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How to Spot a Stock
That's a Keeper

Not every stock you buy is worth holding onto for life. But if you're seeking stocks to keep for the long haul, look for companies with these traits, which can give businesses a long-lasting edge over the competition, writes Nellie S. Huang, Kiplinger’s Personal Finance.

An in-demand product or service, or a trusted name: Whether it's a sought-after product or service or even a popular store (online or on Main Street), a company that offers something in high demand creates a loyal group of repeat customers.

A recurring stream of revenue: Habitual customers generate steady sales. The Holy Grail is a dependable flow of consistent income – say, from subscription-service contracts.

Generous profits: Earnings drive stock prices, so look for a positive trend. Jensen Quality Growth co-manager Eric Schoenstein zeroes in on a company's return on equity, a profitability measure that tells him how well a company uses shareholder investments to generate earnings growth. He likes to see at least a 15 percent return on equity, by his calculation, in each of the past 10 years.

The ability to raise or maintain prices even in a slump: An industry leader has pricing power even when the economy flags. Such a company may also have purchasing power -- the ability to buy necessary materials to make its products at lower prices than its peers.

Smart executives: You want managers who reinvest the company's excess cash wisely with shareholders' interests in mind. Look for executives who behave as the owner or founder of the business might -- and who treat you like one too -- by making sound acquisitions or capital expenditures, buying back shares when prices are low and boosting dividends.

Hurdles that hinder the competition: Keeper companies erect "barriers to entry" that keep competitors at bay. Any prospective competitor to Amazon.com, for instance, would have to overcome the advantage of the Seattle-based firm's vast distribution network. The e-commerce giant has 100-odd warehouses and more than 60 sorting centers and delivery stations worldwide.

A promising road ahead: Like sharks that must keep swimming or die, companies have to keep growing. A keeper stock will have a catalyst to push earnings higher for several years. Look for companies that will benefit from a developing technology, for example, or a long-term trend, such as the aging population or the burgeoning middle class in the developing world.

Editor’s Note: Nellie S. Huang is a senior associate editor at Kiplinger's Personal Finance magazine, www.Kiplinger.com.


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