How to Pick the Best Stocks to Invest In - Part 1 of 2

It takes the best stock market predictions to3. Price/Earnings to Growth ratio - PEG Ratio
achieve top stock market results, but choosingDefinition:
the best stocks to invest in is not easy. OnePEG Ratio is the price/earnings (P/E) ratio divided
approach professional investors and traders use isby the projected year-over-year earnings growth
the fundamental analysis of stocks, where othersrate.
prefer the technical analysis of stock marketWhat it measures:
trend.How cheap the stock is.
The fundamental analysis of stocks is based onRecommended value:
criteria like Earnings per share, Price/Earnings ratio,Less than one (PEG Interpretation:
PEG Ratio, Return on equity and Return onThe value of PEG ratio
assets.- below one is an indication of possibly
Whether you are looking for best penny stock toundervalued stock.
buy or any other hot stock to trade, you will find- equals one suggests the market is pricing the
the following five out 10 fundamental key metricsstock to fully reflect the stock's EPS growth.
very useful. They pinpoint the characteristics- above one means the stock is possibly
shared by the top performing stocks before theyovervalued or the stock market expects future
made huge trading profits in short term.EPS growth to be greater than what is currently
1. Earnings per share - EPSin the street consensus number.
Definition:Observation:
EPS is the ratio of the company's net income toPEG ratio cannot be used in isolation.
its number of outstanding shares (all stocks held4. Return on equity - ROE
by investors and the company's insiders).Definition:
What it measures:It is the ratio of the company's 12-month net
Earnings-per-share (EPS) serves as an indicator ofincome to its shareholder equity (book value).
a company's profitability.What it measures:
Recommended value:How profitable the company is.
No less than 80.Recommended value:
Interpretation:No Less than 15%
If a company has displayed good growth overInterpretation:
the last 5 or 10-year period, it is likely to continueHigh debt companies have higher
doing so in the next five to 10 years.return-on-equities (ROEs) than low debt
Observation:companies.
There are many ways to define "earnings" andObservation:
"shares outstanding". That led to different type ofRelying on return-on-equity(ROE) has a downside.
EPS.You will end up overweighting your portfolio with
2. Price/Earnings Ratio - P/E Ratiohigh-debt stocks if you go by ROE alone.
Definition:5. Return on assets - ROA
Ratio of a company' share price to its earningsDefinition:
per share.It's the net income divided by total assets.
What it measures:What it measures:
How much investors are willing to pay per dollarHow profitable the company is in relation to its
of earnings.total assets.
Recommended value:Recommended value:
A higher P/E compared to the market or industryROA above 20% and higher is better. Avoid
average.company with return-on-assets below 5%.
Interpretation:Interpretation:
If a company has displayed good growth overThe lower the debt, the higher the return on
the last five- or 10-year period, it is likely toassets. A rising return-on-assets(ROA) usually
continue doing so in the next five to 10 years.foretells a rising stock price.
Observation:Observation:
There are different types of P/E but the mostThe assets of the company are comprised of
used is the trailing P/E calculated with the EPSboth debt and equity. The ROA is some time
from last four quarters.called ROI.