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Aesthetic_Mess's avatar

How do you determine if a stock will be profitable for you?

Asked by Aesthetic_Mess (7857 points ) April 27th, 2012

I have a project for school in which I have to determine which of three stocks (DIS, BX, FUN) would be the most profitable or result in the least loss.
I’ve never really understood how this works, or what I would have to look at to determine that.
I don’t want the answer, but I just want to know how I would determine which of those stocks would be the most profitable.
What factors would I have to look at? Gross Profit, Net Income, stock prices?

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19 Answers

mowens's avatar

Look at the 52 week history. If it were me, I’d pick a steady company, such as disney.

You want something stable. Trust me. Ironically, when I did this I chose GM (it was 2004) and I beat my friend who made fun of me.

That being said, GM is not a good choice today.

Aesthetic_Mess's avatar

@mowens It is required that I look at the company’s financials. I have to look at it overall for the last five years, and in detail for one year.
When looking at the history, what factors would I look at? Net income, Gross profit, average stock price?

Salem88's avatar

Agree with mowens but I always look trends and what happening politically for period of time going to hold the stock. Please check company’s history over last year ie Press Releases. Learn a lot from them
Check Ameritrade or like for specifics.

elbanditoroso's avatar

It’s not really up to YOU – it’s up to the other stock holders and the success of the company. As an owner of 100 shares, you don’t have a whole lot to do with the success of the company.

As others have said, you choose stocks based on the company’s past performance their likelihood of future positive results. There is not one rule for all stocks. For example, Exxon is making fantastic profits now but as oil runs out, their margins will change. So you need to decide if you are in the long term investment category, or only want to own it for a couple of months.

What are their products and what is selling well? This is different for each company. And it changes weekly (in Disney’s case, one bad film can drop the stock by 2–3%)

wundayatta's avatar

All the numbers tell you something different. Ultimate, you can make money whether or not the company makes money, because you are going to make money by selling the stock at a higher price than you bought it. The other numbers help you predict whether you will be able to do that.

So if a company has a history of profit making, you might predict it will continue to do so. But that’s not the case, necessarily. It depends on management and market conditions and what will change. So if a company is making profits, but it’s gross profit is falling, and they’ve been making profit by cutting expenses, there may only be so far they can cut expenses. If gross profit keeps on falling, and expenses level out, they will soon stop making a profit.

Or maybe the company has been selling a lot of stuff, but not making much money, and they hire a management team that excels at cutting expenses. You might want to buy that stock if you think the manager will be successful.

Or maybe the company has a bunch of new products coming online. You think those products will do very well. You might want to buy that stock. Maybe you think that the economy is going to come roaring back. You might want to buy housing companies and furniture companies and appliance companies, because their sales will go up if people start buying new houses again.

I think oil companies and energy companies will almost always do well, especially over time. So you have to look at how long you want to hold the stock for. Are you a day trader or a buy and hold kind of guy? Myself, I prefer to buy and hold. But then again, I prefer to let professionals buy and hold for me.

This is not an easy game. In the end, you have to make a gut choice and stick with it.

Charles's avatar

Profit is simply the difference in what you paid and what you end up with. When you write “will be the most profitable” do you mean if you bought earlier or if you are buying now? In the former case it depends on timing, capital gains (and other) taxes, and whether these stocks are in tax deferred (401(k), IRA) or tax free (Roth IRA) accounts. Did you buy the stocks in equal amounts of dollars (like $100, $100, $100)?

In the latter case, if you can come up with an answer, you should quit school right now and go out and get rich.

tedd's avatar

There are a few trains of thought in this.

1) A company that made a billion dollars last year is a lot less likely to double it’s income than a company that made 100,000 dollars last year. So in that sense if you’re looking for the best profit on your stock, you want to pick something in the mid-range.

2) The flaw to #1 is that you don’t know which mid range companies will actually double their profit, so it’s better to go with the company that made a billion dollars last year and promises to do the same this year, giving you a healthy dividend (think of it like interest) payment. Doing this method you’re almost assured to make a profit, but you’re also almost assured to not make a large profit. Though that is not a certainty, two years ago no one though Apple was going to go much higher.

3) No matter what you don’t want the stock to devalue or completely lose value. Then you lose some (or all) of your money/investment.

bkcunningham's avatar

How do you determine if a stock will be profitable for you? You have to factor in how much you paid for the stock and how much you own before you can determine profitiability.

thorninmud's avatar

This is not likely to win any points with your teacher, but the fact is that “skill” in picking stock is largely an illusion. On average, even highly trained stock traders perform no better than blind chance. You can study all the financial reports you want, but you stand just as good a chance by picking randomly.

I know that’s strongly counter-intuitive, but take a look at this article by Daniel Kahneman (who received the 2002 Nobel economics prize for his work on judgment and decision-making). I brought this up with a friend of mine who’s a commodities trader on the Chicago exchange. He just laughed and said it’s absolutely true.

wundayatta's avatar

Actually, @thorninmud, that may be the answer the teacher is looking for. you can’t pick a winning stock. Not regularly, anyway. That’s why the main strategies these days are to hold a large, diversified portfolio of stocks. That way you don’t have to pick. You’ll get the average profit, and over time, that means you’ll do pretty well.

gailcalled's avatar

There is an interesting strategy floating around called The Lazy Man’s Portfolio.

It is a collection of a dozen or so portfolios amassed by experts plus one chosen by a second grade boy. He beats the S & P 500 index over a 10 year period and a number of the experts over three years.

These are funds and not individual stocks, but still…

rish11's avatar

In my opinion, evaluate the pro forma (for several years) versus their competition.
Good companies stand above their competition in some way.

You can’t look at it in a vacuum, the pro forma must be understood in terms of how the competition is doing. There isn’t a magic formula here, it is more of an analysis of what is going on in the industry. For example, a company that has its gross profit increasing at double digit rates (when the competition isn’t) may have a lower EBIT. This just means that the company is spending its earnings wisely versus the competition.

In summary, look at the company versus their competition. Try and determine how their investments are paying back. A company that isn’t growing is declining! Ask yourself the question: “If I were to invest money in this company, would they use it wisely?”

dabbler's avatar

Oija board ? Sometimes that would be as good as serious analysis because factors like political shifts and broad sector or whole economy shifts can bust up a winning trend as often as the activities of an individual company.

That said, earnings history is the most widely used, useful indicator of future values among most stocks in companies that are based on some real product with some real revenue. (i.e. forget about any new high-flying internet companies whose ‘value’ is based on… popularity)

LostInParadise's avatar

If there were a simple way of deciding, stock brokers would go out of business. I remember years ago when IBM was growing by leaps and bounds and the official word was that IBM’s P/E was way too high. The stock kept growing anyway. IBM is still a solid investment, though its growth rate is not what it used to be. There is something to be said for contrarian investing. The secret to doing well is outguessing conventional wisdom.

gailcalled's avatar

I bought Apple at $40 in 1998 and sold it at $20. I bought Microsoft at $27 and watch it now languish at $31.50. Who knew? Who knows?

LostInParadise's avatar

@gailcalled , You should have held onto your Apple stock. It is now hovering around $600.

gailcalled's avatar

I do know that; hence my comments above.

LostInParadise's avatar

Not to upset you, but the $600 reflects two 2 for 1 stock splits. I follow this because I invested in 1997, right after Steve Jobs returned. My modest investment has increased by a factor of over 100. On the other hand, I managed to buy Microsoft near its all-time high and am still losing money on it.

mowens's avatar

@Aesthetic_Mess All of the above. Unfortunately, there is no right or wrong answer. You guess based on the info in hand, and you wait to see if that guess was a good one.

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