Stock selection can be a tricky business in the best of times. Not only do you need to find stocks with good growth potential, but you also need to see that the potential in your selections exceeds that in other stocks out there. Otherwise you end up missing out on opportunities. Since we are always balancing inflation, the economy and our personal situation anyway, missing opportunities is obviously an undesired outcome.
If you’re somebody who hasn’t done a lot of investing in the past, there are a few simple rules.
Number one, start small. Use cash that you can afford to lose. And go for safe stocks. What these might be, we’ll get to in a minute.
Point number two, even if the stock looks safe from a quick appraisal, learn more about the company. How does it generate revenue? Where? Does it manufacture its own products? Does it incorporate third-party components in its products? What could be the factors affecting revenue generation? Does it offer a service? What is the market demand for its product or service? Is it a growing market?
There could be so many questions to ask and answer. Therefore, do take the time to try and really understand the company. If you understand the company, you have a better idea of how economic factors may affect it.
Number three, talk to somebody who’s been doing this for a while. You could pick up tips and tricks. If you’re consulting an investment advisor, chances are they’ll have a tailored strategy for you. One such strategy is outlined below. If you’re feeling risk-averse, as its probably advisable to be when you’re starting out, this strategy could work for you very well:
Go Large: Large-cap stocks are typically those that have a market capitalization of more than $10 billion. They tend to be safer because they’ve been in business longer. They’re likely to have experienced management and a proven business model. They’re also more likely to have relationships with suppliers and customers. All these factors help to make the business relatively stable in times of economic concern or when the business cycle turns down. The downside of investing in these stocks is that they usually have slower growth rates. So you may have to be more patient with them. Prefer Income: If you are to hold a stock for a considerable period of time and not get unnerved at all the market gyrations, it will help to see some income. Additionally, stocks that pay dividends add a layer of stability to share prices because dividends increase the total return. If you’re not in need of cash, you may even use the dividend to increase your holdings. One downside to this is: in an inflationary market, the value of fixed dividends will deteriorate. But most companies also increase the dividend periodically, which may offset this to some extent. Look Forward: The way to understand the future prospects of a company is not only by studying its past performance, but also consulting the experts, or broker analysts. Analysts typically prepare models projecting past performance into the future. Thus, they’re able to estimate earnings for the immediately following quarters and years, as well as for the long term.
The best part of investing in large-cap stocks is that there are usually a significant number of analysts following them, which provides us with average estimates, such as the Zacks Consensus Estimate. If you’re planning to hold a stock for the long term, it may help to check the long-term growth estimates provided by analysts.
Choose Attractive Industries: At any given time, the industry to which a company belongs has some bearing on its performance. There are almost always some factors that affect the entire industry. For example, a chip shortage last year impacted volumes of the entire auto industry, Similarly, rising oil prices were an important factor driving results at oil & gas companies.
Therefore, if you choose industries with good long-term potential (such as EVs, AI, etc), this will increase your chances of success. Zacks makes this easier through its Industry Rank system, which is a way to rank industries that have been previously classified by Zacks. The number of Zacks-classified industries is around 250 and historical data shows that the top 50% outperform the bottom 50% by a factor of 2 to 1. Of course, the higher the rank, the greater the chances of outperformance.
Other Tools from Zacks: At Zacks, we also have a system of ranking stocks based on the chances of their near-term performance. The Zacks Rank for stocks (#1 Strong Buy, #2 Buy, #3 Hold, #4 Sell and #5 Strong Sell) also captures recent estimate revisions. Zacks also has a Style Score System, which grades stocks based on their Value, Growth or Momentum potential. Rank 1 and Value Score A or B.
BNPQY, F and KBCSY satisfy all the criteria as good stocks to buy and hold now. So, let’s take a look at some details:
BNP Paribas SA ( BNPQY Quick Quote BNPQY - Free Report)
BNP is a well-known brand providing banking and financial products and services in Europe, the Middle East, Africa, the Americas and the Asia Pacific. It operates in the Banks – Foreign industry, which is in the top 40% of Zacks-classified industries.
The Zacks Rank #1 stock with Value Score B is expected to grow 17.4% in the long term. It pays a dividend that yields 6.20% (very substantial).
Ford Motor Company ( F Quick Quote F - Free Report)
Ford develops, delivers and services a range of Ford trucks, commercial cars and vans, sport utility vehicles, and Lincoln luxury vehicles worldwide. It belongs to the Automotive – Domestic industry (top 29%).
The Zacks Rank #1 stock has a Value Score A. It is expected to grow 6.2% in the long term. Its dividend yields 5.00%.
KBC Group NV ( KBCSY Quick Quote KBCSY - Free Report)
KBC provides integrated bank-insurance services primarily for retail, private banking, small and medium sized enterprises, and mid-cap clients. This is another player from the Banks – Foreign industry.
The Zacks Rank #1 stock with a Value Score of B is expected to grow 11.7% in the long term. Its dividend yields 6.69%.
One-Month Price Performance Image Source: Zacks Investment Research