How to BUY Profitable Stocks: 3 Easy steps

I want to start by addressing one of the main requests I have received: more detail about what I consider before making a trade.  For now, I have been light on exactly what to look at because I have been doing a lot of guessing.  I decided to make some trades and evaluate them afterwards. The explanations I have given in the earlier posts are the only reasons I decided to make those particular trades.  The following is a summary of what I have learned to date and the considerations I now make before trading.  Today you will learn how to BUY profitable stocks

BUY Profitable Stocks: 3 key parameters:

First, the company profile – what do they do and is the demand likely to increase?
Second, historical pricing – where the price has been can indicate where it is going.
Third, PE Ratio – how does this price compare with rest of the industry?
Let’s dive deeper into each one of these parameters, using Rite-Aid (RAD) as an example.


Company Profile
You can find this info on Yahoo! Finance
See the image below

Scroll down to the description and make sure that, to the best of your knowledge, the business they are in should see an increase in demand in the coming months and years.  In this case, RAD provides retail drug stores and basic clinics among other healthcare-related services and provisions.  You are welcome to read their full profile here.  As I see it, there is no risk of people in the United States needing less health care or fewer prescriptions filled for the foreseeable future.  So right now this stock passes the initial test.

Historical Pricing
You can find this info on Yahoo! Finance
I like to look at the past year and past 5 years.

1 Year Price1 YEAR

The one-year price gives you a good idea of the short-term trend.  Here we see it  was trending downward until it bottomed out (green arrow) a few months ago.  To the left, we see that the lowest price in the past year (52 weeks) is $1.38, while the highest is $7.23.  We may not ever make back to $7 but it is not unreasonable to think it could go to $3 or $4 per share.  Remember, percentage increase is what we really care about.  Markets tend to go lower than they need to go, then correct with price increases; but remember, they go higher than needed, too, then they correct with a price decrease.  Keep the goal in mind: buy low and sell high.


5 Year Price

5 year

The 5-year price tells us more about the long-term trend.  From 2014-2016 the price bounced between $7+ and $4 per share.  The most likely cause I can find is that its competitors, primarily Walgreens and CVS, have moved more quickly into offering additional health-care services like clinics.  RAD is working on providing a similar concept but is behind the curve.  I found this information by paying attention to the news over the past few years. Nothing magical, simply staying informed.

At a minimum, I will read several dozen headlines across multiple news agencies each day.  I scan the national news using Google News, I look at financial news from Yahoo! Finance, FOX Business, and CNBC.  I spend less than 20 minutes a day on news reading, if you’re going to be involved in the market you need to know what going on in the world.


PE Ratio
You can find this info on Yahoo! Finance
See the image belowPE RATIO

PE stands for Price-to-Earnings and is an important ratio when comparing competitors and determining the potential future price.  The price is the price-per-share divided by the earnings per share or EPS (this number is directly below the PE ration above).  So for this example, take the price/EPS or $2.34 / $0.15 = 15.6.  The PE Ratio listed is a few minutes behind so it is slightly different, but you get the idea.  Walgreens and CVS have a PE ratio of about 21 and 16.5, respectively, as of 1/23/2018.

The PE ratio gives a way to compare companies to each other since the share price and EPS can vary greatly; the PE ratio brings things into perspective.  Since RAD is the lowest of the three, it is the most likely to go up.  A share price increase is the way the market corrects these imbalances so long as everything else is equal.


Other factors

There are a huge number of other factors that the professionals consider when making a trade or buying a stock.  I am trying to move slowly and learn things as they seem relevant.  Every time I approached investing before 2017 I got overwhelmed and ended up doing nothing.  I may not have everything figured out yet, but I am learning.

Please let me know your thoughts.  Do you have any other considerations? Do you consider more or less than I do?  Does all this make sense?  I’m happy to clarify anything that seems vague.

Thanks for reading and happy trading!

Trade coming this week!

Follow this Blog!

Subscribe to receive the latest blog posts and trades by email.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

1 thought on “How to BUY Profitable Stocks: 3 Easy steps

Leave a Reply

Your email address will not be published. Required fields are marked *