How to find the Best Stocks to Buy
ValueRays Cheatsheet simplifies finding great stocks ✓ Discover key indicators like Growth and Debt Valuations to make informed decisions.
ValueRay Top Stocks Based on Top-Tier Influence Metrics
| Symbol | Market Cap | 12m | 5y | P/E | P/B | RoE |
|---|---|---|---|---|---|---|
| BJ NYSE BJs Wholesale Club Holdings |
14.1B | 50.9% | 406% | 25.65 | 8.02 | 31.64 |
| COKE NASDAQ Coca-Cola Consolidated |
10.8B | 73.3% | 467% | 21.48 | 9.94 | 41.25 |
| CLS TO Celestica |
15.3B | 250% | 1,725% | 36.60 | 8.08 | 20.73 |
| UNM NYSE Unum |
13.3B | 56.1% | 231% | 7.86 | 1.23 | 16.08 |
| SGO PA Compagnie de Saint-Gobain |
50.3B | 42.0% | 206% | 16.99 | 2.01 | 18.07 |
| CMI NYSE Cummins |
51.4B | 50.3% | 167% | 13.02 | 4.94 | 38.42 |
| CVLT NASDAQ CommVault Systems |
8.14B | 100% | 285% | 48.28 | 28.06 | 59.49 |
| AIT NYSE Applied Industrial |
10.1B | 42.4% | 328% | 26.60 | 5.62 | 21.53 |
| ALSN NYSE Allison Transmission |
8.69B | 45.9% | 153% | 12.23 | 5.24 | 44.28 |
| ENVA NYSE Enova International |
2.86B | 74.8% | 383% | 14.89 | 2.39 | 15.32 |
The Four Principals of Profitable Investing
1. Find Economic Moat
- High customer switching cost or effort
- Unbeatable Prices
- Intangible Assets (Patents, Trademarks, Copyrights, Approvals, Brand Names, Geographic Advantage)
- Network Effect (Being the first mover -> Winner takes it all = legal Monopolists)
2. Buy at Fair Value or below
- What is a low valuation for this company? (Historical P/E, P/B and P/S over the last 10 Years)
- Discounted Cash-Flow Valuation (with a Margin of Safety)
3. Let it Compound
- Avoid Trading (Commissions, Taxes, missing the best spots allways by 10%)
4. Know when to sell
- Realizing it was a mistake to buy it at the first place
- The stock became wildly overvalued
- The company's moat has been destroyed/fundamentals are deteriorating
- You need the money to buy a house for your family, ..
Remember: we make money by not loosing it
- Risk Management: Take the opposite position and evaluate the risks, not just the chances.
- Highest-Quality only: Choose stocks so valuable, that you'd happily pass them on to your children.
- Rigorous Selection: If you could buy every year only one stock, would you still buy it?
Generic Recommendations
- Average Volume > 100,000 (> 1,000,000 for Options-Trading)
When you're looking at stocks, it's a good idea to check if they have more than 100,000 shares traded on average each day. This usually means a smaller spread, making it quicker for you to buy or sell when you need to. - Market Cap > $300 Million (> $1,000 Million for Options-Trading)
It's wise to avoid Nano Cap stocks. This helps to reduce the risk of share price manipulation. - Price > $5
Its best to avoid penny stocks, as they often come with information problems and a higher risk of being manipulated. - Age > 2 years
For solid research, make sure you have access to at least two fiscal years or 8 quarters of key financial data like balance sheets, income statements and cash flow reports.
Recommended Fundamental Ratios
Sources: McKinsey 1,
McKinsey 2
Profitability
- ROIC > 15%
Look for companies with an ROIC greater than 15% for a more profitable investment choice. - Net Profit Margin > 25%
Net Profit Margin is a good indicator of how profitable a company is at the most fundamental level. - FCF Margin > 7%
Free cash flow is the amount of cash a company has left over after it pays for its operating expenses and capital expenditures. FCF margin is how much free cash a company generates relative to its revenue.
Growth
- Revenue Growth > 10% YoY
Key Driver of Long-Term Stock Performance. - EPS Growth > 10%
Leads to higher stock prices, hence most investors use Discounted Cash Flow (DCF) to value stocks.
Debt
- Net Debt / EBITDA < 3
- Net Debt / Free-Cash-Flow < 4
- Debt / Equity < 80%
- RoIC > WACC
How to identify Best Stocks to Buy by analyzing the earning sheets?
Business
- Low volatility of margins
Historically, gross margins have been stable and predictable - Pricing power
High gross margins > 30% - Low Capital Intensity
CAPEX/Sales < 5% and CAPEX/Operational Cash Flow < 15% - Cash Flow Returns on investment (CFROI)
(todo)
- Skin in the Game
Owner & Family > 20% of shares
How to identify Best Stocks to Buy by comparing financial ratios?
Business
- Moat
Sustainable, high Return on Invested Capital (ROIC > WACC)
by recurring revenues, high gross margins and low capital intensity - Pricing Power
Best CAPEX/Sales in Peer-Group
- Pattern of Disciplined Reinvestments
- Extensive Opportunities to Reinvest
Reinvest for organic growth (ROIC > 20%, ROIC YoY)
Acquisitions (hard to predict which M&A createa value; 60%-90% don't)
Share buybacks
Dividends 20% - 25% of EPS (in absence of value creating alternatives)
How to Analyze a Stock
Understand the Product
- Annual Reports
- Investor Presentations, Shareholder Letters
- In which different segments does the company make money
- How does the geographical split look like
- Which Insiders are buying their own stock
- Check ROIC curve of the last 10 Years
- CAPEX/Sales < 5%
- CAPEX/Operating Cash Flow < 15%
- Interest Coverage Ratio (EBIT/Interest payments) > 10
- Net Debt / Free Cash Flow < 4
- Gross Margin > 30
- FCF Margin > 20
- Yearly Revenue Growth > 5%
- Yearly Earnings Growth > 7%
- Secular trend (urbanization, aging, cybersecurity, obesity, digital payments, …)