We all would love to get in at the bottom floor of a wonderful upcoming business ready to ride the profit elevator up to new heights.\nWhere do the best opportunities lie in finding those best-of-breed businesses ready to take off in the markets?\n
Poised to Explode
We all would love to get in at the bottom floor of a wonderful upcoming
business ready to ride the profit elevator up to new heights.
Where do the best opportunities lie in finding those best-of-breed
businesses ready to take off in the markets?
Having a simple set of criteria to help guide you in your decision-making
process is critical to consistently picking those winners.
Here are the top 6 criteria discussed by the experts at Paradigm Capital
Management for you to consider for finding those undervalued stocks
poised to take off:
1. Company size:
Look for small to mid-cap companies with a market capitalization
between $250 million and $1 billion. These emerging companies have
the greatest potential for upside growth in terms of market exposure and
profitability. The Apple's, Google's and Wal-Mart's of tomorrow all
started with humble beginnings.
Look for companies that have a low Beta ratio of less than 1.0. Beta is a
measure of the sensitivity of the company's returns compared to market
returns. In theory, a stock whose returns vary less than the market's
and potentially risky.
3. Solid Fundamentals:
Look for companies that show growth rates in excess of 10% per year
consistently over at least a 5-year period for the following:
ROIC - return on investment capital
BVPS - book value per share or equity
EPS - earnings per share
Free Cash Flow
The key is to identify those businesses that have consistent year-over-
year growth rates. The major stock market websites that post company
financials will have the raw data that you need in order to calculate the
growth rates. For a simple Excel spreadsheet that will convert the raw
data into meaningful growth rates, please visit Stock Investing
Look for a PEG ratio that is less than 1.0. A lower ratio is better (cheaper
& healthier stock) than a higher ratio (more expensive). PEG is
calculated by dividing the P/E ratio by the earnings per share (EPS) in
order to better compare companies with different growth rates.
5. Global Exposure:
Find out if the business in question earns most of, or a large percentage
of, its income from international markets. With America no longer being
the most important economic market for businesses in today's global
economy, finding a company with international exposure to its products
and/ or services is critical.
6. Stock Value vs. Stock Price:
Look for businesses where Mr. Market has priced the stock below the fair
market value of the business. Ideally, you are looking for a stock price
that has a big margin of safety (MOS) price of 30 -50% below its fair
market or intrinsic value price.
Several subscription websites provide fair value estimates for businesses.
However, should you like a simple approach to help you assess the MOS
price for a business, please check out the articles on best-of-breed
analysis at Stock Investing Simplified.
Once you have used the 6 criteria outlined above to identify potential
companies, place them on your personal watch list.
Now it's time to get up close and personal and to only invest in those
businesses that you understand and that you would be willing to monitor
on a weekly basis for any changes to the fundamentals, market forces or
This simple, step-by-step approach to analyzing stocks should help you
identify those emerging companies with the potential of rising to new
Paradigm Capital is a privately held trusted leader in small cap investing
in Albany, NY and employs a disciplined, bottom-up approach with an
emphasis on fundamental analysis and extensive management contact.
To learn more, please visit here: http://paradigmcapital.com/