The best stocks to buy, what a wonderful phrase. The best stock to buy, it ain’t no passing craze… It means no worries, for the rest of an investor’s day. It’s a problem free philosophy…
In case you didn’t get the reference above, it’s to the Lion King’s “Hakuna Mattatta”. As many of you have figured out, finding the best stocks to buy what this blog is all about. I always am on the look out for new material, whether it’s a song from a Disney stock (DIS)… I mean movie, or whether it’s just another blogger blogging on the same topic.
As Ron Says in his best stocks to buy blog (blog no longer available so I guess I will just say this and claim it as my own ):
The best stocks to buy are ones that have a high chance of going up in value. I don’t think anyone has a crystal ball, and if they know what’s going to happen most likely it is illegal insider trading. However, certainly you can identify stocks that have a higher than usual chance of going up in value. Of course a stock that has a medium chance of going up in value, but when it does has a very good chance of going up dramatically, and when it doesn’t won’t go down much, is often better than a stock that has a very high chance of going up but will unlikely move more than a couple percentage points a year. Often times, inflationis your enemy when investing. You could invest all of your money in the bank and earn a consistent return, but when you compare the results to infation, particularly food and fuel inflation, you’re better off just storing your food in a storage room and stocking up on it. You certainly can invest in gold, silver, and other commodities as a hedge against inflation, but this provides much less safety. There are bonds which may provide higher returns, but these too have their flaws. Stocks have the ability to outperform inflation, where as most commodities just stay in line with inflation.
This quote… I mean ummm.. insight I had (wink, wink) gave me a great idea. Since many people are worried about hyperinflation on both the nation wide, and international scale, I thought it might be useful to determine stocks that perform well during inflation. Actually, as I speak many people are also worried about deflation, the problem is that the people that are worried most are the ones that continue to do everything in their power to prevent it, which is more likely to lead to hyperinflation. The cause of hyperinflation throughout history has always been massive usery by central banks and governments around the world. I don’t think there is a reason to be overly concerned, however, I do think it is wise to be very prepared.
I believe it is the losers who consume themselves with fear and worry, where the winners are the ones who are thinking one step ahead because they are not only prepared for what could happen next. Not only is their timing of preparation much better, but they actually do something about it. They fix the potential problems before they happen, and then they are free to move onto more productive uses of their time. I’ve mentioned gold in the past as I think it is a simple investment, and a good investment at that. However it probably won’t beat inflation, at least not long term. What if you want the best stocks to buy? Then you want a chance to grow your wealth in terms of purchasing power, so you want the best stocks to buy in an inflationary environment.
So with that out of the way we need to explain ways to find the best stocks to buy, that will work as a good hedge against inflation.
First of all, we absolutely need high margins, especially if hyperinflation is a concern. Why is this important? Say a company buys a huge order for $1 per item. Now they sell each item for$1.50. This is all great and everything, but what happens if after they sell everything and go to purchase the next order, they can only buy that item for $2. It may not seem like it since the company has more cash, but that company has actually lost purchasing power at least when priced in the items that they are selling. So while a company with large margins in major inflation may still end up in trouble in this example, it is much less likely than a company with small margins. What if that company had bought tons of items for $1, and sold them for $1.05? They might even grow a huge following of people wanting to stock up on their goods, however, this company can not use it’s profits to restock the shelves without dipping into it’s funds. This will result in the cash flowing out of a companies balance sheet, and it’s seemingly good numbers will suddenly turn bad if inflation hits. Think of a companies net margins as it’s own ability to deal with inflation. The larger the margins, the more inflation that company can handle.
As mentioned in the first example, the best stocks to buy will handle inflation, however, the next problem is an inventory problem. If you believe there will be massive inflation, you will want companies with a high amount of inventory. This isn’t neccesarily good if the sales have dropped and the company owns perishable goods, as the goods will go bad before they can sell them. However, for a steal company, or an oil company, or any other company that sells goods that are non perishable, the more inflation there is, the more they profit in terms of dollers if they adjust for inflation when pricing their product. Additionally, these companies will be able to possibly gain a competitive advantage by driving other companies bankrupt simply by selling their product at their initial cost.
The company needs a balance sheet to be able to handle the increase in pricing, or better yet, to take advantage of the current climate.
In an inflationary cycle, a company should have 0 to low debt when it’s in deflation or stagflation, or the time period when inflation is just starting. As inflation grows, the company should borrow more as they will be able to leverage the debt to take advantage of the prices that are low at the moment compared to what they will be in the future.
I will come up with a screen in the future. For now I’m going to instead continue to talk about choosing stocks to buy now. The one mentioned is Johnson and Johnson which is a solid Dow 30 company that has been around for awhile and continues to pay a nice dividend.
Tags: best stocks to buy, best stocks to buy online, buying stocks online
