Points to remember for uncommon profits from common stocks
1. Does a company have products or services with sufficient market
potential to make possible a sizable increase in sales for at least several years? Management of the company should be focused and goal oriented Management should be able to make a mark and stand in the market with increase in market share, if not with existing product then with good R&D dept which shall help in increase in market share with its innovation in its product list. Management should evolve and have a plan of the sales cycle of its products over a period of years for it to sustain and at the same time grow with adding new products in the same product line continuing the sales curve for newly introduced products. 2. How effective are the companys research and development efforts in relation to its size? See how much % to sales the company spends in research & development of the product and compare that with other companies and industry average. Make sure that the cost under research & development is genuinely termed as research and not just expense related to functioning of the machinery and engineering cost. A company with ideal ratio of benefit of two to one dollar spent on research shall be termed as an ideal company to look for an investment. Also take a snap of past few years as to how well have the company contributed to its bottom line by result of its research activities. A company must co ordinate between research, production and sales problem for making a product efficient. The companys Top management should help in achieving the desired output by formalizing a strategy to overcome crash program. (A crash program is what occurs when important elements of research personnel are suddenly pulled from the project by any means) 3. How well the companys marketing strategy is? Ideas and innovative way of marketing their product, how easily have they penetrated the market, market share achieved with its product awareness. 4. Does the company have a worthwhile profit margin and what the company is doing to maintain or improve the same? See how much % of net profit to sales have been achieved by the company and identify this for a series of years and compare the
same with other giants. Unless there is a fundamental change in
marginal companies showing prospects of higher profitability margin by introduction of new product, the ratio of higher net profit to sales stands acceptable for making investment decision. Also identify what the company is adapting to maintain or improve its profit margin. Good companies which should be invested in shall identify ways to reduce cost by product engineering or increasing output with the same cost.