Winning Stocks Share These Common Traits
Everybody loves a winner.
At the 1913 Kentucky Derby, everyone expected the winner to be a powerful colt named Foundation. Or his rival, a talented thoroughbred named Ten Point.
Nobody thought Donerail had a chance. And for good reason. He was a fairly undistinguished horse. He had also just finished a race a week earlier. He placed second to last.
So there was little love for Donerail among the betting men. The horse went off at 91 to 1 odds. Absurd odds. A longshot's longshot.
Unsurprisingly, Donerail floundered out of the gate. He was far off the pace.
Then something miraculous happened.
Donerail started running like crazy. The next day, in the Louisville Courier-Journal, they said he "came down the stretch like a frightened deer trying to shake off a pack of savage hounds."
Donerail beat Ten Point by half a length. Today's he's still the biggest longshot winner of the Kentucky Derby.
Despite his momentary brilliance, Donerail wasn't a good bet. Sure, he was the greatest wager in the world on one glorious afternoon. Yet he soon reverted to form, ultimately failing to win 52 of 62 total races.
When you try to pick a winner, you have to look at more than just a few isolated results. You have to look at the broader picture.
When Donerail won big, hardly anyone bet on him. When bettors started to chase that result, they soon lost their money.
Stocks are no different. There are plenty of Donerails. Companies fooling investors into believing they are something they aren't.
Yet there are also plenty of Secretariats out there -- proven winners with the fundamentals to succeed long-term.
These stocks often share overlapping traits. Today we're going to discuss a few.
What great stocks share in common
It's often said that beating the market is a fool's errand. Even professionals with access to reams of data struggle to exceed the market's performance.
Yet while picking individual stocks is a tremendous challenge, identifying common traits among successful companies is far easier.
First, let's tackle the basics. Considering a long-term investment? Then you need to ask yourself if the product or service is well-positioned for future success. Is demand likely to grow? Do the firm's competitors have an advantage? Is there a paradigm-shifting technology in the wings that will turn this product into the 21st century's version of Betamax?
These are all fundamental questions that need to be addressed. Sure, it takes some work and some analysis. Yet you'll be vastly better informed. It's hard to invest with confidence when you lack insight into your investment.
Is this stock a favorite...or a longshot?
Companies such as Apple or Coca-Cola are the market equivalent of a Triple Crown racehorse. These are market leaders with massive resources and market share. It's not guaranteed both will dominate their space in the next decade. Yet it is a virtual certainty both will come close. To take the racing analogy a step further -- you might not win, but you can count on a place or a show.
There's one obvious downside, here. Companies in this position sometimes get complacent. And that's a real concern. There's always someone smaller, nimbler and more exciting coming up. Yet if you're looking for safe, steady gains, here's the formula. Market leaders with a great product and significant competitive advantages.
Other signs your stock is a winner
Does the company you're investing in have huge completive barriers working in its favor? Things like massive market entry costs? Worldwide name recognition (Coca-Cola) or unrivaled cachet (Apple)? Then it's typically a great bet.
Superior customer loyalty is another common trait between winning stocks. It's also perhaps the best predictor of sustained success. Fiercely loyal customers don't depart overnight. They infuse a company with profits.
Companies that own assets that can't be replicated or replaced are also a great bet. Think about utility companies. Competition here is extremely limited. It's impossible for a new start up to enter the fray.
Companies that consistently return money to shareholders are doubly attractive. A steady track record of dividend bumps is evidence of ongoing success. It shows that company believes its future prospects are bright. And few investors will complain about rising dividends.
Finally, reasonable valuations are always appealing. Can you match this with many of the traits listed above? Then you're well on your way to a building a successful portfolio.