Choosing the right stocks can be the deciding factor between success and failure in the world of stock investing. Join HVA stock expert to share that good stocks need to have a combination of three main factors: quality, growth potential, and reasonable valuation.
1. What is the definition of good stocks?
Deciding which stocks to buy is an essential part of many people’s investment strategies. However, choosing the right stocks is not always easy, especially when you are looking for stocks with the potential to increase in price and provide stable returns. So how do you evaluate a stock that can be considered “good” and how do you choose in a volatile stock market?
Benjamin Graham, the founder of the famous value investing method, proposed some important criteria for identifying good stocks. According to Graham, good stocks are those whose intrinsic value far exceeds their market price. This means buying stocks at a price lower than their intrinsic value.
Graham created a number of specific criteria for evaluating stocks and determining whether they could be considered “good.” One of the most important criteria Graham focused on was the financial health of the company. This included looking at the debt-to-equity ratio, the ability to pay off debt, and past earnings growth.
2. Criteria for choosing good stocks
Good stocks are not only stocks with potential for price increase, but also stocks that bring stable profits to investors. Benjamin Graham, the founder of value investing strategy, proposed some important criteria for choosing good stocks. In the Vietnamese stock market, there are 6 basic criteria that investors can apply to choose good stocks. Below are the detailed criteria that you should consider:
Criterion 1: Total Debt to Current Assets Ratio < 1.1
- This ensures that businesses are able to manage debt effectively, especially in volatile economic conditions.
Criterion 2: Current Ratio > 1.5
- This ratio shows the company's ability to pay debts due within one year. A higher ratio indicates that the company has good debt-paying ability.
Criterion 3: Positive EPS Growth Over the Last 5 Years
- This criterion evaluates the company's ability to grow profits. Stocks with positive EPS growth are a positive sign for business development.
Criterion 4: P/E < 9
- Stocks with P/E ratios below 9 are generally considered good investments. However, be careful about overlooking growth stocks with high P/E ratios.
Criterion 5: P/B < 1.2
- Using P/E can be misleading. P/B uses the most recent book value to overcome this limitation.
Criterion 6: Regular Dividends
- Buying stocks at low prices sometimes requires patience. However, regular dividends provide a steady source of income for investors while they wait for the stock to rise in value.
3. Benefits of good stock filtering
The benefits of filtering and selecting good stocks are not only for new investors but also an indispensable part of any investor's investment strategy, because it brings many significant benefits.
One of the most important benefits of good stock screening is that it saves a lot of time. The stock market is full of different stocks, from large companies to emerging businesses. Investigating and analyzing stocks is a time-consuming and laborious task. However, when applying stock screening, investors can easily eliminate stocks that do not meet the criteria and focus on more potential investment opportunities. This saves time and energy, and allows investors to focus on further research on selected stocks.
In addition, good stock selection also helps to minimize risks in the investment process. One of the biggest risks when investing in stocks is the risk of choosing bad stocks. Evaluating and selecting stocks according to certain criteria helps to eliminate high-risk stocks and select stocks with growth potential and stability. This helps to increase the chance of achieving profits and minimize the risk of losing investment capital.
In particular, choosing good stocks also helps investors optimize profits. By selecting stocks with the potential to increase in price and bring sustainable profits, investors can optimize profits from their investments. At the same time, choosing stocks according to certain criteria also helps investors consider more about the level of risk and profit potential of each investment.
Good stock filtering also helps minimize risks during the investment process.
4. How to choose potential stocks to invest in
1. Quality of Business
To ensure quality, investors should focus on the financial foundation of the company. This includes examining the debt-to-equity ratio, the receivables-to-assets ratio, and the management's stock trading activities. These signs help determine the stability and reliability of the company.
2. Growth Potential
Good stocks should have the potential to grow significantly over a period of time. Investors should understand where the company is in its growth cycle and its forecast for future performance. Stocks in the early or mid-growth cycle typically offer better opportunities than those in the late cycle.
3. Reasonable Pricing
One of the basic principles of investing is “buy low, sell high”. Therefore, stock valuation is important to optimize profits. Investors should compare the stock price with the average price over the past 5 or 10 years to determine the appropriate valuation.
However, it should also be noted that valuation depends on the volatility of stock earnings and should not be higher than the inverse of the savings interest rate.
4. Market Assessment
In the current stock market environment, stock selection requires caution and thoroughness. Although risks have decreased after recent fluctuations, investors still need to be vigilant and practice good risk management.
With the latest volatility, this could be an opportunity for professional investors to review and adjust their portfolios to take advantage of potential investment opportunities and buy stocks.
Above all, picking stocks to invest in like a pro requires meticulousness and patience. Investors should consider fundamental and technical factors, along with a thorough assessment of the market situation and the business's prospects.
Source: Onstocks
