What is the best stock to buy now? Finding stocks from stock screens and finding good stock that also works for you is great, but what if you just want a single stock and want to know the best single stock to buy today?
This is a good question but to answer it, this is a little bit more difficult. There are several factors that go into a stock price, but the bottom line is it’s worth currently what people are willing to pay. So the best stock to buy now would be the stock that very few people know about, but if they did they’d be willing to pay a lot more. In otherwords, if a company has been undervalued and neglected for awhile, yet the companies fundamentals continue to grow, the only thing preventing that stock from going up in value, is the institutional investors knowing about it. The future is uncertain, but eventually people will discover this “gem” and when they do the research, they will buy this stock all out, or at least goes the theory.
Now one trick to find good stocks are to first identify undervalued and neglected stock. Is this going to find you only the #1 stock and nothing else? No, but there may be a top stock among that group. How in the world are you to screen that down? Well any person can have the courage to buy a basket of stocks and have one of them turn out, is there a way to find a stock that is a lock? Warren Buffet thinks so, he says that diversification is a hedge against ignorance. This means that if you know everything there is to know about a company, you can invest in a company that you know is undervalued and that you know will grow, companies that can do so will attract more investor money in the future. Of course this requires you to know all about Benjamin Graham and finding deeply undervalued companies. However, there is one important thing that you may notice.
He introduced the first formula at age 79 and concluded from his results that one would have performed quite well from 1961-1976 by buying stocks with the lowest values of these three criteria:
A low multiple (e.g.,10) of the preceding year’s earnings;
A price equal to half the previous market high (“to indicate that there has been considerable shrinkage”);
Net Asset Value. (I presume this is the lowest price relative to book value)
In his next interview published in Medical Economics, September 20, 1976 titled “The Simplest Way to Select Bargain Stocks” Graham, then 82, proposed a simpler, more refined formula that consisted of:
PE Ratio of 7x-10x or less (Based on 2x current triple A bond rates)*;
Equity/Asset Ration of .5 or more (e.g. Debt/Equity >1).
* Calculate the maximum PE by dividing (2 x triple A bond rate) by 100. Example: 7% triple A bond would equate to PE of 7x (100/ (2×7)). If rates are below 5%, then use 10x PE max. Graham said always buy at PE 7x or less regardless of triple A rates.
So hows this compare to the “magic formula? Again gurufocus adds this table.
Greenblatt’s Magic Formula
7x-10x PE or less and
equity/assets > .5
Highest Combo of EY
2 years or 50% gain, whichever came first
1 year (sale losers 1 day prior and winners 1 day after)
# of stocks
So is that the key to finding the best stock to buy now? No, that will result in too many picks. Stock Guru and one of the world’s wealthiest men Monish pabrai says this about not Ben grahams but Greenblatt’s Magic formula
“[When looking for stock] The Magic Formula is a very good place to go hunting for fifty-cent dollar bills. We could keep it very simple, only analyzing Magic Formula stocks day in and day out, and become quite wealthy over time. I strongly recommend this approach. It is simple. You’re shooting fish in a small barrel, and the results are likely to be vastly superior to the indexes.”
so there are many posts about this. If you want to get your magic formula stocks head on over to
However, if you want to learn more about Ben Graham he had other theories such as net asset value.
Repetition is how we learn so I am going to repeat myself. According to my previous article titled the “best stocks to buy now” simply knowing which stocks are best aren’t enough:
If you have a 55% chance of losing everything you have and a 45% chance of winning 5 times what you risk, that mathematically has a highly expected outcome of winning and a deal like that may even be among the best stock to buy now (or best stocks), but if you do in fact take on the risk of everything you have, you will lose in the long run if you take these risks. This is why risk management is important before you determine the best stocks to buy.
Okay, so I am not going to do the work for you, because I believe that you learn by doing, however, I am going to give you a ste by step process that should help you identify 1 single quality stock. I believe that in this world of free stock advice, it’s easy to get wrapped up in information overload and struggle to identify the one single stock worth owning right now.
So how do you find the best stock to buy now?
1.) To start with screen stocks by using for the Magic Formula. You have to log in and create an account before you can use the screener but it is free to do so.
2.) Using that list come up with the top 100 that are above a market cap of at least 50. The small market cap stocks require different money management strategies as you need to have more money on the side and/or holding it for a longer period of time so the volitility doesn’t effect you in a bad way.
3.) From that list, take the top 20% of stocks of ROIC (return on investment capital) in this case 20 stocks
4.) From the list of 20, enter the ticker and figure out the top 20% or in this case the top 4 equity/asset ratio.
5.) From this list of 4, buy the stock with the lowest P/E of the previous earnings. If the P/E is not under 10, you must screen again, this time starting with 200, then take the top 40 stocks with the highest ROIC, and then the top 8 and from those 8 you should be able to find 1 or 2.
Of course as I hinted at before, I believe that neglected stock are among the best stock to buy now, or at least the best stocks to buy as of October 2009. This may change if you have a shorter time perspective. I consider this trading more so than investing, and if you are trading, you may like breakouts from undiscovered companies that are surging on huge colume. I prefer to do my research once or twice a year, find a handful of good stocks, and then not have to spend any time thinking about it, but that’s just me.
Now I don’t just toss away the best 4, because just because 1 stock appears better, doesn’t mean the others aren’t goods stocks as well. I prefer to do a little bit more in depth research on the management of the company, and assets, and balance sheets, and so on. The longer you intend on holding it, the more that you should do additional research. Perhaps you continue this process every month throughout the year until you find one that meets this manual screen, and from that, you have to find the stocks that meet your own personal requirements.
So is it possible to find the best stock to buy now? It’s certainly not guaranteed, and right now it’s only an opinion on a method to find the best, not an actual fact. You may have other people that completely disagree with that statement. The only thing that is certain is uncertainty. The only thing that you can be confident about is that people will not always be confident. History has shown us that the factors contained in this strategy will help identify valuable stocks. However time will tell whether or not this is the best stock to buy now, or if it should be avoided.