Many people are scared of buying stocks because they don’t know how to pick stocks. I learned this method of screening stocks from an investment newsletter and it has helped me tremendously. I call it The Lazy Man’s Way of Picking Stocks.
The Lazy Man’s Way of Picking Stocks
The Lazy Man’s Way of Picking Stocks is a set of stock screener values that I learned from an investment newsletter I signed up for years ago (I forgot the name of the newsletter).
The criteria are as follows:
- Return on Equity > 15%
- Debt to Equity Ratio < 2
- Dividend Yield > 1%
- Market Cap < 1 Billion
… let me explain the reasoning for each criteria below.
Market Cap < 1 Billion
Businesses valued over 1 billion are all big companies, and big companies have expensive stocks and slow-to-no growth. As a small time investor, we are looking for small-capitalisation companies that have growth potential.
Look for companies with market capitalisation of around 999 million.
Debt to Equity Ratio < 2
The debt-to-equity ratio (D/E ratio) shows how much debts a company has compared to its assets. A higher debt-to-equity means the company may have a harder time covering its liabilities.
Since we are looking for quality companies to invest in, we want the debt-to-equity ratio to be as low as possible, preferably less than 2.
Return on Equity > 15%
I use return on equity (ROE) to gauge a corporation’s profitability and how efficient in generating profits. The higher the ROE, the more efficient a company’s management is at germinating income and growth.
Dividend Yield > 1%
Dividend yield shows you how much dividend payout per year for every dollar invested in a stock.
My main objective is to generate passive income from my stock investments so dividend yield is crucial to me. If you are not buying stocks for dividend income, you can choose not to use this filter.
How to Use The Lazy Man’s Way of Picking Stocks
It’s simple! Go to the stock screener of any stock exchange site and input these criteria and you should get something like this:
You will only get a handful of company that fulfill such stringent criteria. I will do a stock screen every month and down the companies that make the cut. If a company consistently appear in the results for 6 months to a year, I will strongly consider buying the stock.
If anyone needs step-by-step instructions on how to use a stock screener with the above-mentioned criteria, leave a comment below and I will do one in a separate post.