3 Ways to Pick the Best Stock in a Sector

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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:

  1. Pick sectors with minimal competition.
  2. Pick sectors that provide people and businesses with things that they need.
  3. 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.

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