How I pick shares to try and beat the FTSE 100

A FTSE 100 tracker fund is not the best place to invest for long-term price increases. Our writer tells us how he picks individual companies instead.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Businesswoman calculating finances in an office

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I think it’s tempting to buy a FTSE 100 index fund, after all, that’s an easy route into investing. But the 20-year FTSE 100 average annual return is 5%, and that’s not very competitive.

To illustrate this, let’s look at the share price increases of the FTSE 100 versus the S&P 500, the Nasdaq 100 and Amazon shares:

Source: TradingView

That’s three OK index funds versus soaraway Amazon with the Footsie at the bottom. This is why I pick individual companies to invest in.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

How I choose

When looking for a new company, I rarely start with the financials.

Instead, I look at the products and services I use day in and day out. I’m never surprised when the companies I use religiously also have monumentally strong financial statements.

About half of my portfolio is built up of companies that I use. There are others I don’t use — Ferrari, for example. While I wish I could, but it might be some time yet!

So how do I find and decide on the companies I have no first-hand experience of? Well, one way is through stock-screeners. These handy tools filter financial data and list only the companies that meet particular criteria.

What I look for

I’m typically hunting down value opportunities. But I also want the companies that are selling cheaply to be vigorous growers. So, I’ll set parameters that include but aren’t limited to:

  1. 10-year average annual revenue growth of 30% or more
  2. Over five years, a price down 30% or more

This is a very simplified version of the power of screening data. I often use many more inputs than this. Yet, with just these two simple parameters, what I can uncover is amazing.

It’s also essential that I make sure I use a reputable screener. One with good reviews, including endorsements from major financial institutions, is best, as I want the data to be accurate.

I found four companies that could have been included in the FTSE 100, S&P 500, or Nasdaq 100 that met my two criteria listed above. These were JD.com, Paycom, Etsy and SolarEdge Technologies.

That’s down from around 600 companies (the Nasdaq 100 and S&P 500 cross over a lot).

Well, I might say that’s a slightly easier dataset to analyse.

How I analyse

But hold on, just because a company’s revenue growth is good and the share price is down doesn’t make it a good investment.

This is where deeper financial analysis comes in. I often think of reading financial statements like playing chess because attention to detail is everything. I also have to know how each component of these statements coincides with actual operations and consider broader economic factors.

The key things I look for first are how much profit is being generated as reported on the income statement and debt on the balance sheet.

Beyond that, I’m digging into areas of weakness, significantly poor ratios, and discounted cash flow analyses. I compare these metrics to companies in the same industry.

The bottom line

While this is a hypothetical screening for shares, and I’m not buying these companies, this captures the essence of how I work in the real world.

Investing isn’t easy. If it were, everybody would be rich. I believe it takes time, patience, discipline, intelligence and strategy. But after a while, results do show.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won’t want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we’re giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Oliver Rodzianko has positions in Amazon. The Motley Fool UK has recommended Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 20% in a month, should investors consider buying Marks & Spencer shares?

Shares in retailer Marks and Spencer have surged ahead over the last month, despite a cyberattack. Roland Head takes a…

Read more »

Charticle

Here are the latest growth and share price targets for Nvidia stock

Ben McPoland checks out the latest forecasts for Nvidia stock to assess whether it might be worth considering for a…

Read more »

Growth Shares

Yikes! This could be the most undervalued growth stock in the FTSE 100

Jon Smith flags up a growth stock with a low price-to-earnings ratio and a share price back at 2020 levels…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

3 beaten-down FTSE 250 shares to consider buying before the next bull market

Paul Summers thinks brave investors should ponder buying some of the FTSE 250s poor performers before they recover strongly.

Read more »

Investing Articles

Gold prices soar while the Fresnillo share price slumps. What gives?

With a gold bull market in full swing, this Fool argues that the falling Fresnillo share price may not remain…

Read more »

Investing Articles

2 FTSE 100 shares I’m avoiding like the plague right now

While the FTSE remains packed with opportunity, many of the index's blue-chip shares could be at risk as trade tariffs…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Here’s how an investor could aim for a million buying under 10 shares

Christopher Ruane explains why doing less, not more, of the right things could be the key to success as an…

Read more »

Investing Articles

Could this new risk cause a stock market crash?

Tariffs and a potential recession are two major stock market risks right now. But there’s another risk that concerns Edward…

Read more »