Some examples of good stocks
By ensuring that you’re restricting your search to only stocks that are cheap you are giving yourself a built in advantage as these stocks outperform the market.
But you dont want to just buy a bunch of cheap stocks with no regard to the underlying business fundamentals. you want to try to add some measure of quality to the good from the bad. These are the two most important metrics.
In addition to looking at those basic measures I like to glance at the following six quality measures very quickly when looking at a cheap stock.
What is the debt to equity ratio. check the balance sheet! Debt is not always bad but if the stock is cheap, it usually has some problems. Debt can encourage those problems.
What is the company’s returns on capital? I look at ROC to determine quality. Consistent high returns without much leverage indicates a durable advantage.
Some investors dont look at this but book value growth is one of the most entertaining measures to look at. A company that is steady growing their net worth over time must be doing something right. It doesn’t necessarily indicate a advantage but it’s deffinately a positive sign of quality.
What does 10-year sales growth look like? I use Morningstar to glance at 10-15 years worth of sales history.
What is the gross profit margin? Buffett says that a company with consistent gross margins likely has a competitive advantage.