You may be curious to know what are the best stocks to buy right now?
Some of the popular stocks that may come to mind include:
- AAPL (Apple)
- MSFT (Microsoft)
- FB (Facebook)
- GOOGL (Alphabet)
- TSLA (Tesla)
- AMZN (Amazon)
- NFLX (Netflix)
- GME (Gamestop)
- AMC (AMC)
- And the list goes on…
Although some stocks may be popular doesn’t mean they are good investments. Just because a “Finfluencer” on Tiktok, guru on Youtube, or financial analyst on the news made a suggestion doesn’t mean a stock is a good buy.
The question is, how do you know what is and what isn’t a good investment?
This article will give you some quick tips to help you determine if a stock is a good or bad investment. This way you can become the expert in a conversation and the best part is, you can use data to back it up!
By completing these steps below, you’ll find that most advice you see online is… bad advice.
Here is how you determine if a stock is a good or bad investment.
Tools you’ll need:
- Your phone or a computer
- A free website that shows financial statements on stocks. We’re going to specifically look at the three statements which include the Income Statement, Cash Flow Statement, and Balance Sheet. Some easy to use free platforms include investing.com, finance.yahoo.com, or marketwatch.com.
Time you’ll require: 5 – 10 minutes
Steps you’ll take (Don’t worry, there is a simple pattern here.):
When you hear advice from someone on what stocks to buy, the last thing you should do is buy that stock. The first thing you should do is ask why? In most cases, you won’t get an educated response. This means you’ll have to run your own analysis. Let’s dive in!
- Open your browser and go to a free website that shows financial statements. Personally, I like investing.com.
- Search for the stock that someone told you to buy.
- After you search for the stock, look for a button that says Financials. In this example I’m using investing.com and we’re going to look at MSFT (Microsoft).
- Look for the Income Statement first.
- Make sure you are looking at the Annual report not the Quarterly report. There should be buttons or a toggle where you may switch between Annual and Quarterly.
- On the Income Statement we’re going to look for 3 data points which include Total Revenue, Net Income, and EPS. On investment.com, EPS is labeled Diluted Normalized EPS.
- Starting with Revenue, look at the last 4 years or statements. We should see the numbers increasing year over year. As of October of 2021, the four years reported include 2018, 2019, 2020, and 2021. We should see 2019 is greater than 2018. We should see that 2020 is greater than 2019. We should see that 2021 is greater than 2020. In the circumstance with MSFT, the revenues are indeed increasing year over year. This is a great sign!
- With Net Income, we should see the numbers increasing year over year.
- With EPS, we should see the numbers increasing year over year.
- Now move onto the Cash Flow Statement.
- On the Cash Flow Statement we’re going to look at 1 data point which is Free Cash Flow. If there is no data in Free Cash Flow, go to the Net Change in Cash data point and just like the Revenue, Net Income, and EPS, make sure the numbers are increasing year over year.
- Now move onto the Balance Sheet. This is the last financial statement in the process.
- On the Balance Sheet, we’re going to look for 4 data points which include Total Assets, Total Liabilities, Total Debt, and Total Equity.
- With Total Assets, we should see the numbers increasing year over year.
- With Total Liabilities, we should see the numbers remain level or decrease. If they are increasing that’s okay because liabilities include employee payroll. If a business is growing, they will need to hire more employees (payroll is a liability).
- With Total Debt, we should see the numbers decrease. If they are increasing that’s okay because debt can be a form of a bank loan. As businesses grow, they need cash to cover expenses and the fastest way to raise capital for a proven business is a bank loan.
- With Total Equity, we should see the numbers increasing year over year.
To summarize…
You should see the following numbers increasing year over year.
- Revenue (Income Statement)
- Net Income (Income Statement)
- EPS (Income Statement)
- Free Cash Flow or Net Change in Cash (Cash Flow Statement)
- Assets (Balance Sheet)
- Equity (Balance Sheet)
You should see the following numbers decreasing year over year.
- Liabilities (Balance Sheet)
- Debt (Balance Sheet)
Now let’s apply this to a real world example. In this circumstance, we’re looking at MSFT (Microsoft).
You should see the following numbers increasing year over year.
- Revenue – Revenues are increasing year over year for 4 years – Good!
- Net Income – Net Income is increasing year over year for 3 years – Good!
- EPS – EPS is increasing year over year for 3 years – Good!
- Free Cash Flow or Net Change in Cash – Net Change in Cash is decreasing – Bad!
- Assets – Assets are increasing year over year for 4 years – Good!
- Equity – Equity is increasing year over year for 4 years – Good!
You should see the following numbers decreasing year over year.
- Liabilities – Liabilities are slowing increasing year over year for 4 years – Okay
- Debt – Debt has decreased over the last year – Okay
Summary: Overall, we have 5 data points that are Good, 2 data points that are Okay, and 1 data point that is Bad.
If someone were to tell you to buy Microsoft, you can confidently agree that yes, the financials look good.
Now, if you were to look at a business that as more “Bad” ratings than “Good”, this means the stock should be avoided.
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Manual Process
The steps outlined above are the manual process for analyzing a stock. How would you feel if a software could do this automatically for thousands of stocks and give you an easy to understand summary?
Automated Process
While some people will take hours if not days to analyze stocks, you can now do this in seconds.
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