5 Criteria in the Hunt for Blowout Profits

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5 Criteria in the Hunt for Blowout Profits

Investing has been my passion as long as I can remember. I think it goes all the way back to my days as a kid when I sold sunglasses on the boardwalk at the Jersey shore. People at the beach need sunglasses, right? I figured there must be an opportunity there.

OK, so maybe it wasn’t a game changing opportunity, but it was a start!

I began investing in stocks while I was still in high school. I worked part-time at an Army base during summers in order to earn money to invest. I continued to work even as I was a full-time student at Mount Holyoke College.

I’ve learned that you come across some investment opportunities when you’re hunting for them, crunching numbers and staring at a computer screen all day. And others come when you least expect them, maybe even from taking a short walk outside. Those can be some of your best ideas, kind of like Peter Lynch’s famous “invest in what you know” philosophy.

Take Texas Roadhouse (TXRH), for example. I’ve been to that restaurant more times than I can count, and there was not one day when there wasn’t a long wait for a table. And despite the declining economy and similar restaurant chains struggling, TXRH was always busy. They were clearly doing something right.

That, of course, got me interested in learning more about this company. After all, it was highly in demand during a time when consumers were trying to save money. After rolling up my sleeves and doing a little digging, I found out that TXRH was indeed a great stock to own. So, I bought it and was later able to sell my shares for a hefty 60% profit.

Of course, I don’t just rely on long lines for possible trends. I also read. A lot. I’m constantly picking up the newest editions of Business Week, the Economist, and Bloomberg–just to name a few. There have been plenty of times where a new technology mentioned in an article caught my eye, and after doing some research, I would find that the company behind the tech was a solid one to own. The opposite has happened, too.

I’m a research fanatic, so no matter where I first come across a company, I always take a very close look at their fundamentals. I have very strict criteria, and if the company doesn’t meet it, no matter how much I like their product, that company is crossed out (although I do keep an eye just in case something within the company changes later on, making it an attractive investment).

The companies I consider owning must have:

  • strong growth catalysts that will drive the shares up
  • attractively valued with strong free cash flow
  • a solid balance sheet
  • limited debt
  • a sensible investment with the current market environment at that time

Sure, a stock might be great, but if it’s out-of-whack with the market, then I’m usually not interested.

While I never invest in a company just because it has the potential to be a takeover a target, that prospect is also enticing. As I’ve mentioned before, we’ve made good money on takeover targets across many of my services, but that’s not the starting point. Strong fundamentals must be there first, and if there is an acquisition while I own the stock, well, that’s just icing on the cake. One takeover target I sold was Exact Target (ET) for a 56% profit after it was acquired.

So keep your ear to the ground and your eyes wide open, because a good investment can be right around the corner. You just have to know where to look.


Article printed from InvestorPlace Media, http://investorplace.com/2013/07/5-criteria-in-the-hunt-for-blowout-profits-et-txrh/.

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