When you want to select the best stocks to own in your portfolio, you want to select candidates with the best chances for possible increase in their share price. You want to invest for future gains whether you want to hold stocks for a few hours, a week, a year or longer.
You want to see the increase in the price of shares you selected for your own portfolio. You can find such shares using fundamentally based stock screeners. The value mentioned below is third key parameter I recommend to monitor.
The undervaluation of the company
This value can be defined as a situation when the market price of company shares is smaller than its intrinsic value. The bigger a difference between these two levels, the bigger possibility that the price will try to return to intrinsic value.
Several different methods can be used to calculate intrinsic value of the company. The dividend discount model is not practical for valuation of high growth companies that do not pay dividend.
The much better solution is to pay attention to company’s profits especially compared with yield of the best long term corporate bonds. The rate of profit increase should be higher than the yield of these most safe corporate bonds.
You can also add additional filers. It is possible to add filter based on ROTC, the Return on Total Capital, and expected profit growth for next 12 months. The inflation rate plays also important role in fundamental valuation of companies.
Check fundamental values regularly
You have to monitor fundamental values of your stocks regularly. Do not expect that good fundamentals could be always good in the future. The world economy is a very dynamic organism and business conditions in any sector or for any single company could change rapidly.
Plan your holdings and know when to sell
When you select your best stocks to own, do not forget to define your plan for entering the position, placing the stop loss and finally define your expectations. The clear definition when you sell the shares you hold is a key for making money on stock market.