Identifying good stocks and recommending good stocks to invest in is our business here at Cabot Wealth Network. We’ve been doing it for over 50 years. But what might be a great stock for one investor might not be a good stock for you. So how do you find good stocks to invest in?
The first question to ask is, what kind of stock do you want? Obviously, you want a stock that goes up; that much is certain. But the big question is, how much risk can you tolerate?
In today’s column, we’ll review a variety of successful strategies for selecting good stocks to invest in. Not all of them will be right for you. But if you think first about how much risk you can tolerate, and then focus on the stock picking systems that apply, I think you’ll find at least one stock selection system that is just right for you.
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How to Find Good Momentum Stocks
If you’re chasing high returns and are comfortable with high risk, you can follow a momentum strategy, such as that advocated by Cabot Top Ten Trader.
Momentum stocks are strong now and thus promise to be strong later. A good stock from that advisory can bring a quick 50%+ return in just a few months, as one rapidly expanding restaurant stock did for readers recently.
Also, momentum investing can get you into big long-term winners like Tesla (TSLA), which was first recommended in late 2011, and gained more than 905% over the next three years.
With momentum stocks, the chart is the most important part of the stock selection system.
However, even a good momentum stock can drop like a stone on a bad day, in part because when buying pressure runs out, the short-sellers often step in to make money on the downside.
How to Find Good Growth Stocks
Moving down the risk scale a bit, you could focus on picking good growth stocks, such as those recommended by Cabot Growth Investor, which is always working to identify the next Apple (AAPL), the next Netflix (NFLX) and the next Alphabet (GOOG). The beauty of investing in the best growth stocks is that the more successful they become, the more attractive they become to institutional investors, who help push the stock up through their buying.
Cabot Growth Investor is our flagship advisory, and it’s been identifying promising growth stocks for decades.
To pick good growth stocks, we look at the story, the numbers (sales and earnings growth in particular) and the chart.
But in growth stocks too, risk can be substantial, and if you can’t sleep well at night because your stock holdings worry you, you’re investing at too high a risk level.
How to Find Good Small-Cap Stocks
Small-cap stocks are a special breed. They’re almost always unknown names, and institutional sponsorship tends to be very low. But if you do your research well, and you are patient, small-cap stock investing can be very profitable.
Readers of Cabot Small-Cap Confidential, for example, who bought stock in a little company that specializes in cloud and automation software just two months ago, are now looking at profits of over 40%.
In choosing good small-cap stocks, the fundamental story is paramount; the numbers and chart are secondary.
But small-cap investors need to diversify, because any big bump in the road, particularly competition from a bigger player in the industry, can deep-six one of these stocks quickly.
How to Find Good International and Emerging Markets Stocks
Another specialty area is international and emerging markets stocks, which can offer diversification away from U.S. equities and potentially offer faster growth due to the growth potential of smaller economies such as those in Southeast Asia. Readers of Cabot Explorer have had some spectacular successes there, but there are also great growth stocks to be found in more developed economies such as China, India, and Europe, to name a few.
In choosing good global stocks, the same factors apply as with growth stocks—the story, numbers and chart are all important.
Of course, international investing brings its own risks, from changes in currency exchange rates to political changes that can affect entire industries, but if you truly want to diversify globally, good international stocks can add some spice to your portfolio.
How to Find Good Turnaround Stocks
Moving down the risk scale substantially, we come to turnaround stocks. Good turnaround stocks have lower risk because ideally, they’ve reached the nadir of negative perception.
This is the specialty of Cabot Turnaround Letter, which identifies promising turnaround stocks that are unloved and undervalued by the market.
Identifying good turnaround stocks leans heavily on finding catalysts that can help change a company’s fortunes, whether it’s a new, promising point in the economic cycle, a strategy overhaul or leadership with a fresh perspective.
Although it’s a lower-risk strategy, it’s worth remembering that you can never completely eliminate risk when investing.
How to Find Good Undervalued Stocks with Good Charts
Putting a twist on the undervalued stock investing system, Cabot Value Investor uses value as a starting point but then also considers stories and charts. As Chief Analyst Chris Preston puts it, growth at value prices.
Cabot Value Investor emphasizes identifying fundamentally sound companies that are being overlooked by the market. Companies run the gamut from precious metals, insurance and specialty manufacturing firms to solar energy and consumer goods.
Value Investor also approaches stock picking with a longer time horizon than our momentum advisories, which makes it ideal for investors with a similar mindset.
How to Find Good Dividend-Paying Stocks
Finding stocks that pay steady dividends is a great way to invest if you want to reduce risk, particularly if you can be confident that the dividends will not only continue but increase over time.
Many investors like to invest in Dividend Aristocrats, which are big old safe dividend-paying companies like Johnson & Johnson (JNJ), but Cabot Dividend Investor does even better by investing in the higher-paying companies that are maximizing income generation for their investors.
To identify the best dividend-paying stocks, you need to consider the numbers first, particularly the company’s income statement and balance sheet. The business story has less weight and the chart has the least weight of all.
Properly selected, a dividend-paying stock has lower risk and substantial upside potential, particularly over the long term.
Conclusion
There is no one best way to pick good stocks to invest in. You need to find the systems that are best for you, weighing your appetite for growth vs. your tolerance for risk while considering using dividends to offset both. Whatever systems you settle on for finding good stocks to invest in, Cabot can help you implement them by providing expert advice you can trust on a regular basis, from the moment you buy a stock to the moment you sell it and at every point in between.
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