Everybody knows that a wise and successful investor always seems to pick stocks with a high probability of future appreciation. In fact, you hear it all the time. The secret to making big money in the Stock Market is simple: "buy low and sell high." From the perspective of an outsider or an inexperienced newcomer to investing, it sounds simple enough. Just purchase any given stock at a low price, let it rise in value, and then sell it for a nice profit. But believe it or not,  most experienced investors know that picking winning stocks can be the most difficult task of all. In fact, it is not unusual to find well versed investors constantly asking themselves, and their financial advisors, the very question of how best to go about the process of choosing a winning stock. You see, it is not so easy to know when a stock is undervalued and therefore, "LOW" and most likely ripe for accumulation.  And it is also not so easy to know when a stock is "HIGH" in value and hence, not very well suited for making a potential profit. If it were really all that easy to pick winning stocks every day in the Stock Market, don't you think there would be more millionaires and billionaries,  claiming widely that they made their fortunes buying and selling stocks?  

The fact is, picking winning stocks can be complicated and time consumming work, but there are some specific methods that can increase your chances of making good choices. And these same methods can also increase your chances of making big money in the Stock Market. In this article, I am going to discuss one of these really important principles for good stock picking. If you haven't read my articles on "The Big Picture," you probably need to do so. "The Big Picture" collection opens an investor's mind to some wide ranging fundamental discussions, covering the general world wide macro Market structure. These articles can also help you or any investor, experienced or new,  understand how to approach a proper analysis of  stocks in various Stock Markets around the world.

As I mentioned, the first and foremost issue in all stock picking is the fundamental question of VALUE. This is the question of whether a stock is either priced below its actual intrinsic value or whether it is in fact over valued. One thing we can say up front is this. Each and every day of the week, in every Stock Market in the world,  investors place values on stocks. They make these evaluations by simply buying or selling the stock on exchanges. So every day, prices of stocks change and so do their values. This being said, how does an potential investor decide whether any given stock is undervalued at the moment and ready for a purchase?

The answer to this question begins with Investors looking closely at the company's prospect for income and profit. Stock Investors always look primarily for this characteristic. They want to buy companies with growing profits and income. They try to collect information from a number of sources in order to determine whether a stock's present price truly reflects its future prospect for profit. For example, an investor may look to utilize all of the news he or she can get on a company in order to discern whether the company's earnings are growing. EARNINGS ALWAYS DRIVE STOCK PRICES.  Investors often look to the company's management for hints of earning trends and for any signs concerning the company's overall future earnings power. All of this information gathering is important because it helps investors determine THE FUNDAMENTALS of the company's basic health and prospect for growth. Since investors in the Stock Market are always looking to invest in stocks that will go up in value,  COMPANIES WITH EARNINGS TRENDING UPWARD ARE THE ONLY GOOD CANDIDATES FOR INVESTMENT.

There are a large number of possible types of information that investors can glean from the fundamentals of a prospective company's stock, but for me, there are only three types of information that really matter: EARNINGS, EARNINGS AND EARNINGS. I also have to admit that I like to look at a company's net cash flow, its long term debt, and its growth in sales.  The trends found in these kinds of data give the investor even more evidence of value. A company with good net cash flow, low or non existent long term debt, and a history of growing sales has a better chance of a good, strong earnings trend than a company ladened with debt and struggling with poor cash flows.

So how does an investor gather this kind of information? One of my favorite spots on the Internet for information gathering is Yahoo Finance. Let's say, for example, that you want to know the fundamentals for Microsoft. You can click on Yahoo Finance, insert the symbol, "MSFT" into the "Get Quote" box, click on quote and voila: all kinds of information comes up on your computer screen. If you want to find out about Microsoft's earnings, you can look at the information just below the stock's quote and see it. If you want to know about Microsoft's cash flow, long term debt, or growth in sales, you can look to the left hand column and see a section near the bottom of the page called, "Financials." There, you will see three choices. Income Statement will give you details of earning trends. Balance Sheet will tell you about the long term debt of Microsoft, and Cash Flow will tell you all you want to know about the company's recent trends on the subject. In the case of Microsoft, you will note that the company has a high cash flow, very low  long term debt and a growing sales trend. Bingo. Here is a company whose fundamentals appear to demonstrate quite well that its future prospects for growing earnings are strong. This is the kind of company an investor wants to consider for the accumulation of its stock. 

But is Microsoft's stock fairly priced in the Stock Market right now? Interestingly enough, this question may not really matter. Why? Well, even if Microsoft's stock happens to be fairly valued in the Market, IT STILL MAY NOT BE FAIRLY VALUED FOR ITS POTENTIAL FUTURE EARNINGS POWER.    Investors in the Stock Market always begin with the question of the future. That question can be formulated something like this. Assuming that even if Microsoft's stock is fairly valued in the Market at the present, what will be the stock's continued earnings growth in the future? If the answer to this question suggests that Microsoft is underrvalued for its future earnings power, then the stock is "low" in value and ready for an investor's accumulation. Of course, other investors will more than likely eventually see what you see concerning Microsoft's future earnings and begin buying the stock in anticipation too. Ultimately, the Stock Market will make a value adjustment upward of Microsoft's worth in relation to those future earnings, and Microsoft's stock will eventually trend upward in price on the stock exchange.

So, when it comes to the matter of choosing a stock for potential investment, one of the most important issues for investors is whether the stock under consideration has earnings that suggest a future of upward trending growth in earnings. If the prospect of future earnings is sharply higher, the price of the stock is inevitably bound to follow. Investors who anticipate higher earnings in a stock, and who correctly anticipate this upward trend, are sure to eventually make big money in their Stock Market investments.

John K. Brackett, Ph.D.

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