The Smart Investor
    Facebook Instagram
    Saturday, February 4
    Facebook Instagram LinkedIn
    The Smart Investor
    • Home
    • About
      • About Us
      • Careers
    • Smart Investing
      • Getting Started
      • Investing Strategy
      • Smart Analysis
      • Smart Reads
    • Special Free Reports!
    • As Featured on BT
    • Our Services
      • Our Services
      • Subscribe now!
    • Login
    • Cart
    The Smart Investor
    Home»Investing Strategy»How to Find a Winning Stock for 2021
    Investing Strategy

    How to Find a Winning Stock for 2021

    Royston YangBy Royston YangDecember 25, 20204 Mins Read
    Facebook Twitter LinkedIn Email WhatsApp
    Share
    Facebook Twitter LinkedIn Email WhatsApp

    We will soon bid farewell to the first year of the new decade.

    As 2021 beckons, the hope is that it will be a year of recovery.

    Amid the challenges, there’s a silver lining to all of this.

    Humans have shown their tenacity by adapting to changing business conditions, and businesses have leaned heavily on technology and digitalisation to continue functioning.

    Although many stocks have been badly hammered, there have been notable winners such as Top Glove Corporation Berhad (SGX: BVA) and iFAST Corporation Limited (SGX: AIY).

    How should investors go about identifying a potential winning stock for 2021?

    It boils down to five attributes that you should look closely at before you put your money down on a business.

    Gross margin

    The gross profit margin measures the pricing power a business has and is calculated as the gross profit divided by revenue.

    A higher gross margin indicates the business can price its products as a high mark-up to its cost of goods.

    However, a high gross margin alone should not be an indication of a strong business.

    Investors also need to observe how consistent the gross margin is.

    Companies in cyclical industries may display a high gross margin at the peak of its cycle, but subsequent years may see this margin fluctuating wildly as the cycle turns.

    An example of a company with consistent gross margins is PepsiCo Inc (NASDAQ: PEP), a food and beverage giant with its signature Pepsi-Cola. Its gross margin has hovered between 52% to 55% over the last 10 years.

    Free cash flow

    Another sign of a great business is its ability to churn out copious amounts of free cash flow (FCF).

    Free cash flow is what’s left when you deduct a company’s capital expenditure from its operating cash flow.

    Businesses that consistently generate healthy levels of FCF are more resilient when faced with adversity.

    The FCF also provides management with different options as to how to deploy the monies, be it for share buybacks, an increase in dividends, or for opportunistic acquisitions.

    Competitive moat

    The next attribute to look for is a company’s competitive moat.

    In a nutshell, a “moat” relates to how strong a company’s competitive edge is versus its competitors.

    The stronger the moat, the tougher it is for the company to lose customers or market share.

    Such businesses are also more resilient during crises as the moat will offer some buffer against falling demand.

    That said, investors need to assess a moat carefully in light of the disruptive nature of the pandemic.

    Some business models may become obsolete as human habits and practices have been irreversibly altered.

    As a result, competitive moats may also shift and either strengthen or weaken.

    If a moat is assessed to be durable, the company can likely generate high returns for investors over an extended period.

    Dividends

    The fourth attribute that investors should look for are businesses that have a long track record of paying dividends.

    As mentioned earlier, companies that can produce consistent free cash flow usually are also able to maintain dividend payments.

    Besides being a generator of cash, a dividend-paying company will usually also have a strong balance sheet and a sturdy business model.

    These two attributes stand the investor in good stead during challenging times as it will provide the company with a better chance of survival.

    There are even companies that have increased their dividends for more than a decade and have not let crises along the way crimp their ability to raise dividends.

    By observing such an impressive track record, investors can determine the secret sauce that makes the company so successful.

    And if the company has what it takes to increase dividends over such a long period, there’s a high chance it will continue to do so in future.

    Risks

    With the first four attributes being positive aspects to watch out for, investors mustn’t neglect the negatives.

    What I am referring to are the risks associated with any business that may cause it to perform poorer than expected.

    These risks may not immediately manifest themselves but may remain hidden until a crisis or challenge comes along.

    By thinking through different scenarios and observing how the company handled previous crises, you can obtain a better sense of how resilient the business is.

    By weighing the potential risks against the anticipated rewards, you can then arrive at a better-informed investment decision.

    Get Smart with The Smart Investor.  CLICK HERE for your FREE subscription to our Smart Investing newsletter. Picking the right shares and the strategy to be successful in the stock market isn’t easy. Get Smart in Investing with us and learn how to do so today.

    Follow us on Facebook and Telegram for the latest investing news and analyses!

    Disclaimer: Royston Yang owns shares in iFAST Corporation Limited.

    Yahoo
    Share. Facebook Twitter LinkedIn Email WhatsApp

    Related Posts

    Capitaland

    CapitaLand Integrated Commercial Trust Reports a 1.7% Increase in FY2022’s DPU: 5 Things to Note About its Latest Earnings

    February 3, 2023
    Keppel DC REIT

    Keppel DC REIT Reports its Full Year 2022 Earnings: 5 Highlights Investors Should Know

    February 3, 2023
    Social Media on Mobile Phone

    4 Big US Tech Companies Announced Layoffs: Are Their Growth Days Over?

    February 3, 2023
    Facebook Instagram LinkedIn Telegram
    • Careers
    • Disclaimer & Privacy Policy
    • Subscription Terms of Service
    © 2023 The Smart Investor. All Rights Reserved. The Smart Investor, thesmartinvestor.com.sg, an investment education website managed by The Investing Hustle Pte Ltd (Company Reg No. 201933459Z) is not licensed or otherwise regulated by the Monetary Authority of Singapore, and in particular, is not licensed or regulated to carry on business in providing any financial advisory service. Accordingly, any information provided on this site is meant purely for informational and investor educational purposes and should not be relied upon as financial advice. No information is presented with the intention to induce any reader to buy, sell, or hold a particular investment product or class of investment products. Rather, the information is presented for the purpose and intentions of educating readers on matters relating to financial literacy and investor education. Accordingly, any statement of opinion on this site is wholly generic and not tailored to take into account the personal needs and unique circumstances of any reader. The Smart Investor does not recommend any particular course of action in relation to any investment product or class of investment products. Readers are encouraged to exercise their own judgment and have regard to their own personal needs and circumstances before making any investment decision, and not rely on any statement of opinion that may be found on this site.

    Type above and press Enter to search. Press Esc to cancel.