how the company is operating. Stocks which are in the initial stages of a growth may not have formulated a strategy to generate strong profit so it would be hard for these stocks to have consistent positive performance.

Frequent Publicity: Avoid stocks which are in the news frequently as this may cause the stocks to be very volatile and potential move rapidly in line with the news coverage. Stocks tainted by a scandal may find their stock prices movements exaggerated.

Competitive Advantage: Look for companies which have a point of difference in their products that consumers are willing to pay for. These companies have innovative products which their competitors do not have.

Lauren Hua is a private client adviser at Fairmont Equities.

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