| Growth Ahead First, growth... There has never been a stock in the history of the markets that saw big revenue growth and didn't eventually see its share price rise as a result. So my system looks for companies that have seen revenue growth of 10% or more for multiple quarters in a row. I also look for companies that have consistently beaten earnings expectations... and have growing profits. But remember, growth alone won't do it. If a stock's price is too high, then its growth is already priced in. That stock won't help us. That's why I don't rely simply on growth. After my system narrows our candidates down to the stocks seeing tremendous growth... I go to the next step. Value. The Right Value My system focuses on a stock's price relative to its earnings, or its P/E ratio. Sure, most value investors use P/E. But they use it the wrong way. They believe that the stocks with the lowest P/E ratios present the greatest value. So when they find a stock with a tiny P/E ratio, like 3 or 4, they think, "Wow, what an incredible value! This stock has no place to go but up!" But they're wrong. The stocks with the lowest P/E ratios are often trading as cheaply as they are for a reason. Stocks move up based on buyer demand. A P/E ratio of 3 or 4 means NOBODY wants to buy that stock! So I take a different approach. I want to see stocks that trade cheaply in comparison with their future growth. I've found that targeting companies with P/E ratios in the 30-to-60 range can generate tremendous value. Find a truly great growth stock at that low a P/E, and you can crush the market. From there, I run an algorithm to rank every publicly traded company based on growth and value. Every stock receives a Growth-Value score on a scale of 1 to 10 - 1 being the worst, 10 being the best. I recommend only stocks with Growth-Value scores of 7 or higher. And now comes the important third factor... Income. Cash Kings When it comes to income, I want to see three things. First, I want to see strong cash flow, growing by at least double digits annually. With strong cash flow, the company can invest in growing the business or distributing money to shareholders. That last bit leads me to the second thing I look for: I like to see a strong and rising dividend yield. And last but not least, I have a secret tool to track the third and final income factor... It's the most powerful tool in my repertoire. It's called cash return on capital invested - or CROCI. In the simplest terms, CROCI measures how much cash a company produces relative to the capital it invests in its business. And because it's harder to manipulate cash than it is to manipulate earnings or profits... CROCI paints a truer picture of a company's efficiency than other metrics do. I'm always looking for CROCI scores of 10% or higher. Now, here's the big takeaway from everything I've just shared... When my system uses the criteria I mentioned to filter the 9,000 stocks on the market... it eliminates more than 99% of them. The few that remain are the most extraordinary stocks available at any given moment. Period. If the Shoe Fits It's how my readers scored a 100% gain on Crocs (CROX), the company that makes those ridiculous-looking slip-on shoes. In October 2020, my system showed me that Crocs was a top-notch investment opportunity. This company had a Growth-Value score of 8... passed my income metrics... And had a CROCI of 13.5%. So I alerted some of my most loyal followers that this was a screaming "Buy." And sure enough, the stock went on to more than double in a year. When you put all three factors together - growth, value and income - you can isolate the best stocks on the market... the cream of the crop... the companies that consistently and dramatically outperform the market. Happy hunting, Alpesh | 
No comments:
Post a Comment
Keep a civil tongue.