6 Surprising Aspects of the Best Stocks

Every Top Investment has these 6 Aspects Right

Abstract Up Down Percentage Arrows
Down and Up Percentages. Roy Scott

You might call them abstract, or perhaps unknown, misunderstood, or even surprising. Either way, there are several aspects of every stock which people need to consider but rarely do!

Each concept below is simple to delve into, yet has significant implications for the future direction of any underlying company, and therefore its share price. Ideally, once you learn how important these aspects of analysis can be to any stock, you will never make another trade without first checking out the clues which these tactics provide.

Management Team:

People tend to do exactly what they've always done. Winners win, losers lose.  

So, why not take a look into the current management team of a company, and assess how successful they were in their previous positions?  The beauty of the digital age is that information like this can be pulled up pretty easily.

Often, when a new CEO or CFO or CTO or Vice President is announced, the press release will provide you an idea of their qualifications.  Typically, they do this by identifying where (and usually when) the individual was previously engaged.

If Mrs. McDougal was formerly with a publicly-traded corporation for the last five years, you can see how that company performed during her stead.  Look into the share price reaction around the time of her announcement with that original company years ago, and also how the stock performed a few months in and a few years in.

To take this a step further, get an idea of how the shares (and especially the underlying company itself) responded to her strategies and involvement.

You very likely could expect a similar path at this new venture.

Did the company undergo dozens of major changes immediately? Was the business model refined?  Was the headcount reduced massively? Or increased? Did Mrs. McDougal sell off parts of the business, or go on an acquisition shopping spree?

Spoiler alert - she would very likely have the same impact on this company as she had on the former one.

 After all, like we said people tend to do what they've always done.

Marketing:

The purpose of a business is to make money. The main way they achieve this is through marketing, whether that means advertisements, social media posts, television interviews, or pamphlets underneath your car's windshield wiper.

It stands to reason that looking into the marketing strategy of a business is important. What is even more important is to assess the effectiveness of their efforts.

Advertising is like a bottomless, unforgiving pit. When a business spends 20% of their budget running Super Bowl ads, or pumps millions into newspaper and magazine advertorials, get a comment from management about how effective they feel their approach has been.  

This information will be especially important when contrasted with other marketing channels.  What tactics have been showing the greatest results, and are those channels scalable so that they can roll the effective ones out to much larger audiences?

If you don't feel like you are getting a good answer about the effectiveness of their marketing efforts, make sure to read the "Management Discussion and Analysis" (which you'll typically find with the annual financial reports).

 Alternatively, call the investor relations contact, which nearly every publicly traded company has, and ask them for their summary of their marketing efforts.

Of course, with or without the two approaches mentioned, you should be looking closely at the promotional efforts yourself.  What do you think of their ads?  Do you expect that their latest slogan or offer will be successful for them?

Product Adoption:

The rate at which prospects adopt a product or service will reveal a great deal.  Even the world's best item will wither on the vine if only a few people are "getting on board" each week.

Meanwhile, some of the businesses which perform the best are the ones which sell inferior wares.  Despite the quality, if their gadget happens to be all the rage, then their stock price may explode higher.

 

This is often true even if the demand is driven by a temporary fad, in which case you should want to profit as you ride the wave higher, but sell those shares before the inevitable collapse (as I explain in detail in the revised edition of, "Penny Stocks for Dummies.")  Investor stampedes and trader manias are actually quite common, but typical cost the majority most of their money.

You've probably seen fads and investor stampedes play out a few times yourself, whether with people piling into Bitcoin, pot and marijuana penny stocks, and Dot Com bubble internet companies.  If you were several hundred years older, you also would have watched the Dutch Tulip Bulb Mania, the California Gold Rush, and even witnessed 1,900 American automobile manufacturers come and go around the 1900's.

Customer Loyalty:

Many products or services have an attrition rate.  Simply put, they lose a certain portion of their clients or customers over time.

The higher the attrition rate of a business, the harder they will need to work to maintain their sales, and even potentially grow.  The amount of business lost each month will be high for the local gym, or some product which over-promises, then under-delivers.  

On the other hand, any wares which provide excellent value at a wonderful price (and are required on an ongoing basis), should have a minimal and manageable level of "disappearing" customers. Think about the customer loyalty you see with cars (many people buy the same make of vehicle over and over), fast food, and golf clubs.

You can find the attrition rate for most publicly-traded businesses by looking at their revenue figures.  See if they give any clues or breakdown about what percentage of customers are first-time, compared to returning.

For example, the publicly-released quarterly financials often make a mention (usually in the form of bragging) about customer retention, new orders, and growth.  While not an exact science, this information often shows the minds and actions of the clients.

You should also see lots of comments about customer loyalty in the annual "Management's Discussion and Analysis," which gets released with the financial reports for the full year.  Of course, if none of this helps, you can always just pick up the phone and ask them straight out.

Overhangs:

Often a company will have concerns, issues, or even situations which cause investors to hold back.  These overhangs act as a wet blanket to the share price and dampen any potential upside.

The very unusual thing to know about these overhangs is that they can keep the stock price from climbing, even when they are a positive thing!  Just the specter of uncertainty keeps investors back until they have more clarity.

Some typical overhangs include lawsuits or waiting on an FDA approval, or there is a merger in the works.  Others are such events as a CEO search, moving the head office, or a Presidential election which would have significant ramifications on the underlying business.

Potential shifts in the stock market which the company trades upon, as well as the listing profile, can also be a weight to the shares. For example, consider a situation where a business is trying to uplist to the NASDAQ from the Bulletin Board, or perhaps if they are considering a split (or reverse split) - typically in such events the stock will have a ceiling on its price in the short term.

As long as these overhangs are "in play," the shares may be trading in a tight range, and at lower prices than would typically be justified. This means that you should consider how such situations impact the shares you have but also use them to identify some excellent undervalued investments which you want to purchase.  

Typically, when the issues causing the overhang is resolved, the stock will pop higher.  This makes uncertainty (and the elimination of it), a compelling strategy for the stock market.

Social Shifts:

Buddhists will tell you that everything is impermanent. This includes dinosaurs, countries, flowers, roads, that tree out your window, and even the phone book.  

Buddhist or not, you've heard the expression that nothing lasts forever, or at least understand it to be true. The computer or electronic device upon which you are reading these words won't likely be around and functional a decade from now.

Watch closely for social shifts, because they can either act as an anchor to your investment or be the wind at your back.  Fur coats and pipes were great investments in their day, but may not make for a great long-term hold now.

The Yellow Pages was an excellent business when phone booths were relevant, but banking on that business to undergo a resurgence may be a foolish approach.  The Internet has destroyed the entire business model of telephone listings, as it has with graphic design services, retail stores, movie theaters, and pretty much standard network television.

Individuals who anticipated the shift from conventional taxi services to Uber would have been on the right side of that social shift and therefore made some profits on the related stock trades. Likewise, Tesla electric vehicles and Netflix both made great investments, and neither of these would have been possible a few decades ago.

Watch the Abstract!

By keeping an eye on the abstract aspects of the stocks which interest you, a clear picture forms, which can lead to superior investment returns. All of the concepts mentioned above are simple to assess, proven, and put you in a different field from the vast majority of investors.  

After all, very few people take the time to delve into these aspects of publicly-traded businesses, let alone even know about them, or understand how to check into them. If a quick check and a little bit of knowledge would make all the difference to your investments, why wouldn't you take a couple minutes to be significantly more sure about the shares you are trading?

While everyone else is looking at revenue growth rates and debt loads (which of course are also important), you get to have the unique advantage of delving deeper into the company in a way that the majority of people do not understand.

Long story short, a business with very high customer loyalty, a proven management team, and social trends going in their favor will end up rising over time.  Combine great marketing, while eliminating any overhangs to the shares, and the upside can be significant.