Beginner's Guide To Picking Profitable Stocks

Everyone is always asking for the right formula to pick profitable stocks. Today I will share the metrics I look at when I choose stocks for my personal portfolio.

Lately, I have begun to prefer investing in index funds and ETFs as a passive way to make money in the market in the long run. But if you fancy picking your own stocks to try to beat the market, here is what you should analyze to find profitable stocks.

I will also choose a stock for each metric that I personally think could be a potentially profitable stock in the long term.

You can start buying stocks with apps like M1 Finance, Robinhood, and Charles Schwab.

Market Capitalization

The first thing I like to consider is the market cap of a company. This is how I figure out how big the company is and if there is potential for further growth.

The market cap is calculated by the following formula:

Shares outstanding x price = market cap

Essentially, it is just the number of shares a company has multiplied by the price that gives us the total value of the company.

This means that the price of one share of a company does not tell us anything. A company with a price of $40/share can actually be worth more than a company with a price of $75/share.

Simply put, the market cap is how much money is needed to buy the entire company.

If you want to play it safe, you can pick large-cap stocks, which have a market capitalization of $10 billion to $200 billion.

However, I like to focus on mid-cap to large-cap stocks ($2 billion-$200 billion) because I want to be part of their growth to become a mega-cap stock.

This gives me an opportunity to make large returns off of their transition to becoming a leader in their industry and eventually reaching that $1 trillion market cap.

The stock that meets this criteria for me would be NIO.

Profitability

I want to point out that there are a lot of stocks that continue to appreciate in price even though they have not generated any profit yet. That is because investors are optimistic about the company’s future ability to generate a profit.

Profitability is referred to as earnings per share in the stock market. Earnings per share is how much profit the company generates per share.

Earnings per share (EPS) are calculated by the following formula:

Company profit ÷ shares outstanding = EPS

I'd like to own companies that are already generating a profit. This gives it a safe spot in my portfolio for the long run.

My stock pick for this metric is going to be Shopify.

Economic Moat

Another criteria I like to consider when looking at stocks is their economic moat. This is defined as the competitive advantage a company has over its competition that allows it to protect its profits in the coming years.

One way of analyzing the moat of a company is to look at its financial profits over the past years. If profits are growing, that is a good sign of having an edge against the competition.

Another way of looking at the moat is to consider the network effect around that company. The more people who use a product or service, the more likely it is that others will begin to use it as well.

People like to copy others, and that, in turn, generates new users and maintains the existing users of that product or service.

My stock pick for this metric would be Etsy.

Dividends

I like to invest in companies that give out dividends to their investors. However, this is not a hard-set rule for me. I invest in many companies that do not offer dividends.

But providing a dividend means that the company is already established and, instead of spending their money to further grow, they share it with investors.

This results in investors wanting to continue investing in the company and helping the company grow steadily.

Simply put, a dividend is when a company shares a portion of the generated profits with its shareholders in exchange for their trust in the company and their loyalty.

My stock pick for this metric would be 3M.

P/E Ratio

The price-to-earnings ratio is used by experts to determine whether a company is overvalued or undervalued. Unfortunately, P/E ratio standards are different for each sector of the stock market.

For instance, the benchmark for P/E ratios in the energy sector is going to be completely different from that in the technology sector.

The P/E ratio is calculated by the following formula:

Share price ÷ earnings per share = P/E Ratio

You may find a company that you like and would like to invest in, but you will see that they do not have any P/E ratio. This means that the company has not yet generated any profit.

Many investors gravitate towards companies with low P/E ratios because they believe that the stock is undervalued. This also implies that the stock will rise in price in the near future.

A stock that has a high P/E ratio might not necessarily mean that it's high in price and will soon decline. Sometimes investors anticipate growth from a company and the price reflects that growth.

In this case, the company would need to play catch-up with its earnings to justify the price. If the earnings do not match expectations, then the company could experience a short-term decline.

My stock pick for this metric would have to be Coinbase.

Bottom Line

Those are the factors that I personally consider when looking at adding individual stocks to my portfolio. However, these are metrics used for long-term investing.

I am in the process of shifting my trading strategy to be more passive by investing in index funds and ETFs. But I still hold a small portion of my portfolio in individual stocks that I believe will outperform the market in the long run.