Congratulations! You've decided to take your financial future into your own hands by choosing individual stocks to invest in. That's a big decision, and one that can create a lot of excitement.
That excitement, however, can quickly be replaced with anxiety once you realize that there are literally thousands of different companies to invest in, and no guide telling you which is the best pick. Sure, "that guy" you know from the gym has a couple "can't miss" stocks, and there are a few that you're familiar with, but where is a reliable place to start searching for your next big-time winner?
We asked three of our analysts that question, and they've got some pretty simple answers for you. Here's what they had to say:
When I have thousands of companies to sift through, there are two very basic screens that I run to see if a company is worth investigating. The first is the revenue growth rate over the last three years. Many investors get hung up on earnings — but I think that's a mistake.
Eventually, earnings play a huge role in the success of a company, but searching for earnings growth isn't going to help you find the next disruptive technology or homerun stock. Most of the time, companies that are growing their revenue rapidly are showing one important thing: that people really, really like what the company has to offer.
That company might not yet be profitable, but that's because it's reinvesting its revenue to meet demand for future growth. That's something I'm willing to pay for.
After narrowing my list of candidates, I apply my second variable: companies that have their founder as the CEO.
To be sure, you don't need a founder/CEO to be a successful stock-picker. But when there are thousands of stocks to choose from, you can be picky. Founders, in my experience, typically view their company as a physical extension of themselves, and are willing to do what it takes to make sure it's successful in the long run.
Two examples of companies fitting this profile right now — that I'm currently researching — are engine specialist Power Soutions (NASDAQ:PSIX) and Chinese search engine and software security specialist Qihoo 360 (UNKNOWN:QIHU.DL).
When looking for the next hit stock, I focus on innovative growth companies with sustainable competitive advantages. Priceline (NASDAQ:BKNG) would be a good example, the company is disrupting the travel industry with it's online reservation platforms, not only is the business growing rapidly, but the company gains competitive strength as it expands over time.
Travelers want to go to the platform where they can find the best deals. Hotel operators, airlines, and car rental businesses choose to partner with the platforms that can bring in the most customers. More users make the service more valuable for both travelers and service providers, and this attracts more users on both sides of the transaction.
Sales at Priceline increased by nearly 25% during the last quarter, and operating profit margin was remarkably strong, in the area of 46% of revenues. Even if growth slows down as the company matures over time, the future is looking quite promising based on a combination of rapid sales growth and extraordinary profitability.
Priceline stock is also moderately valued, it trades at a PEG -- price to earnings growth -- ratio of 0.8, as calculated by Morningstar. A general rule of thumb is that companies trading at PEG ratios under 1 are undervalued, and this may especially be the case for such a profitable growth business like Priceline.
"Find out where the world is going and get there as soon as possible." That's something legendary investor and Fool co-founder David Gardner once told me, and it has since become a core part of my investment philosophy. I try to identify where the world is headed is by remaining keenly aware of the products and services my family and friends use and love.
As an early adopter of many new consumer technologies, I'm able to gain some insights into which products and services may have a leg up on the competition. But in order to look even further ahead into the future, I've been increasingly utilizing a secret weapon – my kids.
As a father of three, I'm able to see what's popular among today's youth -- and tomorrow's adults. Are little girls wearing more Under Amour (NYSE:UAA) gear than Nike equipment at my daughter's soccer matches? Is my daughter's school district continuing to purchase Windows-based computers, or is it beginning to invest in Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) lower-cost Chromebooks to help ease budgetary constraints?
If you're thinking that this sounds like the "Buy what you know" mantra of famed mutual manager Peter Lynch, you're right. Lynch's classic tomes One Up On Wall Street and Beating the Street are two of my favorite investing books. But as Lynch would tell you, the products and services you know and love are just a starting point for identifying great investments. Much more research in to areas such as a business's competitive advantages, financials, and management is also required before a Fool should feel confident in investing her hard earned dollars. Fortunately, it's exactly that type of research that we can help you with here at The Fool.
Andrés Cardenal owns shares of Google (C shares) and Priceline Group. Brian Stoffel owns shares of Google (A shares) and Google (C shares). Joe Tenebruso has no position in any stocks mentioned. The Motley Fool recommends Google (A shares), Google (C shares), Priceline Group, and Under Armour. The Motley Fool owns shares of Google (A shares), Google (C shares), Priceline Group, and Under Armour. Try any of our Foolish newsletter services free for 30 days. 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.