07/ How do I know what stocks or funds to pick?
At Dimepop, we spend countless hours researching and analyzing publicly traded companies so that we can deliver to you the very best stock and fund (ETF) picks available. You can sign up to receive those stock and ETF picks with a paid VIP membership.
These are the criteria we look at when determining whether to recommend an individual stock or the group of stocks that make up an ETF fund:
1. A Great Business. We love to see a company with a great business. Having a great business means that the company has a good business model (its approach to the business) and is producing goods and services that are exceptionally attractive to customers. The perfect example of a great business model is Apple Inc. (ticker: AAPL). Assume you are thinking about Apple for the first time. Apple is a company that essentially sells a range of "Apple gizmos" that are well engineered and designed, and its customers not only love its "Apple gizmos"--they line up around the block to get newly released "Apple gizmos" due to their loyalty to the Apple brand and their love of its products. Then, two or three years later they get back into line in order to buy replacements for their "Apple gizmos" from Apple! That is essentially Apple's business, and it is a fabulous business. However, a great business is not the only factor that we look to as factors for investing, and we would not necessarily invest in Apple as an individual stock because it does not necessarily meet our other criteria.
2. An Unfair Competitive Advantage. We love it when a company has an unfair competitive advantage! An example of an unfair competitive advantage is a patent on necessary technology that makes it difficult or impossible for other companies to compete with the company owning the patent. Note that we are only talking about an "unfair" advantage here, not an illegal advantage. Owning a patent is perfectly legal. Another example of an unfair competitive advantage would be a train company that is 130 years old. It owns legacy tracks that were build over 100 years ago. The expense of building a competing set of train tracks would be exorbitant. In fact, obtaining the capital, land rights, labor and materials might be impossible altogether. So this gives the legacy train company a huge and unfair competitive advantage.
3. Disruptive. We love to see companies that are disruptive to an industry either due to one or more pieces of technology the company owns or to the business model (the approach to business) of the company. An example of a disruptive technology is the 3-D printer. It has changed multiple industries in a huge way. An example of a disruptive business model is Uber Technologies, Inc. (ticker: UBER) which has disrupted the taxicab industry by letting just about anybody be a private passenger vehicle driver without having to obtain an expensive "hack" license. While it has not completely put all taxis out of business, it has taken a big chunk out of the taxi business. Arguably, Uber's business model depended on advances in technology, so Uber is both an example of a disruptive technology and a disruptive business model. However, we would not necessarily invest in Uber because it might not meet our other criteria.
4. Network Effects. We love to see companies that benefit from network effects. Network effects essentially means that a company increases in value as more people use it. Think of LinkedIn Corporation (which is no longer a publicly traded company). So many people are using LinkedIn that people not using it might be swayed to become users just to interact with the people that are already on it. Corporate recruiters might use it because there are so many potential hires already on LinkedIn as opposed to its competitors. However, we would not necessarily invest in LinkedIn even if it were a publicly traded company because it might not meet our other criteria.
5. Recurring Revenue. We love to see revenue models such as selling "software as a service" which allows a company to continuously generate income from its customers rather than sell something on a one-off basis.
6. Momentum. We love companies that already have built up an upward momentum in their share prices. The old saying, "Buy low, sell high" is true and it makes sense. But sometimes it makes more sense to "Buy high, sell higher." When a stock has been doing very well, its success tends to increase the chance that it will continue to do well due in part to the psychology of the stock market as well past performance being indicative of underlying strengths. So, we look for companies that already have momentum. Of course, they will need to meet our other criteria, as well.
7. Market Cap. We love to see companies with the right market cap size. Market cap (market capitalization) is defined as the market value of a company. It is determined by simply multiplying the current share price by the number of shares outstanding. Generally, we want to see companies with a market cap between $35 billion and $50 billion. The reason for that is that these companies have proven they can get big, but they still have a lot of room to grow. Having said all that, we will sometimes make exceptions to this rule for a company that is either smaller or larger than our preferred range.
8. Great Leadership. We love to see companies with great leadership at the top. Ideally, the people leading the company are the same people that founded the company and have a deep passion for the company.
9. Metrics. We love to see companies with great metrics, such as a low price-to-earnings ratio. Metrics are the nuts and bolts of a company. They tell us how profitable a company is and whether the company's stock is selling for a bargain or if its stock is relatively expensive. Now, we can overlook poor metrics if there is a good reason for us to do so. For example, a company might be focused on being profitable six months from now and so it might have poor earnings reports for a couple of quarters before it gets there. If we understand this and it makes sense to us, we might invest in such a company despite lackluster metrics.
10. Employee Happiness. We love to see companies with happy employees! If there is a lot of turnover in a company, that could seriously harm their ability to function and be profitable. We check with Glassdoor to see how a company is rated. Lower turnover can tell us that, possibly, employees sense big things for the company. It can tell us that, possibly, empoyees are happier and therefore more productive. Of course, there might be exceptions to this principle, and we have to look at all of the criteria together.