How to select which stock to buy?
LAST week, a young man who has been involved in the technical aspect of virtual AGMs began asking questions about stocks.
He never had any exposure to the capital markets nor thought of owning shares in companies.
But his views are surely changing as he hears more and more about listed companies and listens to conversations that go on at AGMs.
He has since begun reading up on stocks but he kept asking: “Which is the best stock to buy for maximum gains?”
Just like him, there are many out there who may want to dabble in the stock market but find the world of investing rather confusing.
If you could and want to, what is the one stock you will buy?
Will it be Nestle, United Plantations, Top Glove, Dutch Lady, Heineken Malaysia, Time dotCom, TNB, Malayan Banking, IHH Healthcare or Axis REIT?
These are not stock recommendations but these are some of the over 900 stocks on Bursa Malaysia to pick from.
By sector, the pandemic saw the stocks of glove makers soar to new heights but the aviation and several other sectors were beaten down.
Technology companies were given a breadth of fresh air as digital-based platforms became the norm for everyone, while healthcare counters were also sought-after during the pandemic.
There are essentially many ways to select which stock to invest in. Though some rely on tips from friends and brokers to buy stocks, one should do one’s own research and know the fundamentals of the companies.
“There are many reasons why people pick a particular stock, and while stocks can be a valuable part of your investment portfolio, your goal should be to find value, ’’ said an expert.
Be clear about your investment objectives, and reports say, not having time to do enough research is a factor why some failed.
“Look for the company’s price-to-earnings ratios (P/E ratio) – the current share price relative to its per share earnings. A company’s beta will tell how much risk is involved with a stock versus the market, ’’ one report said.
Beta is a measure of the stock’s volatility in relation to the overall market.
Another report added that one should look for trends in earnings growth, debt-to-equity ratio versus industry norms, price-to-earnings ratio, dividend policy, company’s strength versus its peers and how effective the executive leadership is.
Among the food and beverage companies, Nestle remains a pick of many brokerages. It has been paying one of the highest dividends among the locally listed companies.
From other sectors, favoured stocks include Time dotCom, Telekom Malaysia and Axis Reits and these too have been paying good dividends.
During the pandemic, the share prices of glove makers and telecommunications and healthcare companies soared.
To bet on the future, know what companies will do well when normalcy returns after the pandemic. There is always an impetus for the share price to soar if capital gains are your objective.
For illustration, Nestle’s share price closed at RM135 last Friday. It has a P/E ratio of 57.28 times and a market capitalisation of RM31.66bil.
It offers a dividend yield of 1.7%.
Dividend yield shows which companies pay more in dividends per ringgit you invest in.
In terms of share price movements, year-to-date, the share price fell RM3.70 a share. But if you had bought the stock five years ago, the capital appreciation (not taking into account the dividends or other factors) is RM60.02 or 80% of your initial capital outlay.
When you buy a share, you are actually owning a slice of a particular company and you should know what that means to your investment strategy.
You must also have the holding power in case markets go south.
Start small, as you can always add more later to build your portfolio. But as a report pointed out: “Emotions can lead to speculation, so be an intelligent investor (instead)”.