3 Ways to Pick the Best Stock in a Sector
Picking winning stocks consists primarily of two kinds of decisions. The first is a “top-down” determination: Which sectors of the economy are going to perform the best? Recently I provided investors with three tips for picking winning sectors. You can read the article here. Specifically I came up with these three pieces of advice:
- Pick sectors with minimal competition.
- Pick sectors that provide people and businesses with things that they need.
- Pick sectors with recurring revenues.
Once you have picked sectors of the economy that you think will be winners it is time to take a bottom-up approach — pick individual stocks. True, you could pick sector ETFs , but if you look at the specific points in my first article it becomes clear that what I mean by a “winning sector” isn’t always reflected in what we typically think of as a sector. For instance Mastercard (NYSE:MA) shares can be found in a financial sector ETF, or maybe even a technology sector ETF, but “financials” and “technology” as they are delineated for the purpose of index funds will not qualify as winning sectors as I define them above.
So, you need to be a stock picker. In this article I offer ways for you to find the “best of breed” stock in a sector. The best of breed stock in a sector is its best positioned company — the one that should rise the most, grow the fastest, and benefit from a particular sectors tailwinds while brushing off its headwinds.
Picking winning stocks is not as clear cut as picking winning sectors. For this reason the tips I give are less rigid than those I give for sector selection — they are not necessary and sufficient conditions, but rather guidelines. In short, stock picking is more of an art than a science.