Candlestick Trading Blog

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The idea of building a strong portfolio should be the central focus for any investor looking for successful long term investing results in the stock market. While it is true that a trader can find an occasional gem with stock buying tips or a hunch, the majority of good investments will be the result of doing the “dirty work”. This work will help a successful investor to discover the strengths and weaknesses of a company, as well as helping to understand the business economics and market position of the company. Such research of a company would fall in the category of fundamental analysis and is important to making a good decision on the purchase of a company’s shares and to building the strong portfolio that you need to succeed in the stock market.

How does the company earn cash?
A trader can’t really add a company to a strong portfolio unless he or she knows how the company is generating its cash. This is critical and needs to be specific and void of assumptions. Papa John’s Pizza is a perfect example of such a need for understanding cash flow. Millions of people recognize the brand for Papa John’s; it’s easy to assume that the company makes their money from selling pizzas. While Papa John’s does make pizzas, many of the actual stores are franchises, separately owned and making products according to the ingredients and recipes of the parent company. In other words, Papa John’s creates the pizza and other products that its franchises make. After making this connection, it is easy to see how important the relationship between Papa John’s and its franchises is both to the company’s value in the stock market and to a strong portfolio.

How much cash does the company make and how quickly?
Because of the time value of money, a company that makes a million dollars today is worth more than a company that makes two million over the next twenty years. Making such connections between cash flow and time is critical to implementing successful stock market strategies.

Can the company continue to maintain its cash flows?
At one time the American steel industry was considered a blue chip stock in a strong portfolio and countless analysts advised adding it to a stock portfolio. An extended history of profitability led many investors and analysts to believe that this business would always be a strong investment. The past, however, is of little value in projecting future cash flows. One way to evaluate whether a company can sustain its cash flows is to look at its earnings estimates. A company that is struggling to make its numbers might not prove to be a successful investment and its purchase might not help to make a strong portfolio.

How costly is a business to operate?
For a strong portfolio, it is wise to consider that some companies need a lot of money to make their profits, while others can operate successfully on very little revenue. A utility company needs billions of dollars each time it opens a new power plant, yet an Internet company can operate on a small amount of ad revenue while it develops its product. The less money it takes for a business to survive, the more appealing it will be for someone investing in the stock market and the more desirable it is to give investors the advice to add it to their strong portfolio.

Is the company managed in a shareholder-friendly manner?
The management team and its attitude towards the shareholders are extremely important both in the company’s success and in creating a strong portfolio. A company that looks at its own investment philosophy and investment options, such as repurchasing shares when the stock price has fallen rather than invest in another company is more likely to create wealth than a one only looking to build the company. Reading a company’s actions before you buy can help make a strong portfolio.

Is the price attractive?
Simply put, price is the single most important technical analysis tool. The most common metrics for stock technical analysis are found because of the share price. A $20 per share company that earns $6 per share has a yield of 30%, but a $100 per share stock that returns the same $6 only turned a 6% yield, hardly anything that will excite investors or cause a company to be included in a strong portfolio.

The best investment advice happens to also help to make a strong portfolio; follow the money flow. If a company is successful at making and sharing its money, it will be a company that has strong investment potential.