Pick the five stocks that you believe will out perform the market in the one, two, and five years. Choose market sectors. Look for cash reserves. When will consumer spending pick up for your market sectors and companies? This is a drill that you should do periodically. Even though you are in the market for the long haul it does not mean than you need to stick with a dieing market sector, support a company with dwindling cash reserves, but rather look at anticipated consumer spending and be there with your stock purchase before the customers arrive at the door.
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In the best of all possible worlds you already have your stocks in the best market sectors, in companies with the best cash reserves, and in companies for which consumer spending is a given. On the other hand, maybe that is not the case. The obvious, old, example is American Telephone and Telegraph, which was the “widow and orphan” stock that always paid dividends, always appreciated as the United States grew its telephone system over the early and middle 20th century. Then an antitrust ruling took the company apart and the remaining ATT arm has had continuing problems, takeovers, etc. Some of the “Baby Bells” have done well and some have not. Not to belabor the example you cannot assume that today’s great stock will last.
A good drill, whether you are going to add to your holding, divest, or stand pat, is to routinely evaluate market sectors for growth potential, companies for success and stability as evidenced by cash reserves, and consumer spending for the company’s products.
Sounds like homework again, doesn’t it? But the drill is homework. We are not suggesting that you go out and buy every hot new stock pick. For one thing once a stock hits the “news” it is, in fact, yesterday’s news and has already had its run.
A nice, conservative, approach to stocks is to look for cash reserves. Cash reserves tell you if the company is making money, as a rule, and if they have a buffer against a slide in their market sector.
A look at consumer spending and expected consumer spending tells you when to expect a jump in quarterly earnings. The typical example is retailers and the year-end holidays. Some, like Target and Walmart do well all year long and make more over the fourth quarter and some, niche, retailers depend very heavily on year end sales.
Apply the same logic to your current holdings and, if you think a new stock is a good pick, apply the same logic over a number of time frames to that stock before you buy.
The one, two, and three year forecast is obvious in that you want a stock that is not just a flash in the pan. You want to be in a market sector that is stable and growing. You want continued income, dividends, and cash reserves so that your company has the wherewithal to respond to market opportunity no matter what the economic conditions.
Consumer spending issue is an issue today. If you are invested in mining stocks and your “consumer” is manufacturing you will see a jump in sales while long before employment figures rise. If you have consumer electronic stocks you can use the rise in sales of refined copper and steel to anticipate increased sales of high definition TV sets in the next year.
Do the drill. It will give you continuing perspective on the market and on your holdings.