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How to Pick Good Stocks to Invest In

What are good stocks to invest in? That’s a question we get all the time at Cabot Wealth. The answer? It depends on what kind of investor you are.

Good Stocks to Invest in ... for You

Identifying good stocks and recommending good stocks to invest in is my business. I’ve been doing it for 30 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, I 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 49% return in just five weeks, as one turnaround steel stock did for readers recently.

Also, momentum investing can get you into big long-term winners like Tesla Motors (TSLA), which was first recommend in late 2011, and gained more than 905% over the next three years.

Good stocks to invest in: Tesla Motors (TSLA)

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 Google (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 by their buying. Cabot Growth Investor recommended Amazon (AMZN) in its early years and made a profit of 1,290%!

Good stocks to invest in: Amazon.com (AMZN)

To pick good growth stocks, we look at the fundamental 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 makes devices for the treatment of peripheral vascular disease just seven months ago, are now looking at profits of over 44%.

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 Emerging Markets Stocks

Another specialty area is emerging markets stocks, which are typically found in countries that are growing faster than the U.S. China is a big and fast-growing emerging market economy, and readers of Cabot Global Stocks Explorer (formerly Cabot Emerging Markets Investor) have had some spectacular successes there, including profits of 125% in Weibo (WB). But there are also great growth stocks to be found in India, Argentina and Indonesia, to name a few.

In choosing good emerging markets 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 emerging markets stocks can add some spice to your portfolio.

How to Find Good Undervalued Stocks

Moving down the risk scale substantially, we come to undervalued stocks. Good undervalued stocks have low risk because ideally, they are so cheap that they can’t fall any lower!

This is the specialty of Cabot Benjamin Graham Value Investor, which uses an extremely detailed system to track 44 different data points about all the stocks in its universe, with the goal of buying low and selling high.

Identifying good undervalued stocks is mainly about the numbers; fundamentals and charts hardly matter. It’s also about patience; sometimes these stocks take time to get moving. But in the long run, it works! Since 1995, the Cabot Benjamin Graham Value Investor portfolio is up 1,173%, while the Dow is up just 274%.

BGV performance

Low risk as this system is, it’s worth remembering that you can never eliminate risk totally from investing. Cabot Benjamin Graham Value Investor does experience occasional losses. But in the long run, its loyal readers enjoy great success.

How to Find Good Undervalued Stocks with Good Charts

Putting a twist on the undervalued stock investing system, Cabot Undervalued Stocks Advisor uses value as a starting point but then also considers fundamental stories and charts.

Cabot Undervalued Stocks Advisor recommended a major provider of managed care health plans in October 2015, when its stock chart looked like this—trending up but at a short-term low:

CUSA-12-12-16

And one year later, subscribers were able to sell for a profit of 65%, as institutional investors rushed back into the stock thanks to a rapidly improving fundamental story.

Identifying undervalued stocks with good charts and good stories takes a lot of experience, and as with all these systems, perfection is impossible; there will be losses. But if you buy low, as readers did in the example above, your risk will be low and your profit potential high!

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 younger, faster-growing companies that are likely to become Dividend Aristocrats in the future.

For example, Cabot Dividend Investor identified Costco (COST) as a high-potential dividend-paying stock in early 2014, and readers are now sitting on profits of 43%, while raking in dividends of 1.2%. Costco is becoming an institutional investor favorite!

Good stocks to invest in: Costco (COST)

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 very low 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 for a big profit.

Timothy Lutts is Chairman and Chief Investment Strategist of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.