How to be self sufficient and constantly developing

Portfolio: How do I pick stocks to follow?

I have two stock lists. One is a list of stocks I own or am thinking of owning (my portfolio). The other list is a watch list. The stocks in the watch list are the ones I pull from and put in my portfolio. I don’t go trolling for stocks in the general market. Rather, I just scan my watch list each day and stop on anything that interests me. Reviewing the same stocks each day means you get to know both the stock and industry. You know when a stock is cheap and when it is expensive. This entry describes how I build the watch list, not my portfolio list.

When I built the original list years ago, I used Value Line (available free in most libraries) and picked companies that I knew were solid fundamentally. I looked for price to have a heartbeat, meaning up and down movement over the years. I looked at the yearly price range. If it was just a few points wide, I moved onto the next stock. I wanted to see the low price was half the high price in at least two of the past 5 years. In other words, the stock doubled in at least two years.

I avoided selecting companies too expensive or too cheap. The preferred price range was about $5 to $ 20. That meant I could buy many shares without worrying about them heading for bankruptcy (like penny stocks trading below $1). I selected stocks with a positive price to earnings ratio (if Value Line shows NMF in the P/E ratio box at page top, I skipped the stock). I also selected stocks with a large 3-5 year price appreciation potential.

I built a list of at least five stocks in each industry, just to be sure I had good representation. If the stock was a utility, I looked at the yield first then safety rating and read about how safe the dividend was in their view. I looked at the payout ratio, debt load, and other fundamental factors before adding it to my watch list.

That was then. Since my list is built, when I want to fatten up an industry (by adding a company) or if I am adding a new industry to the list, I will look at yahoo!finance and scan their industry list (this may have changed because they revamped their website and got rid of the good stuff). I will read the profile of the company to be sure that it fits into my definition of the industry (in other words, if it mines gold and has a small subsidiary that makes concrete, I do not want to put it into the cement industry.

I will look at market cap because I want to have the big boys (large caps) represented and will add many stocks to the industry providing they are above about $100 million in market cap. Below that and their existence gets dicey. Also, I avoid thinly traded stocks, say, below 100k to 250k shares daily.