Six stock picking tips to help you become a better investor
Australian Market Strategist
Summary: One of the most frequent questions clients ask, is how do I pick a stock. Or, how do I know what to buy or invest in? it is not easy to pick a winning stock, however if you create a solid and repeatable approach, it can help you identify opportunities sooner and improve your trading success. So here is a simply way to approach to stock picking, with six simple tips
Before getting started; think of a business, or brand, that you know and trust. Then, ask yourself, ‘is that business able to grow earnings over time, and over the longer term?’. If you answered yes, you could be on track to picking a wining stock. As earning growth, and earnings upgrades drive share price growth. If you can’t think of a company, or don’t know where to start, here are six stock picking tips
Tip 1: Become observational
When picking a stock observe trends, forming around you and think of stocks that could benefit. A famous investor, Peter Lynch, said you can have ‘one up on Wall Street’ if you do this. Observe how things have changed overtime at your workplace, home, on the street, how you make transactions. Just for a day, I dare you to think of the moving cogs. I bet you’ll notice; more electric cars on your street, cranes in the sky, brand names when you tap and go. You might catch the news and see more countries making initiatives to reduce carbon emissions, or banning petrol cars. You might then think about; Square (SQ2) for example, the pay-tech business who facilitated your tap and go transaction. You might think of the electric car makers like Tesla (TSLA) or BMW, thinking they’ll likely see more sales, or you could think about the mining companies who produce materials, like lithium, copper and nickel, that are used in powering electric cars.
Tip 2: Pick a sector that is growing
After observing a trend, determine if the sector is benefitting from either; behavioural shifts, government support, regulatory changes, or from a demand/supply imbalance (relevant for commodities). You want the sector to have ‘wind in the sectors sales’, which will likely support share price growth.
When looking for inspiration; Federal Budgets are a great place to look. The Australian Budget highlighted, defence, cyber security, low emission technology, agriculture, infrastructure (rail and roads), and the travel sector would receive financial support. Along with households and small businesses.
- Defence: Australia's defence spending will rise to $48 billion in 2023 financial year, that’s 2.2% of GDP, up from $44.62 billion (2.1% GDP) in 2021 FY.
- Cyber Security: $9.9 billion of that ($48b) will go to develop Australia’s cybersecurity capabilities.
- Green Transformation: $1.3 billion in funding will go toward low emission exports with the government to invest in carbon capture, carbon capture storage technology, low-emissions steel and hydrogen fuel.
- Agriculture: $7.4 billion of funding will go to new dams and expanding existing dams, that can unlock new opportunities for agriculture. The funding includes $6.6 billion of water infrastructure, to help develop a new food bowl in Australia’s north.
These are just examples of how to pick sectors. At Saxo we’ve been bullish on commodities, for some time, and observed professional investors funneling money to the sector from November 2021. In commodities, remember, there is hard commodities (metals and energy) and soft commodities (grains, poultry, beef etc.) and we see the commodity sector setting higher prices, due to the lack of supply and higher demand, which supports share price growth in the sector.
After you have found a growing sector, it’s time to pick a stock.
Tip 3: Pick a company growing market share
After you have identified a growth sector; for example, commodities, cybersecurity, defence, or logistics, then think of growing companies, in that field, that will be probably around in 10 years. Think of companies that are dominate or have growing market share, for instance, in commodities, you might think of BHP. In cybersecurity, CrowdStrike. In Logistics, you might think of DSV. Companies like these, with a global reach, typically have stronger earnings and profit growth and thus see stronger share price growth over time and tend to outperform the market. BHP shares for example, are up 110% in 5 years, CrowdStrike up 258%, DSV is up 267%.
If you don’t know where to start to; for ideas check out Saxo’s Equity Baskets, which highlights the biggest companies in each sector, globally.
If you want to find your own stocks; try Saxo’s screener. You can find stocks in sectors, that have BUY, HOLD or SELL ratings from analysts. Simply, head to Trading, Screener, then click Filter list. Select, a Sector (s) that you think will grow, then you can find stocks covered by Analysts, by clicking Analysts Consensus.
Tip 4: Look at companies about to be added or removed from ASX200, S&P500
If you are still needing stock inspiration, why not check out, which companies will be added, or removed from key indices like the ASX200, ASX300, and the S&P500, each quarter. S&P Global create indices, that ETF providers then mimic, to make ETFs. S&P Global generally give the market a months’ notice, before a stock is added or removed from an index. Sometimes, this allows investors to get ahead of the curve.
This quarter, in the ASX200 and ASX300 for example, we saw 11 commodity companies added to the key indices. Most are lithium miners. That’s because lithium stocks have risen in value, as the lithium price is up 88% this year. As a companies market cap (or size) rises and it overtakes another company's size, it means it can enter the ASX200 or ASX300. For a list of the companies added to the key indices on the ASX, click here.
Tip 5: Pick a business with growing financials
After picking a company, you need to figure out if the company’s financials are moving in the direct direction. Are they growing their cashflow, earnings and profit? You can find this information easily by looking at the company’s annual report, or by looking at the company’s website. You ideally want to see if the company can sustainably increase their performance over the longer term – what has growth been like over 3 and 5 years?
These questions form the basis of your fundamental research.
Tip 6- Use technical analysis to back your decision making
You can take your stock-picking to the next level by pairing it with technical analysis. So head to Charts, and work towards building a model that works for you. I like to look at moving averages and support and resistance.. And you will find at Saxo, on our podcasts, and upcoming videos, we might refer to these a lot too.
For more info of Technical Analysis, refer to our Education library.
And lastly, remember, time and again, it’s been shown that combining fundamental research and technical analysis gives investors a higher probability of picking an outperforming stock.
Good luck and happy trading.
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.