Finding the best shares to buy: 5 questions I ask before buying a stock

first_imgFinding the best shares to buy: 5 questions I ask before buying a stock “This Stock Could Be Like Buying Amazon in 1997” Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we’re offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our ‘no quibbles’ 30-day subscription fee refund guarantee. I’m sure you’ll agree that’s quite the statement from Motley Fool Co-Founder Tom Gardner.But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.What’s more, we firmly believe there’s still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.And right now, we’re giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool. Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge! Edward Sheldon owns shares in Apple, Microsoft, and dotDigital Group. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Apple and Microsoft. The Motley Fool UK has recommended dotDigital Group and recommends the following options: short March 2023 $130 calls on Apple and long March 2023 $120 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors. Enter Your Email Address In a recent article, I explained how I pick stocks for the long-term. To recap, I look for leading companies with high-quality attributes in growth industries. This approach doesn’t guarantee success. However, it has helped me pick some great long-term winners such as Apple, Microsoft, and dotDigital Group.Today, I’m adding a little more insight into my stock-picking process by highlighting five key questions I ask when analysing a stock. These questions help me identify the best shares to buy for my portfolio.5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…And if you click here we’ll show you something that could be key to unlocking 5G’s full potential…Does this company have the potential to be bigger in five or 10 years?This is a ‘big-picture’ question I always ask at the start of my stock analysis. The reason is that investing, at its core, is pretty simple. If you invest in a company that’s able to grow substantially over time, and invest for the long term, there’s a good chance you’ll make a profit.If the company isn’t likely to be materially bigger down the line, I’m generally not interested in investing in it.What’s going to drive revenues higher?My next question digs deeper into the growth story. Here, I’m looking at ‘why’ the company might be bigger in five or 10 years’ time.Is the company operating in a high-growth industry? Or is it poised to benefit from a dominant structural trend that’s likely to provide tailwinds? I need to know that, going forward, there’s a clear growth driver.Does the company have a competitive advantage?If I’m happy the stock has strong growth potential, I then look to see if it’s a leader in its industry with a strong competitive advantage. Without a competitive advantage, the company may not be a good long-term investment as competitors may steal market share.Is this a high-quality company?Answering this question involves taking a deep dive into the company’s financials. Here, I look at revenue and earnings trends, return on capital employed (a key measure of profitability), the balance sheet (I like low leverage), and the dividend track record.Is the valuation reasonable?Finally, I examine the valuation and look to see if it’s ‘reasonable’. I focus on that word as I’d rather pay a higher valuation for a great company than a lower valuation for an average company.I’ve found that ‘cheap’ stocks are often cheap for a reason. As Terry Smith said in his annual letter to investors last year: “Markets are not perfect but they are not totally inefficient either and most of the stocks which have valuations which attract value investors have them for good reason — they are not good businesses.”Of course, I don’t want to pay a sky-high valuation for a stock. That would increase risk. My goal is to make sure I pay a valuation that still provides room for share price upside over the long term.Finding the best shares to buyAsking these questions doesn’t guarantee stock-picking success. Even a rock-solid investment thesis can be obliterated by a black swan event, such as a global pandemic.However, I find that asking these questions helps me identify top companies that have substantial growth potential. And that gives me a good chance of earning strong returns over the long term. center_img See all posts by Edward Sheldon, CFA Simply click below to discover how you can take advantage of this. I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement. Image source: Getty Images Edward Sheldon, CFA | Monday, 22nd March, 2021 Our 6 ‘Best Buys Now’ Shareslast_img

Leave a Reply

Your email address will not be published. Required fields are marked *