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Getting a group of like-minded folks together to form an investment club is the easy part. Deciding what to invest in can be a brain drain, even though numerous guides, including one put out by the National Association of Investors Corps. (see “Meeting of the Minds,” Moneywise, February 1997), can help you evaluate stocks. Knowing which companies to give the once-over is the next step.
There are various styles and strategies for picking stocks. The first thing many industry gurus agree on is to consider companies you already know. Start by taking a look around you–say, your bathroom, kitchen cupboards, refrigerator and clothes rack. The products that fill your house, or even the corporations that provide services that you and your family couldn’t do without, often yield investment ideas. After all, wouldn’t it be nice to own a part of the companies that make the clothes you wear and the food you eat?
Looking for household brand names can lead to market leaders whose earnings-per-share are growing. Among the most promising consumer-driven stock sectors are soft drinks, fast food, specialty retail (like fashion) and entertainment.
Several financial top guns have made money the same way, simply by observing what’s going on around them and following trends. For example. Peter Lynch, former manager of the world’s largest mutual fund, Fidelity Magellan, often bragged that he came across one of his best investments by noting how his wife liked the quality of L’eggs hosiery.
Hot industry trends can be another source of stock picks. A word of caution, though. It may not be a safe bet to follow the herd after the latest “craze” sector, like health care or technology, unless a member of your dub is familiar with the business.
“If you are computer literate, look at what new soft ware is making your life easier, find out the manufacturer and if the company is publicly traded,” says Pierre Dunagan, an investment officer at First Chicago, NBD Investment Services Inc. Toys are another good bet. If your teary- eyed three-year-old is begging for an action figure, chances are, other parents will be shopping for the same product. “Take a trip to retail stores and check to see how many people are buying the product,” advises Dunagan. “Stand in the isles for a little while and just observe. Talk to the store manager and ask how well a particular product is selling.”
The obvious downside to this type of homespun research is that you could come in late on the cycle, when the buying frenzy is ending. And, of course, you risk a glitch cropping up in the product, slowing sales down.
Popularity alone doesn’t make a company a good investment. Look for a good balance sheet, consistent sales and strong earnings growth. Ideally, you want to buy a company with a price-to-earnings ratio that is lower than its earnings-growth rate. You can find a company’s P/E ratio by looking at the stock tables in the newspaper or online.
Call the company’s investors relations department and ask for an