How to determine which stocks are worthy investments
There are many different ways to invest in stocks. Some people like to invest in:

  • growth stocks,
  • value stocks,
  • industries and companies they are familiar with,
  • compelling “stories” or themes,
  • smaller and riskier stocks,  
  • larger and less risky stocks,
  • etc.

We have developed our own unique Bull And Bear Profits approach to stock picking. This approach combines “technical” chart analysis with “fundamental” company and stock analysis. Here are the key technicals we recommend focusing on before buying a stock:

  1. Identify stocks that are in a “bull market” uptrend. That means they are in a rising price trend as determined by various technical indicators. 
  2. Determine if the stock is also outperforming the market, as represented by a “benchmark” index such as the S&P 500. 
  3. Finally, after determining that the stock is in a bull market uptrend AND is outperforming the benchmark, it is important to confirm it is not “overbought,” which usually signals peaking, at least on a short-term basis. 

You can learn about these and other key technical indicators in our free Special Report titled “How To Use Technical Analysis To Invest For Bull And Bear Profits,” as well as a our free Webinar titled “How To Use Stock Market Indicators To Invest For Bull And Bear Profits."

After a stock passes these technical tests, it is important to analyze the fundamentals of the company and stock. Here are key company fundamentals we recommend:


  1. Strong and/or accelerating revenue growth
  2. Strong and/or accelerating EPS (earnings per share) growth
  3. Rising operating profit margins
  4. Rising ROIC (return on invested capital) and ROE (return on equity)
  5. Positive and growing FCF (free cash flow)
  6. FCF being used to pay dividends and/or buy back stock
  7. Strong balance sheet
  8. Large market opportunity
  9. Attractive industry with solid growth prospects
  10. Strong competitive position and advantages with high barriers to entry
  11. New growth initiatives
  12. Limited government/political risk
  13. Shareholder friendly management; management incentives, insider ownership, buying/selling
  14. Attractive valuation

Understanding and using financial accounting
In order to analyze the fundamentals of a stock, it is important to understand basic financial accounting principles. There are three key financial statements that every US publicly traded company files quarterly and annually with the US government’s Securities and Exchange Commission (SEC):

  1. Income Statement: The income statement shows the amount of revenues generated and expenses incurred in a given period (quarterly or annually), along with the difference between the revenues and expenses, which is the net income (or loss). It is similar to your personal budget of income and expenses, but it is for the business you are analyzing. Revenues are what the company generates selling its goods or services to customers. Expenses are the costs incurred to generate those sales, including the cost of goods sold, employee salaries, advertising and marketing expenses, depreciation on their production equipment, interest expenses if they have debt and the taxes they have to pay to the government. The income statement also shows the number of shares of stock that are outstanding and the earnings per share (EPS), which is calculated as net income divided by shares outstanding. The EPS number is typically the most important number that investors focus on, since the entire point of stock investing is to profit from owning stocks in companies that are growing their profits or EPS.
  2. Balance Sheet: The balance sheet shows the assets and liabilities of the company, along with the difference between the assets and liabilities, which is the shareholders’ equity. The balance sheet is shown at a given point in time, such as the end of a quarter or year. It is similar to your personal balance sheet of assets, liabilities and net worth, but it is for the business you are analyzing. Assets are the physical resources the company owns in order to generate its revenues, including cash, accounts receivable, equipment and real estate. Liabilities are what it owes to other entities, including accounts payable and short-term and long-term debt. Shareholders’ equity increases if profits are earned and decreases if losses are incurred and as cash is returned to shareholders in the form of dividends and share buybacks.
  3. Cash Flow Statement: The cash flow statement shows the actual cash inflows and outflows of the business from operations, investing and financing. Operations cash flows include net income plus non-cash expenses like depreciation, as well as changes in working capital, such as inventories and accounts payables. Investing cash flows include cash outflows in capital expenditures and acquisitions and cash inflows from asset sales. Financial cash flows include raising cash from borrowing and issuing stock and spending cash on dividends and share buybacks. It is positive to see cash from operations growing along with net income. If a company is reporting growing net income but falling cash from operations, that is a key warning sign that the company may be playing games with their accounting and is not as profitable as it appears based on net income and EPS.  

In order to analyze a company’s financial statements, it is helpful to focus on key financial metrics and ratios, including:

  1. Growth rates: year-over-year growth rates in quarterly and annual revenues and profits are key; particularly attractive are growth rates over 10% and/or growth rates that accelerate to higher levels than prior quarters or years. Decelerating or, much worse, negative growth rates usually lead to bad stock performance.  
  2. Profit margins: profit margins, such as operating profits (revenues less expenses before interest and tax expenses) and net income divided by revenues are also very important; rising profit margins are a positive sign, while declining profit margins are a negative sign. 
  3. Return on invested capital and return on equity: Return on invested capital (ROIC) is typically calculated as after-tax operating profits divided by invested capital, which is shareholders’ equity plus debt. It is a very important metric that shows how effectively management is investing their capital. A similar metric is return on equity (ROE), which is calculated as net income divided by shareholders’ equity. Rising returns on capital and/or equity are positive, since it shows the company is generating higher returns on its investments and increasing shareholder value, while falling returns on capital and/or equity are negative, since it shows the company is earning weaker returns on its investments, which is likely destroying shareholder value.  
  4. Free cash flow: Free cash flow (FCF) is typically calculated as cash from operations less capital expenditures, with both items available in the cash flow statement. Free cash flow is what is available to pay out to creditors and shareholders. Growing free cash flow is what creates shareholder value over time. 
  5. Credit ratios: credit ratios, such as debt to capital (which is total debt divided by capital, which is shareholders’ equity plus debt), debt to EBITDA (which is total debt divided by EBITDA, which is Earnings Before Interest Taxes Depreciation and Amortization) and interest expense to EBITDA (which is interest expense divided by EBITDA) are all important measures of a company’s credit and balance sheet strength. Credit ratings by key rating agencies such as Standard & Poor’s and Moody’s are based on such credit ratios and are also good to look at in determining the credit risk of a company. S&P credit ratings in order of strongest to weakest are: AAA, AA, A, BBB, BB, B, CCC, CC, C and D (for default) with + and - added for additional nuance. Credit ratings of BBB- and above are considered “investment grade” and relatively safe credits, while credit ratings below BBB- are considered risky “junk” or, euphemistically, “high yield” credits. It is usually wise to avoid stocks with credit ratings below BBB-, since the stock price of a bankrupt company usually falls to $0.

Investing Insights
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