This Is How You Find Winning Stocks

Ever hear the saw "Investing is a marathon, not a sprint"? While it's easy to get caught up in the minutiae of day-to-day events "as the market turns," it becomes that much more important for Foolish investors to not let themselves get sucked up in the noise that moves stock prices like a world-class yo-yo champ slinging a Duncan original.

It behooves you to know at least three things that you're looking for in a potential investment. Otherwise you'll be lost before you even get started.

1. Stuff of legend
Investing legend Warren Buffett looks for businesses that generate superior returns on equity because it is a key indicator of not only how profitable the business is, but also how well the company's assets and leverage are being managed. One of his most well-known holdings, Coca-Cola (NYSE: KO  ) , generates close to a 30% return on equity on a consistent basis. While that may be a lofty goal, we can still find plenty of worthy candidates that generate double-digit returns on equity. Spice-maker McCormick (NYSE: MKC  ) has generated returns on equity of better than 20% for more than decade, and the stock continues to outperform the S&P 500.

2. Inside info
Foolish investors know that insider ownership is usually a positive sign that management's interests are in line with shareholders'. Executives who don't "eat their own cooking" may have less incentive to make decisions in the best interest of the business, and ultimately shareholders pay the price. Take Panera Bread (Nasdaq: PNRA  ) as an example. Insiders own more than 5% of the shares outstanding, with 4.5% of those held by co-founder and Executive Chairman Ron Shaich. This is a good indicator that management is committed to the business.

3. Value, return to me!
Another popular axiom of Foolish investing is finding companies that create value for shareholders, whether it be in the form of dividends, share buybacks, or just plain-old reinvesting in the business. Companies that generate consistent cash flows need to do something productive with that cash, and shareholders should reap some of the benefits.

Johnson & Johnson (NYSE: JNJ  ) may not be the most exciting name around, but with a 3.5% dividend yield, it can add balance and stability to any portfolio. Bed Bath & Beyond (Nasdaq: BBBY  ) just recently announced a $2 billion  share repurchase program to start in early fiscal 2011. While in this case the repurchase is value-creating, it's also worth remembering that not all share buybacks are created equal -- sometimes they serve as cover-ups for options dilution.

Then there are companies like Markel (NYSE: MKL  ) that don't pay a dividend at all. The idea here is that management is best able to maximize shareholder value by using cash flow to continue growing the business. Call it a play right out of the old Buffett handbook. And with master capital allocator and Chief Investment Officer Tom Gayner  calling the shots, long-term investors are grinning from ear to ear because the company has grown its book value at a compound annual rate of 21.2% since the IPO in 1986.

Can I really have it all?
Put it all together and you may just find a company like Hasbro (NYSE: HAS  ) . The famous toys and games company generates healthy returns on equity, sports a 2.2% dividend yield, has returned a total of $2.8 billion to shareholders in the form of dividends and share buybacks since 2005, and boasts insider ownership just north of 10%.

These are just the kinds of stocks that lead analyst Jeff Fischer and his team look for every day at Motley Fool Pro, along with his strategy to make money in any market using long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds.

If you're interested, Jeff is opening Motley Fool PRO for a few days on Tuesday, Jan. 18. The service has been closed to new members since June. To learn more and receive a private invitation to join, simply enter your email address in the box below.

Motley Fool Stock Advisor analyst Jason Moser owns shares of Markel. Coca-Cola and Markel are Motley Fool Inside Value picks. Bed Bath & Beyond, Hasbro, and Panera Bread are Stock Advisor recommendations. Johnson & Johnson, Coca-Cola, and McCormick & are Motley Fool Income Investor recommendations. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Coca-Cola, Johnson & Johnson, and Markel. Motley Fool Alpha owns shares of Johnson & Johnson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (48)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 12, 2011, at 5:59 PM, Bonefish100 wrote:

    Uh, where's the beef? Shallow story. I was expecting a little more depth.

  • Report this Comment On January 12, 2011, at 7:03 PM, drillerjim101 wrote:

    Very wise advice indeed. Calm, patient, steady handed thinking will always win the day. Forget the day to day gyrations and follow a sensible long term investing horizon that ignores the chronic dooms day naysayers. Shallow advise? If my 12 year old can understand it, is will probably prove true. This is the only advice that has stood the test of time to building a lasting fortune Absolutely.

  • Report this Comment On January 12, 2011, at 8:58 PM, dbartholomew100 wrote:

    Maybe you could just identify articles that are shills for a MF service with a warning symbol at the top. Although I accept the observations made by this author as valid and reasonable I just feel dirty when I read the piece and it ends in such a blatant sales pitch. UGGGHHHHHHHH

    It makes me want to IGNORE all the articles.

  • Report this Comment On January 13, 2011, at 10:18 AM, johnnypajamas wrote:

    Markel has done nothing but go down over the last four years... and with it $1500 of my hard earned dollars... at some point MF you need to stop praising this company... don't you !

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