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How to Pick the Best Stocks: a Comprehensive Step by Step Strategy

In this video Luca Discacciati, co-funder of Forecaster Terminal, describe a detailed strategy for selecting the best stocks for investment, emphasizing the importance of analyzing a company's sector, future sector prospects, and fundamental data such as sales and net income. It highlights the necessity to evaluate both current results and future growth potential.
Special attention is paid to financial ratios analysis, such as profit margin and debt-to-equity ratio, to understand the quality of sales and net income.
The video demonstrates how to use indicators like the Wickoff demand/supply and seasonality to pinpoint the best times to buy stocks, showcasing practical examples like Nvidia and LVMH Moët Hennessy - Louis Vuitton.
Some simple tricks are explained in the video, which will help the investor identify stocks with great growth potential

  • How to identify growth sectors with strong future prospects;
  • Focus on companies with increasing sales and net income as indicators of potential stock growth;
  • Assess financial health through ratios like profit margin, ROE, and debt-to-equity;
  • Check solidity of the company thanks to Haltman Z score, Piotroski F score and Beneish M score;
  • How to time the market thanks to demand/supply indicators and seasonality;
  • Tios and tricks to identify stocks with great growth potential.

A Strategic Guide to Picking Winning Stocks
Navigating the stock market successfully requires a blend of art, science, and strategic planning. With countless investment options available, pinpointing the stocks most likely to yield substantial returns can seem overwhelming. However, adopting a methodical approach can significantly enhance your investment decisions. Here's a detailed, step-by-step strategy to help you choose stocks with promising potential, illustrated through real-life examples of standout performers like Nvidia and LVMH.

1. Industry and Sector Analysis
The first crucial step in selecting the right stocks is understanding the broader industry and sector in which a company operates. This context offers insights into growth prospects and sustainability. For instance, Nvidia's standout success can be attributed to its pivotal role in the artificial intelligence and GPU sector, highlighting the importance of selecting companies in forward-thinking industries.

2. Financial Health Evaluation
A company's financial health is a strong indicator of its viability as an investment. Key metrics to analyze include consistent growth in sales and net income. Companies that demonstrate year-over-year growth in these areas, like Nvidia, are typically more robust and offer a solid foundation for long-term investment.

3. Ratio Analysis for Deeper Insights
Digging deeper into a company's financial stability and efficiency involves examining various ratios. Important ratios to consider include profit margin, return on equity (ROE), and debt-to-equity. These figures provide a nuanced understanding of a company's operational efficiency and financial health. For example, an increasing profit margin and ROE suggest that Nvidia is not only growing its sales but is also efficiently managing its resources to enhance profitability.

Expanding the analysis to include solidity aspects further refines the stock selection process. In the solidity section of the Forecaster, you can find three different ratios, allowing for an even deeper analysis of a company:

  • Altman Z-Score evaluates the likelihood of bankruptcy; a higher score suggests a lower risk of financial distress. This metric is particularly useful in distinguishing financially healthy companies from those on shaky ground.
  • Piotroski F-Score assesses a company's financial strength based on nine criteria related to profitability, leverage, liquidity, and efficiency. Scores closer to 9 indicate stronger operational and financial health.
  • Beneish M-Score helps identify potential earnings manipulation. A score that falls into a suspicious range may indicate that the company's financial statements could be overly optimistic or manipulated, warranting further investigation.

Incorporating these deeper financial and solidity analyses enables investors to make more informed decisions by identifying companies with solid financial foundations, efficient operations, and low risk of financial difficulties. For example, Nvidia showcases not only impressive sales growth and profitability but also maintains a healthy balance between debt and equity, coupled with favorable solidity scores, underscoring its financial robustness and operational efficiency.
By thoroughly evaluating these financial ratios and solidity metrics, investors can sift through the market noise and pinpoint stocks that stand on solid financial ground, possess efficient operational practices, and offer promising growth prospects, thereby crafting a more resilient and potentially lucrative investment portfolio.

4. Market Sentiment with Wyckoff indicator
Understanding market sentiment towards a stock can be gleaned from Wickoff indicator, which highlight the market's demand dynamics. A divergence between the stock's price movement and the Wickoff indicator can reveal accumulation phases, suggesting that despite a temporary dip in price, demand for the stock is increasing, indicating potential for future gains.

Nvidia, renowned for its groundbreaking work in GPUs and artificial intelligence, presented an intriguing scenario where the stock experienced a temporary price dip. Despite this, the Wyckoff indicators suggested an underlying strength in market demand for Nvidia’s shares, indicating an accumulation phase. This phase is characterized by savvy investors purchasing the stock amid price dips, in anticipation of future gains.

During this period, Nvidia's stock price was on a slight decline. However, the Wyckoff indicators painted a different picture. They showed that while the price of Nvidia was going down, the demand for the stock was, in fact, rising. This scenario typically indicates that knowledgeable investors are accumulating shares, foreseeing potential for appreciation. This accumulation phase is a critical signal for potential investors, suggesting that the stock is undervalued and poised for a rebound.

A deeper dive into the Wyckoff analysis for Nvidia revealed a significant bullish divergence. The stock made a new low, which could typically be interpreted as a bearish signal. However, the Wyckoff indicators began showing higher lows, diverging from the stock's price movement. This divergence is a strong bullish signal, indicating that despite the stock's price hitting a new low, the selling pressure was weakening, and buying interest was starting to dominate, setting the stage for a potential price surge.

This real-life example underscores the power of Wyckoff indicators in revealing the real market sentiment hidden behind price movements. By understanding and interpreting these indicators, investors can identify when a stock like Nvidia is in an accumulation phase and therefore likely to experience price increases. This approach offers a strategic advantage in selecting the right moment to invest in a stock, based on a deeper understanding of market dynamics and investor behavior.

5. Seasonality for Timing
Incorporating seasonality into investment analysis can optimize the timing of your investment decisions. Historical performance data can reveal patterns in a stock's price movements at certain times of the year, offering insights into the best periods for investment. For example, historical trends have shown that Nvidia often reaches significant price lows in October, providing an opportune moment for investment.

Adobe, renowned for its dominance in digital media and software, including industry-standard tools like Adobe Premiere, also shows a compelling seasonal trend. The analysis of Adobe's stock performance over various years indicates a turning point close to the end of the year, where the stock historically bottoms out and begins its upward trajectory shortly thereafter.
This pattern suggests that investors might find a strategic entry point in this period, capitalizing on the seasonal low to purchase Adobe shares before their anticipated rise.

Incorporating seasonality into the investment analysis process enables investors to make more informed decisions about when to enter or exit positions in specific stocks. The historical performance of Nvidia and Adobe around October and the year-end, respectively, highlights how understanding and acting on seasonal trends can enhance investment outcomes. By identifying these optimal investment windows, investors can align their strategies with historical patterns, potentially maximizing returns by timing their transactions to coincide with expected seasonal fluctuations in stock prices.

This nuanced approach, grounded in historical data analysis, offers a strategic edge in the complex world of stock investment, allowing investors to navigate the market with greater confidence and precision. Seasonality, when combined with other analytical methods such as financial health evaluation and market sentiment analysis, forms a comprehensive toolkit for selecting and timing investments in stocks like Nvidia and Adobe, with a view to achieving superior returns.

Current Opportunities: Johnson & Johnson complete analysis
The analysis of Johnson & Johnson (J&J) within the context of selecting winning stocks is a fascinating example of applying a comprehensive strategy to evaluate potential investments. Here's a deeper dive into the multifaceted analysis of J&J, highlighting the crucial aspects considered in the video transcription:

Sector Analysis
J&J operates in the healthcare sector, specifically focusing on areas where innovation, such as artificial intelligence (AI), is beginning to play a transformative role in drug discovery and patient care. The healthcare sector's resilience and growth potential, especially with the integration of AI, make it an attractive field for investment. Companies like J&J, which are at the forefront of integrating technology into healthcare, are well-positioned for future growth as they work to revolutionize treatments and expedite drug discovery processes.

Financial Health Evaluation
Although J&J experienced a slight dip in sales and net income last year, the long-term view of its financial health remains positive. This slight decrease should be contextualized within the broader picture of J&J's consistent growth over the years. Such fluctuations are not uncommon in large, diversified companies and can often be attributed to various factors, including investment in research and development, which may yield significant returns in the future.

Ratio Analysis
The analysis moves deeper into J&J's financials by examining key ratios that shed light on its profitability, efficiency, and financial stability. Despite the observed dip, J&J maintained a healthy profit margin and a strong return on equity (ROE), indicating efficient management and the ability to generate profit from shareholders' equity. The debt-to-equity ratio further illustrates J&J's financial prudence, indicating a balanced approach to leveraging debt against shareholder investments, ensuring long-term stability and risk management.

Solidity Analysis
Evaluating the solidity of J&J involves looking at indicators such as the Altman Z-Score, Piotroski F-Score, and Beneish M-Score. These metrics assess the company's risk of bankruptcy, financial strength, and the likelihood of earnings manipulation, respectively. J&J's strong scores across these indicators reinforce its financial health, suggesting a low risk of bankruptcy, solid financial operations, and transparent financial reporting. This solidity reassures investors of J&J's reliability and ethical financial management.

Dividend History
An important aspect of J&J's attractiveness as an investment is its history of increasing dividends. A rising dividend history is often a strong indicator of a company's financial health and its commitment to returning value to shareholders. For J&J, this not only signals confidence in its future earnings but also makes it a compelling choice for income-focused investors.
The comprehensive analysis of Johnson & Johnson, as detailed in the transcription, exemplifies a holistic approach to stock selection. By considering sector prospects, financial health, ratio and solidity analysis, market sentiment, seasonality, and dividend history, investors can make well-informed decisions, leveraging a blend of short-term insights and long-term growth potential. J&J, with its solid foundation in the healthcare sector, innovative approach to integrating AI, strong financial indicators, and commitment to shareholder returns, stands out as a robust candidate for investment portfolios seeking diversified exposure to healthcare innovation and steady growth.
Johnson & Johnson seasonality: the secret to timing the market
Seasonality is a very powerful strategy, providing a very effective weapon for choosing the timing of entry into a trade/investment
For example, starting from the middle of March, JNJ shares have historically perfoamed very well, until the end of April.
An upside trade from 03.22, held until 04.24, would have returned:

  • a positive performance 100% of the time over the past five years, with an average performace of 9.7%
  • a positive result in 70% of cases over the last ten years, with an average performace of 8.4%
  • a positive result in 65% of cases over the past five years, with an average performace of 7.2%

This approach, rooted in empirical data, highlights the importance of not just selecting the right stocks but also choosing the optimal moment to engage with the market.

Final Thoughts
Selecting winning stocks requires more than just luck; it demands a strategic, informed approach. By analyzing industry trends, financial health, ratio metrics, market sentiment, and seasonal patterns, investors can identify stocks with high growth potential. The success of companies like Nvidia and LVMH, along with the promising outlook for Adobe and Johnson & Johnson, underscores the effectiveness of this comprehensive selection strategy. While historical performance is not a guaranteed predictor of future success, a disciplined and methodical approach to stock selection is key to building a profitable investment portfolio.

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