The best way to find great stocks to invest in is to look for great companies. Great companies have great stocks and build wealth for the owner who has held them for the long-term.
Okay, how do you find great companies?
The process for finding great companies very simple: by looking. The Internet has a wealth of resources to help you find great stocks associated with great companies. If you have the patience to wait for a great price, this is a winning formula for successful long-term investors.
The formula is simple to say: buy great companies at great prices and a hold for the long-term. However, it is not always easy to find great companies that can be bought at great prices.
The best way to begin your search it is with a stock screener, which is a tool that will sort through all available stocks on the data points you choose. For example, at the time I was writing this I asked the screener to look for stocks that had a forward price-to-earnings ratio equal to or greater than 15.
Preset screens are helpful to get you started. For example, Yahoo has great stock screening tool is free for anyone to use and has some of the stock screens built-in with presets to help you get started.
The screener allows you to enter a number of criteria you pick to help you identify great companies.
The screener pulled up results for stocks with a forward P/E of equal to or greater than 15. The first name on the list was a familiar one :Coca-Cola. When I charted the results and compared those to the S&P 500 index it showed something quite dramatic.
I asked the chart to plot five years and compare Coca-Cola and the S&P 500 index. The resulting chart showed why Coca-Cola may be a great company.
Coca-Cola followed the pattern of the S&P 500 as it dipped through the problems in 2008 and 2009 and followed it up as the market recovered. However, at the bottom of the crisis, the S&P 500 Index was down some plus 50%, while Coca-Cola barely dropped below a negative 20%.
At the time I wrote this, Coca-Cola was up about 45% for the five-year period, while the S&P 500 lagged at a minus 10% for the period.
Beating "the market" as the S&P 500 Index is known does not in itself make Coca-Cola a great company. However, it is a good start.
This is just a simple example of how you can use stock screens to identify companies based on a variety of criteria that may put them in the great company category.
This brief look at the results of a simple screen of does not do that. For more detailed analysis we would want to look at earnings, dividends, ranking among peer and other criteria over a long term.
This is easy to accomplish with stock screeners. Long-term investors interested in finding great companies should become comfortable stock screens, because they will help you find great companies and great stocks.
However, they will not help you precisely identify the correct price the pay for the great stock. Price is critical to our formula of buying great companies at great prices.
More about this and subsequent columns, but you'll be off to a good beginning if you can come up with a handful of good companies that you think may be great companies based on the criteria you can use in stock screens.
What criteria should you use to judge a company as either great or not? Some of this is personal preference, while the basics are common to all qualifying searches. In future columns, I will look deeper into building a list of criteria to use in judging companies.
