6 Best Fundamentally Strong Stocks for Long Term Investment

(Published on 01-Sep-2016)
Investing in stock market is a long term process. You should wait with patience to yield good returns from the stocks. However, selecting a good stock for investing is a difficult process. This is the important key for your successful investment in stocks. Many experts and websites provide different stocks based on their analysis and this will create some confusion to the investors in selecting the good stocks from these sources. Every new investor should know some minimum knowledge about the stock selection procedure and the parameters we should apply in filtering the good stocks. This self analysis process would help you in finding the good stocks to proceed for investment. What are the parameters we should know for filtering the stocks which are fundamentally strong?

Parameters We Should Know for Fundamentally Strong Stocks:

A strong stock fundamentally is one with good valuations and strong future earnings. We need to do little homework in finding the strong stocks. There are some standard indicators or parameters that commonly used to assess the company fundamentals. These include:

1. PEG Ratio:

The PEG Ratio is one of the effective parameter in analyzing the stock fundamentals. The PEG ratio is the earnings divided by the five-year earnings growth rate. For example, a company that has a P/E ratio of 10 and a five-year growth rate of 40%, would have a PEG ratio of 0.25. Thumb rule says, a PEG ratio of one or lower is considered to be an undervalued stock and likely a good buy. We should not buy the stocks having PEG ratio greater than 2 or less than 0 (i.e. negative PEG). Growth stocks with a PEG of one or lower can help investors spot the best investment opportunities in those stocks.

2. PBV Value:

The Price to Book value or simply PBV is also another important factor in deciding the fundamental strength of a stock.  Price to Book Value is one of the most useful ratios you can use when buying or selling company shares. The Book Value Per Share is also known as the Net Asset Value per share and usually abbreviated to NAV. It is the total asset value of a company less it’s total liabilities, divided by the number of shares the company has. A PBV ratio of 1 means that I am paying a price for the shares which is exactly equal to the net asset value of the shares. On a thumb rule, if the PBV value of a stock is less than 3 means the stock is under valued and good buy bet. Ideally we can consider the PBV value up to 5. If the PBV is greater than 5 means that stock is expensive to buy and better avoid for investment.

3. P/E Ratio: 

The  price-to-earnings ratio, or P/E is the most widely used stock analysis method. This method has been used for ages by analysts and still remains one of the most relevant procedure for stock valuation. A simple P/E ratio can reveal the stock's real market value and how the valuation compares to its industry group or a benchmark like the S&P 500 Index. By knowing mere the P/E ratio of a company, we cannot judge the stock strength. However, we need to compare the company's P/E ratio with the industry's P/E ratio. Lower P/E ratio means company is undervalued and can be bought at current levels and vice versa. Some analysts even compare the current P/E to a company's historical P/E, investors could determine if the stock is trading higher or lower compared to the past. If the stock is at the higher end of its range, the likelihood of the stock being overvalued is much greater, whereas, if the stock has a P/E at the lower end of its range, then there is a greater likelihood of it being undervalued.

4. EPS Value: 

Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.

EPS = (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares

Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio. In other words, this is the amount of money each share of stock would receive if all of the profits were distributed to the outstanding shares at the end of the year. Higher earnings per share is always better than a lower ratio because this means the company is more profitable and the company has more profits to distribute to its shareholders. Although many investors don't pay much attention to the EPS, a higher earnings per share ratio often makes the stock price of a company rise. Since so many things can manipulate this ratio, investors tend to look at it but don't let it influence their decisions drastically.

6 Best Fundamentally Strong Stocks for Investment:

Based on the above parameters, I have analyzed the stocks and filtered following 6 stocks that are fundamentally strong to invest. Fundamental analysis will help you in identifying the strength of the stock. However, we need to do Technical analysis to find the entry time and exit time for investing into those stocks. We will discuss how to do Technical analysis in my coming articles.

Disclaimer

This data is for Academic purpose only. The data published on this post is just my opinion based on my own research and analysis and is provided as a general market commentary. As it does not take into account of your personal circumstances, please do not invest based solely on this information. By Viewing any material or using the information within this post you agree that this is general education material and you will not hold any person or entity responsible for loss or damages resulting from the content or general information provided here.