Identifying the best stocks to buy has its challenges. On the London Stock Exchange, there are nearly 2,000 stocks to choose from. On international exchanges, there are thousands more.
Here, I’m going to reveal how I’ll be trying to find the best stocks to buy for 2024. I’ll take you through my investment research process and highlight some stock-picking shortcuts I use.
My investing process
There are several things I look for when searching for top stocks for my portfolio.
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One’s a healthy level of revenue and earnings growth. To my mind, this is what investing’s all about – putting money into growing companies. In my experience, when companies are growing, it’s much easier to make money as an investor. I look for companies in growth industries and have big tailwinds.
A competitive advantage is another. This is an ‘X factor’ that allows a company to do something that others can’t. For example, it could be a strong brand or a niche technology. If a company doesn’t have an advantage, competitors may emerge and ruin the growth story.
I also look for companies with strong financials. I like to see a robust balance sheet with minimal debt. I also like companies that can generate a high return on capital. Companies that can do this often get much bigger over time through the power of compounding.
Finally, I look for a reasonable valuation. It doesn’t have to be a low valuation. I just don’t want to pay a silly price. If I pay too much for a stock, my returns might be underwhelming.
A good example of all this in practice is my purchase of Rightmove shares a few months ago. Rightmove has a strong brand and is growing at a healthy rate. It also has superb financials. And recently it was available on a price-to-earnings (P/E) ratio of just 18. At that price, I couldn’t resist buying more shares. Since my purchase, the share price has risen about 20%.
Three stock-picking shortcuts I use
Now, finding companies that meet all of the above criteria can take some time. So there are a number of shortcuts I use.
First, I look at what professional money managers (ie the ‘smart money’) like Terry Smith, Warren Buffett, and Nick Train own in their portfolios. I keep an eye on monthly fund factsheets. I also check 13F regulatory filings to see what US stocks top fund managers have been buying.
Following the smart money has paid off. For example, after looking at Smith’s (Fundsmith Equity) holdings a few years ago, I decided to invest in Microsoft. Since my initial purchase, the stock has risen more than 200%.
I also listen to investing podcasts. Every night, I listen to CNBC’s Halftime Report on Spotify while I’m walking my dog. This is a daily show where a handful of money managers discuss the stocks they’re buying and selling. I’ve found it can be an excellent source of investment ideas. For example, it led me to invest in Uber a few months ago. Since then, the stock has risen around 40%.
Finally, I read a lot of The Motley Fool. With a wide range of writers covering both UK and US stocks, there are always some brilliant investment ideas here.
