Earnings, estimates, and revenue are the three big factors that every investor looks at when picking stocks. These factors are very important, and definitely should command a great deal of attention. Lurking below the surface, however, are some indicators that are incredibly important and often overlooked.
These factors are listed below along with the reasons for adding them to your scrutiny when picking stocks.
Investors looking for income often gravitate to companies with high yield, and solid dividend growth trends. Other factors that they should look at includes Dividend ex-date (i.e. when they need to invest in a company to be on record for the next dividend paydate). But more importantly, Payout Ratio measures the percentage of earnings that are going out the door for dividends. This is a great way to see how likely the dividends are to continue.
If a company has a high payout ratio, and recession hits, the dividend is likely to be sacrificed. So when you are investing in a company with a great dividend, look under the covers, and see what type of payout ratio they have before you start picking stocks.
So, everyone looks at Earnings as the ultimate yardstick of a company’s performance. But as we found out during the internet boom, earnings can often be manipulated with one-time charges, and other non-recurring charges. What can’t be as easily adjusted is Cash Flow. In a Cash Flow Statement, each quarter you can see how much net cash came into a company’s bank account from operations, financing, and investments. Good Cash Flow is a terrific predictor of forward price performance.
Who knows the companies the best? Clearly, it has to be the high level executives and board members. If they are buying their stock, that is a great harbinger of things ahead. If they are selling, it is not as clear cut. They could simply be buying a house, paying for their kid’s college, or diversifying their assets. Either way – focus on the upside – when the CEO buys, follow that!
Of course, I am not saying don’t pay attention to the key metrics when picking stocks, but definitely add these three factors to your stock checklist. They may help you find some winning stocks.