Stock Market Education

Sharpen Your Skills to Become a Better Investor

We Researched the Best Stocks of Our Generation

Here's What We Learned

We went back and researched the best stocks of our generation (including the ones shown here) to see what made them great. 

Here’s what we discovered: History repeats itself in the stock market.

Characteristics of top stocks are often the same, decade after decade. 

Below is our list of characteristics good-to-great stocks often possess during their prime, what to buy and when to sell:

Profit Growth Leads to Stock Growth

Our research points to profit growth driving stock growth. To locate stocks that grow the fastest, look for companies growing profits rapidly.

How to Value a Stock

Owning a stock is like owning part of a business. And businesses often sell for a number of years worth of profits, also known as the multiple or in stock terms the P/E ratio.

How to Value the Stock Market

The S&P 500 is commonly referred to as the stock market.  Like a private business, the “stock market” has a “multiple” too, which is usually 16 to 20 times the S&P 500’s annual profits.

When Stock Growth Equals Profit Growth

Stock growth can equal profit growth. If a company makes $1 a year in profits and sells for 20x profits, its a $20 stock. If someday profits reach $2 and the “P/E “is 20, the stock would be $40.

The Best Stocks Are No-Brainers

The best stocks are often easy to find. One of the best no-brainers was Walmart (WMT), which grew profits every year from 1974 to 2012, from $0.002 to $5.02.

Buy Stocks With Certainty

Stocks with certainty are companies you can depend on and are often in sectors that don’t get pinched in recessions. Try to be certain profits aren’t about to decline.

Buy Stocks With Consistency

The best stocks grow profits consecutively every year. They provide consistent growth, year-in year-out Each time annual profits are up, the company is proving its success.

Buy Stocks With Growth Opportunity

Growth opportunity is the ability to compound sales over a long period of time. For a stock to compound in value over-and-over again, it has to grow sales and profits exponentially.

Buy Stocks in Hot Sectors

The best stocks often come from the best sectors because there is a revolution happening (usually technological). In new industries profits are easy because there’s not much competition..

Buy Stocks With Catalysts

Explosive profit growth is usually caused by a company having a profitable catalyst. Catalysts are unique products or services that transform an industry.

Buy Stocks that Beat the Street

Some of the most powerful stock moves happen when a company rides a new catalyst far beyond expectations and the company beats analyst expectations, also known as “beating the street”.

Buy Stocks Below the Radar

Younger companies often have an easier time growing profits rapidly. It’s often the small unknown stocks which can lead to some of the biggest gains.

Buy Stocks with Dominant Franchises

The best stocks often come from the best sectors because there is a revolution happening (usually technological). In new industries profits are easy because there’s not much competition..

Buy More Stocks

Explosive profit growth is usually caused by a company having a profitable catalyst. Catalysts are unique products or services that transform an industry.

 

Don't Expect Consistent Returns

Even if a company delivers consistent profits, the stock won’t produce consistent returns. The reason is the P/E ratio is an arbitrary number of what investors feel the stock is worth at that time.

Stock Price Doesn’t Matter

Investors often caught up in a stock’s price, thinking a high stock price means the stock’s too expensive. That just isn’t true. Focus on the profit growth, and the P/E, not the stock price.

Don’t Buy Commodity Stocks

What not to buy? Anything commodity related, as you’re dependent on the commodity price. This includes semiconductors. The reason is there are so many competitors they have to cut prices.

Sell When Profits Decline

When company profits decline, it could be a sell signal. For example, if a company made $2 and sold for 20x profits it would be a $40 stock. What might the stock be if it only $1 the following year?

Sell When Profits Miss Estimates

When a company misses profit estimates, it could mean business is weakening, and it might be time to sell. The company could miss next qtr as well. Declines in future estimates are also a sell signal.

Sell When the Stock is High

When I say high, I mean the P/E not the stock price. If the P/E ratio suddenly gets higher than historical standards with no new catalyst on the horizon, it could the stock is high and its time to sell.

Sell When The Market is High

When company profits decline, it could be a sell signal. For example, if a company made $2 and sold for 20x profits it would be a $40 stock. What might the stock be if it only $1 the following year?

Blast From the Past

A Look Back at a Past Stock Market Winner

Microsoft (MSFT)

One of the big winners of the 1990’s was Microsoft (MSFT).

MSFT had most — if not all — the characteristics mentioned above. This is a perfect textbook example of a winning stock.

At the School of Hard Stocks we create our own charts and tables, which are shown here.  Click the tabs to view each chart.

Here’s MSFT’s one-year chart as of July 1992 (after stock-splits).

Notice on the right profits were up every year since the company’s IPO. That’s consistency.

Along the bottom is MSFT’s qtrly profit growth. Profit growth was strong, this was the time to buy.

Here is MSFT during the 1990s. Our ten-year charts show the monthly price data for the stock during the decade, with annual profits along the right and the annual profit growth rate at the bottom. 

Notice MSFT’s annual profit growth rate didn’t slip below 20% the entire decade.

Profit History tables display a company’s annual profits (in EPS), median stock price and P/E the stock sold for.  Record profit years are in green, non-record years are in red.

Although MSFT didn’t have profits decline, the P/E of 67 in 1999 was high and a sell signal.

Here is MSFT as of March 2001, one year after the stock market peaked in March 2000.  

Notice along the bottom that MSFT’s qtrly profit growth began to slow. That was a sell signal. 

Also, 2001 profit growth was estimated to be just 4% ($1.78 vs. $1.71). In addition, the P/E of 31 is high for a company delivering 4% annual profit growth.

About David Sharek

David Sharek is stock portfolio manager for Shareks Stock Portfolios and founder of The School of Hard Stocks.

Since 2003, Sharek’s Growth Stock Portfolio has averaged a 12% return to its investors (after fees) vs. 8% in the S&P 500. 

Sharek’s Growth Portfolio delivered four years of +40% returns to his investors in his 16 year career.

David has written more than 2500 stock research reports, and has published a book titled the School of Hard Stocks, which is available on Amazon.com.

Utilizing the research posted here, David manages three stock portfolios for his investors:

  • Growth Stock Portfolio
  • Aggressive Growth Portfolio
  • Conservative Stock Portfolio

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