Stocks have given the highest yield over the past seventy years. The real challenge is to find a stock that is both profitable and safe, which I do using fundamental analysis. My long term strategy looks at ways to measure the safety of companies. In a world with dozens of startups erupting every day, the company must have a large market cap to ensure dominance over the industry. In addition, the company should have a modest P/E ratio, one of at least less than the average P/E ratio in the sector. This generally prevents a company from crashing if it is has an earnings report which is not as glamorous as investors expected.
If its P/E ratio is low for the industry, the stock often undervalued, although one can check this through many ways such as the Benjamin Graham valuation. Moreover, the company should have its assets diversified with many customers. In case one of its products is not popular among consumers, the product should not be a large blow since the company gets revenue from many others sources and types of consumers. Furthermore, the debt to equity ratio must be low. If it is high, this can mean that the company is getting most of its assets from loans of the bank and not through investors.
This can show that investors are not confident in the stock. My long term strategy looks at ways to forecast of profitability of the company. One of the most important indicators is the return on equity ratio. The more profit the company can make from an investor’s dollar, the more attractive it is to the investor. The investor must also look at qualitative factors such as competitive advantage. The company must have something special about it, and be able to do something that other companies cannot easily copy, which makes it attractive to consumers.
Another indicator would be looking at the forecast of the sector. The industry should be producing something that is hot now and will be hot in the future, an item which people depend on and cannot live without in the modern world. Also, an investor must study the management, which should be shrewd and aggressive and find the most creative ways to expand. Investors can tell the strength of the management through their candidacy in conference calls, insider sales, and their past performance in previous companies. There are two excellent companies which follows the tenets listed above.
The first one is Costco, a wholesale corporation. Its competitive advantage is its strong business model in which Costco focuses on having low operating costs by buying only a few brands of each item from producers in bulk and relying on word of mouth advertising. They pay employees well which ensures efficiency through retention. Finally, they reward loyal consumers the more they purchase, which entices them to buy more. Costco actually makes its money through membership fees, which are steady and therefore safer in the future.
Loyalty is especially important in today’s day and age because there are so many competitors that only companies loved by customers will survive. To ensure safety, Costco is diversified among three main categories, consumer services, insurance services, and business services, which can be broken down further. It not only has loyal customers, but loyal investors as its debt to equity ratio is 59. 42, much less than the leading wholesale company Walmart, with a debt to equity ratio of 63. 49. It has so many investors that it has a market cap of 71. 6 billion dollars.
Although Costco is very popular among its customers and investors, it still has a P/E ratio of 29. 88, which is less than its industry. Costco makes good use of its money and has a return of equity ratio of 20. 63%, more than Walmart with a ratio of 18. 62%. Costco will likely never go out of business because it sells items that people need: food, water, clothing, and shelter, and because of its affordable prices, loyal customers, and tight economy, its products will be in demand.
It is based in the US, which has a strong economy as revealed by the Fed, and does not have to worry about problems faced in the EU and China such as the devaluation of the yuan. The persistent management is taking advantage of this as Costco grows across the nation. Another company which I would recommend is Cisco, a company which deals with networking equipment. Cisco is one of the top dogs out there, with a market cap of 138. 93 billion dollars.
Cisco has fantastic management who have the foresight to acquire young companies with its large reserves of money which help Cisco stay ahead, giving Cisco its competitive advantage and diversification through sales. Even though it acquires many companies, it is still in great financial health and making the right moves. Investors love it and it has a debt/equity ratio of merely 41. 05, less than competitor Juniper Networks with a low ratio of 44. 01. Cisco makes networking equipment which includes routers, gateways, switches, etc. Without all this, the Internet would be useless.
Cisco thrives off our dependence on the internet and has a return on equity of 16. 42%, which is more than Juniper Networks with has a return of -6. 29%. The most alluring indicator of Cisco is its P/E ratio of 14. 59, 70. 3% than the industry average ratio. Similar to Costco, Cisco deals in mainly the US; therefore, it will not be affected greatly by the instability in the other parts of the world. To conclude, although the stock market is volatile, there are ways to ensure maximum profitability. Costco’s main strengths are its strong business model, while Cisco’s is its use of market cap to ensure diversity.
