Turning over rocks

Peter Hodson, CEO of 5i Research Inc., has written an article about looking for that one great company that becomes a core holding in your investment portfolio. Using Google Inc. as an example Hodson admits these stocks are hard, but not impossible to find. Since it came to market back on Aug. 19, 2004 with an initial public offering (IPO) of $85 per share, Google has continually set record highs. Just recently the stock was trading above $800 a share. To say it has become an investor’s dream is an understatement.

So why is Google so successful when so many other companies hyped by the media have crashed and burned? According to Hodson, the company simply built a better mousetrap. Its Internet search algorithm was faster and more accurate than other search engines at the time and more important, the company had the vision to take full advantage of its market share by expanding into other directions, making billions along the way.

Google is the type of stock you want to find. Most of the time you have to turn over a lot of rocks to find gems like it and fortunately, there are a few warning signals that tell you to keep on looking. Management that keeps pitching the size of their industry but never their company, prolonged testing stages, and reports of excessive insider selling are just a few red flags to be aware of. Search for stocks that excel in a number of areas.

For starters, a company that shows a healthy growth in revenue tells you that management is moving the business in the right direction. Look at the company’s margins. It measures how much of sales a company actually keeps in earnings. A high profit margin indicates a profitable company that has control over its costs. It’s important to realize that strong sales mean nothing if the company cannot produce profits from them. Analyze the balance sheet. A company that does not carry any long-term debt is always in a better position to weather an economic storm making it a much safer investment. A company that is debt-laden is usually distracted by the banks and bond holders competing with its shareholders for management’s attention.

Another area is the company’s return on equity (ROE). It’s one of the most important profitability metrics out there. It reveals how much profit a company is earning using the amount of shareholder equity found on the balance sheet. And finally, look for a company that not only pays dividends but also has regularly raised its dividends through several economic cycles. Dividends, a portion of the company’s profits, show a strong commitment by the board of directors to treat its shareholders well.

Does finding that great stock, a company that represents the perfect business model, take time, effort, and patience? Absolutely, but finding that one gem, that one stock that’s right for you, that continues to make you money is well worth it. The rewards could be tremendous.

This article is solely the work of its author, Gerry Cameron, a registered Associate Investment Advisor at Canaccord Wealth Management, a division of Canaccord Genuity Corp., member Canadian Investor Protection Fund. The views (including recommendations) expressed in it are those of the author alone, and are not necessarily those of Canaccord and does not assume any liability. Gerry can be reached at [email protected]