How to Pick the Perfect Stock
In many ways… markets don’t make much sense right now.
Stocks were inches away from all-time highs to start the week… but volatility is back, too. The VIX (Wall Street’s fear gauge) has ticked up for the past three days in a row.
Why do I say markets make no sense today?
As Bloomberg notes: We have to go all the way back to 2009 to find the last time stocks gained over 2%, while the VIX also climbed upward in the same time frame.
Of course the million-dollar question today is what do I do as an investor in times like this?
For that we have an answer… And it’s using my seven-step screener to pick out market winners no matter how volatile and confusing the greater indexes are today.
In short, I search for companies with the following seven characteristics:
- Dominant Business: An established company with a market cap of at least $10 billion.
- Consistent Dividends: A dividend yield equal to and preferably higher than that of the S&P 500.
- Cash Flow Doesn’t Lie: Consistently positive cash flow to sustain dividends and grow the business.
- Follow the Peter Principle: Invest in businesses that are easy to understand, and be able to explain why you buy so a fifth-grader can understand.
- High-Quality: Insist on companies with an S&P Quality Ranking of B or better, and preferably A.
- Improving Prospects: Buy the right stock at the right time, when earnings estimates are rising.
- History Rhymes: Look closely at the company’s historical results over the past 10 years to make sure it has consistent sales, profits and, most important, dividends.
Now let’s see how one of my favorite blue chips holds up to this test.
Double-Dipped Income From Big Tech
The company I want to highlight today is Microsoft Corp. (NASDAQ: MSFT). On the year, MSFT shares are up roughly 30%, but does that mean this company cuts the mustard for our seven-step screener?
We all know Microsoft is a dominating tech company. They have their hands in software, hardware, gaming, streaming and cloud computing, among other things. You can easily check them off as a dominant business.
But MSFT also pays a consistent dividend. It’s not a huge one at 1.39%, but it significantly beats the average tech dividend of 1.05%.
On top of that MSFT has reported a positive net cash flow for the past four quarters.
Check off screeners Nos. 1, 2 and 3 as yeses.
Microsoft is also an easy company to understand. They make tech products and provide a swath of computer-based services. They also make a lot of money doing it. You don’t need a degree in coding to understand that.
Perhaps that’s why MSFT is also a AAA-rated stock, according to the S&P ratings systems. Go ahead and check off screeners Nos. 4 and 5 as yeses, too.
But with 30% gains already, can this stock still go up from here?
According to Yahoo Finance, “While the historical EPS growth rate for Microsoft is 13.2%, investors should actually focus on the projected growth. The company’s EPS is expected to grow 18% this year, crushing the industry average, which calls for EPS growth of 8.8%.”
Stocks screener No. 6… Check that as a yes, too!
Last but not least is MSFT’s historical results. In terms of dividends, MSFT has grown its dividend for the past 15 years in a row.
That’s a strong sign of a healthy, growing company.
Additionally, the share value has grown incredibly over the past five years, from roughly $43 per share in July 2014 to around $131 as of midday today.
Add on the fact that the historical growth rate for MSFT is 13%, as noted above, and you have a high-quality company that offers you a great chance at double-dipped profits from strong share growth and consistent dividends.
Bottom line: If you don’t own any MSFT shares, consider adding some today.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch