Choosing the best companies to invest in depends partly on your investment goals. You may focus on equity growth or on generating income. Securities that are good for the first are not usually good for the second. To choose the best companies to invest in, identify what you want to accomplish. Then study the market to find and research likely candidates. Even if you are a novice at investing, you can do well if you learn and practice some basic principles of investing.
Before you begin to search for the best companies to invest in, identify what your investment goals are. A person nearing retirement age usually wants low-risk investments that provide substantial income. Younger investors are more likely to seek growth-oriented companies whose stock will increase in value. For those more adventurous, companies in high-growth industries like alternative energy offer the possibility of high rates of return, although with greater risk.
To find possible investments, read financial publications like the "Wall Street Journal," "Kiplinger’s," and trade journals for industries you are interested in. Then go to a company’s investor relations Website. Get a copy of their annual report. Ask if the company’s revenue and earnings growth has been above average for its industry. Second, determine if the company’s stock has consistently done as well as or better than average for its industry as a whole, based on stock indexes for the past 3 to 5 years.
Even if a company’s fundamentals are good, you want to get a good price when you invest your money in its stock. Check the price-earnings ratio (P/E) for the stock (the ratio of current stock price divided by per-share earnings). Compare the PE ratio to other companies in the industry. A high PE ratio may indicate the stock is overvalued or that the company is expecting strong earnings growth. Conversely, a low PE ratio can mean the stock is undervalued or that there are signs of potential trouble. When you see a high or low PE ratio, investigate further to find the reason before you make your investment decision.
If you want low-risk income, a company with a stable history of stock value and dividends is what you want to find. Here are two examples in the public utilities industry. Duke Energy (NYSE: DUK) is a North Carolina-based provider of electric power and natural gas to several southern and Midwestern states. Duke has a long record of steady earnings and is among the leaders in investing in advanced energy production technology.
The Southern Company (NYSE: SO) is the chief electric utility in Georgia and several other southern states. It has a profile similar to Duke Energy. As an alternative to public utilities and similar industries, consider corporate bonds. Bonds carry less risk than stocks and are designed to provide income. Most “blue chip” companies in all industries issue bonds. If a major company’s fundamentals appear sound, check with a bond rating service like Moody’s or Standard & Poor’s. If the bond has a top rating, it is very low risk. Beverage producer Coca Cola (NYSE:KO) is a good example. Another is Eastman Kodak (NYSE:K) which is a leader in imaging technology and photography.
For equity growth, you’ll want to invest in the common stock of promising companies. Most of the increase in value for any growth-oriented company will be in this type of security. A good example is Starbucks (NASDAQ: SBUX), the international coffee retailer. From the time of their initial public offering in 1992 through the end of 2007, the company grew from 165 stores to over 15,000 units and plans continued expansion, especially in its international division. Home Depot (NYSE: HD), the retailer of home improvement supplies, grew to over $90 billion in sales in 2007 and is expanding into international markets, especially China.
You can choose smaller entrepreneurial companies if you want to take more risk in return for higher growth potential. The alternative energy industry features high-growth companies to invest in. For example, California-based SunPower (SPWRA, SPWRB: NASDAQ) is a national leader in high-efficiency solar energy equipment manufacturing. Denmark’s Vistas Wind Systems (NASDAQ-OMX: VWS) had 34 percent of the world wind turbine market in 2007. Although well-established, Vistas is the front runner in the wind energy industry.