Learn how to find up and coming stocks and how to avoid buying bad ones

To put it simply: the best up and coming stocks have a clear business plan that seems to be working. Most of these stocks have an established business and a history of sales gains, plus some earnings or cash flow, if not dividends.

Let’s take a look at how to find up and coming stocks for your portfolio, as well as some investing processes to avoid.

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Take a broad view when looking for the best up and coming stocks

When we’re looking for the best investments to recommend in our newsletters and investment services, we start by putting all the important information we know about a company into perspective.

But things are never quite so simple. Your stock pick’s latest earnings may reflect unusually favourable or unfavourable conditions. This can make the company look safer or riskier than it really is. In addition, the company may put the funds it borrowed to immediate profitable use, increasing its earnings and its ability to pay interest. It may plan to sell assets to reduce debt, or cut costs to increase earnings.

In the end, there are many ways to try to put the facts about a company into perspective. None are perfect, since all involve a mental balancing act between high and low estimates, history and the future, and faith versus skepticism.

Our goal is to put the information in a form that lets us weed out the extremes—excessively overvalued stocks, or those that are suspiciously cheap. In the long run, investors make most of their profits in investments that offer good value and an attractive long-term outlook.

Use our 9-point stock rating system to find the best up and coming stocks

Unlike computerized risk assessments, our ratings demand many judgment calls. But we find this system gives us a deep-seated measure that goes to the heart of a company’s staying power, and yields few unfortunate surprises.

After you use our stock rating system help you pick stocks, you should also spread your stocks over most if not all of the five main sectors.

If you diversify across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities), and stick mainly to high quality blue chip stocks—then you can be almost certain of long-term gains in excess of what you’d get with any other investment approach.

Next, you should remain vigilant and avoid or downplay stocks in the broker/media limelight.

Investors can build up unrealistic expectations when blue chip stocks spend time in that limelight. When broker/media favourites fail to live up to those expectations, they drop much further than they would have if they had been less widely followed.

Finally, you should know that “holding for the long term” usually only pays off with investments in high-quality stocks. If you buy low-quality or speculative stocks, time tends to work against you. The longer you hold them, the likelier you are to lose money. Our stock rating system puts you in a position to maximize your profits in the long term.

Bad investment advice includes unsatisfactory reasons for selling your up and coming stocks

To decide when to sell on bad news, you need to develop perspective. You need to be able to tell if the company has hit a bump in the road or gone off a cliff. Here are three bad reasons to sell stocks:

• Weak quarterly earnings report: One quarter of weak profit may simply be a normal fluctuation. By the time the news of a weak quarter comes out, it may have already had its impact on the price of the stock.
• Strikes: A single strike rarely puts a lasting dent in a company’s profitability. However, chronic labour troubles are a bad sign and may be a good reason to sell.
• Environmental, regulatory or anti-trust problems: These laws are complicated and constantly changing through court and bureaucratic decisions, so it’s easy for well-meaning companies to run afoul of them. Also, unethical companies sometimes raise these issues to hurt their competitors.

You’ll make your investment life easier and more profitable if you mainly choose high-quality investments with honest managers and established profit-making, reputable businesses. You can make money by holding these stocks and collecting dividends over long periods, even if you sit through lengthy price setbacks.

Have your investing goals ever been derailed by up and coming stocks that ended up failing?

This article was originally published in 2017 and is regularly updated.