A Quick Overview of My Stock-Picking Approach:
Analyzing Analyst Opinions:
Investing in individual stocks is both exciting and nerve-wracking. I prefer holding a small portion of my investments in individual stocks because they play an important role in my overall financial strategy, which I like to call my “money design.” With years of investing experience, I generally know what I’m doing.
When you buy individual stocks instead of mutual funds, you lose the safety net of owning hundreds of stocks at once. However, experts say you only need about 10-12 stocks to be adequately diversified. And the potential upside of stock investing is huge—imagine owning a stock that doubles or even grows tenfold in a year! Last year, I invested in Pitney Bowes (PBI) and saw its value increase by 109% before I sold it. Not too shabby!
If you Google “how to pick stocks,” you’ll find an overwhelming amount of conflicting information. Everyone thinks they’re an expert and has their own unique method. Even mine might differ significantly from yours. This makes the whole process frustrating. With thousands of options and various metrics to consider, how do you spot a winner and avoid a lemon?
To make things easier, let’s rely on analyst opinions for stock picks. Almost every major financial website has an “analyst opinion” section where they compile views from different investment firms. These opinions are then converted into recommendations to Buy, Sell, or Hold.
Sounds foolproof, right? Not quite. Analysts often disagree, with one saying “Buy” and another saying “Sell.” So, how should we proceed?
Let’s use some logic to shape our stock-picking strategy:
For this example, we’ll use major websites to gather analyst opinions for our stock picks. To keep it concise, I’ve already made my stock picks for the year in late January.
In my stock-picking process, I only buy from two obvious categories: one that displays exceptional long-term performance and another with strong fundamentals. From there, I check various other factors like industry, dividend yield, PE ratio, return on assets, and more. You can find detailed explanations on reading stock metrics through the links provided.
So, having listed the stocks I bought, let’s review the analyst opinions from the following websites:
CNN: They provide high, median, and low price outlooks for the next 12 months relative to the current share price. Ideally, all these metrics should be higher than the current price.
Yahoo: Rates stocks from 1 to 5, with 1 being a strong buy and 5 a strong sell.
MSN: Their Money Stock Scouter scores from 1 to 10, where 10 is a strong buy and 1 a sell.
Fidelity: Uses a similar 1-10 scale, where 10 indicates a strong buy.
Now, here are the results. Keep in mind this is only two months of data, and these forecasts are for the next 12 months. Still, some returns didn’t look too bad. For fun, let’s break down the data to see how we’re doing so far:
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