How To Choose Better Stocks

Consider investing in the best stocks from an industry you’re interested in, instead of buying more than two from the same industry, as there usually aren’t that many great investing ideas.

If you’re a low-risk, conservative investor, you should consider focusing your investing dollars on stocks that:

  • have stable earnings or cash flow generation,
  • have an investment-grade credit rating or stocks that have little to no debt and are not rated, like Facebook (FB),
  • have weighted average interest rates of about 4% or lower,
  • don’t dilute shareholders,
  • have little short interests, and
  • are trading reasonable valuations.

Stocks from the same industries are subject to the same operating environments/challenges and risks. So, it makes sense to compare stocks from the same industries. Additionally, you’d generally want to compare with peers of similar size (i.e., large cap to large cap and small cap to small cap).

In general, you don’t want to hold too many stocks in the same industry because such stocks tend to move in tandem, and you want to reduce risk through diversification. Besides, why not choose the best stock from an industry you’re interested in? The aim is to lower your risk for satisfactory returns.

The first thing is to identify defensive stocks by looking for businesses that generate stable earnings or cash flow through economic cycles, as I discussed with examples in my previous article, How To Choose Stocks For Your Defensive Dividend Portfolio.

Unfortunately , I have maxed the word limit for this excerpt. But you can read the full Seeking Alpha article here: How To Choose Better Stocks

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Disclosure: As of writing, I’m long FB.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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