How I Pick Stocks: An Amateur Investor Thinks About Investing!

Selecting a stock to invest in is an intimidating task. Thinking about buying any stock in a market like we have currently has to be absolutely terrifying for most individuals.

I have been blogging about stocks for over five years now.  And no I am not a broker, I do not sell a newsletter, and I do not want to manage anyone's investments.  However, I do believe that I may be able to share with you a few thoughts that might be helpful in selecting stock investments and thinking about a few things that I use in making that decision.

Where I live, in southwestern Wisconsin, one of the favorite local stocks is Fastenal.  I am sure there are 'favorite' stocks that make the rounds depending on where you live.  (I do not currently own any shares in Fastenal (FAST)). 

I say favorite, because early investors in this stock have made many-times-over their original investment.  "Buy Fastenal stock" is a common refrain among local investors.

Others might comment "if only I had bought Google when it came out" or it might be Microsoft, or Cisco, or Disney early on.  So what is it that makes these companies special--and offers a patient investor the opportunity to do well with their investments over the long haul.

It has been my observation, and the observation of far brighter minds than mine, that there is actually nothing particularly magical about these companies.  And yet they share many similar characteristics, qualities that I would suggest we should search for in possible stock purchases.

And what are those qualities?  It is not, as some might suggest, the nature of the product or the service that is sold.  It is the results that matter.  That is the financial results that the company reports year after year. 

Let me explain. 

It is my belief, that if we can identify companies that I would call 'boring' investments, we may well stand a chance at doing better than just the indices.  They are 'boring' because they are so predictable.  Year after year they continue to report improving revenue, improving earnings, stable outstanding shares, possibly pay a dividend and if so, likely increase it year after year, and produce growing free cash flow.

I start with the latest quarter.  I want to invest in companies that are reporting increasing revenue, increasing earnings, and possibly doing better than expectations and maybe even raising guidance.

They are companies that are not over-priced, that is they have reasonable valuation, and they have solid balance sheets.

Finally, I look for a stock with a good chart.  And I like to keep even that simple.  What I mean by a good chart or strong price performance is simple:  the stock is rising in price, and has been relatively steady in experiencing a price increase over the last several years.

I use easily available information sources:  Yahoo Finance for latest quarterly results and valuation figures, Morningstar.com for longer-term results, and StockCharts.com for charts--usually 'point and figure' charts.

Totally boring.

But smart.

I call this "profiling" stocks.  I do not try to be a contrarian (although I have made contrarian trades.) 

I do not look just for stocks that are great values, although value is important to me.

I do not believe I am smarter than the market.  In other words, I do not (usually) try to buy when others are selling, and sell when others are buying. 
(Although I did exactly that with my recent 'trade' in Meridian Bioscience (VIVO)).

How do you go about picking stocks?