Stock Picks, Stock Pick, Stock Picking, Stock Recommendations

By: EconomyWatch   Date: 23 November 2010

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EconomyWatch

The core Content Team our economy, industry, investing and personal finance reference articles.

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Stock picking refers to the process of selecting the stocks that an investor would invest in. Stock picks are those stocks that an investor has selected for purchase. An investor may use systematic analysis to weed out bad investment options from the good ones. While doing so, s/he might deploy a range of analytical calculations and compare stock-specific parameters to finally make a calculated decision. At times, an investor makes decisions based on simple guesswork or gut feel.

Tips for Stock Picking

Stock picking has become a sort of national sport. However, before you indulge in this risky game, you should consider the following:

Industry specific selection: Invest in stocks of verticals that have high growth potential, such as pharmaceutical,healthcare and Fast Moving Consumer Goods (FMCG).



Value investing: For value-based stock selection, follow these commandments:

  • Do not invest in shares that are priced higher than two-third of their intrinsic value.


  • Invest in only those shares the price of which is lower than their book value.


  • Select shares that are issued by companies that have a total debt value lower than the total equity value.


  • The minimum yield of a profitable stock pick should be at least two-thirds of the yield of a high-yielding AAA grade bond.

Growth investing: Growth investors are concerned about the company’s future growth potential. The National Association of Investors Corporation states that the stock of a company with an annual revenue growth rate of at least 5%-12% can be considered for growth investing.

Grants Adabas Access and Retrieval Package (GAARP) investing: GAARP investing is a combination of value and growth investing. GAARP-based investors buy a stock when its P/E ratio is lower than the anticipated rate at which the average earnings per share will grow in future.

Income-based investing: In income-based stock picking, investors forego the stocks of riskier fast growth for high-yielding stocks of slow-growth industries.

The CANSLIM approach: Proposed by William O'Neil, the CANSLIM approach for profitable stock picking can be summarized as:

C = Select shares with current quarterly earnings per share growth of 18% to 20%.

A = Choose shares with consistently high annual earnings over a period of five years.

N = New things. Buy stocks when something new happens in a company.

S = Shares outstanding. Don’t invest in slow growing large cap stocks.

L = Leaders-purchase market leaders.

I = Institutional sponsorship. Purchase the stocks of companies that are backed by institutional sponsors.

M = General market. An investor’s fate is decided by the general market indices. So, interpret them and select stocks accordingly.

Forecasts of a stock’s health are prone to human errors. So, one should be prepared for ups and downs.


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