Mellody Hobson: Picking Stocks

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ABC News
January 15, 2007, 2:59 PM ET
5 min read

Sep. 26, 2006 — -- Picking stocks can be a difficult job even for investment professionals. In her fourth installment on the growing trend of investment clubs, "Good Morning America's" personal finance expert offers a few tips on how to begin the process of picking a winner.

For starters, what details deserve the most attention to when choosing a stock? For those who are newer to investing, the key piece of advice is to "know what you own." More specifically, you should start by looking at companies who businesses you understand. One of the best ways to build a portfolio is to do so in the same way you would fill your shopping cart or select gifts for your child's birthday or for under the Christmas tree. Buy what you (and others) like and know.

With that in mind, here is Mellody's Shopping List -- some items to consider, not necessarily buy, when you're trying to build your portfolio.

Food:

Cereal Companies: Most everyone who has children relies on cereal for breakfast, not to mention the many "in-between" meals. A simple walk down your grocer's cereal aisle -- a whole aisle dedicated to it! -- reveals that you are probably not the only family in America that eats Cheerios, Corn Flakes or Raisin Bran.

Spices and Condiments: Everyone who cooks flavors their food. As such, spices are the one commodity that I would recommend people consider adding to their portfolios. In a similar vein, consider companies that make jelly, ketchup, mustard -- also staples for sandwiches and many items that Americans consume every single day, no matter if the economy is flourishing or lagging. It is important to scan the aisle for the product with the greatest presence and shelf space -- an item that is not being swallowed by independent, smaller competitors.

Clothing:

Not necessarily the hot, must-have, back-to-school item, but again, the staples that every American family has in the wardrobe. Ask yourself what item you always end up buying year after year.

Similarly, are there certain brands that are better than others, that stand up to rough usage and that even become hand-me-down's -- those items may be even better choices. Some suggestions: jeans, underwear, wool hats and gloves.

Pharmaceuticals:

Flu season is right around the corner, so if you are like many Americans, you are likely going to fill your medicine cabinet with all types of remedies. Additionally, more than 23 million American over the age of 65 take between one and six prescription medicines per day. That makes for a pretty big market.

Consider asking your pharmacist what is the most popular prescription filled, or even an elderly parent, neighbor or friend. Again, this is a suggestion, not a recommendation to buy a specific drug. But it's a good place to start hunting for investments.

Toys/Electronics

Children always seem to know what is "in" and what is not when it comes to toys. The next time your child asks for a toy, consider taking a look at the company that manufactures it. If he or she really, really wants the item, it's likely your child isn't the only one in America. Some examples: Tickle Me Elmo, iPods, Xbox video game systems, etc.

What is the Next Step?

Once you identify a product or service you understand and believe in, or just the one that's always in your shopping cart, the next step is to take a closer look at the company behind the product>

  • First and foremost, you need to determine whether the company is public. A public company is one that issues stock to outsiders. If a company is not public, the general public is not able to buy its stock. Examples of public companies in your cart could include Kellogg's, Smucker's and Pfizer. Some examples of private companies are smaller, private-label brands like Kirkland -- Costco's private label brand.
  • Second, look for quality in management, product service and financials. Some questions to ask during your research include: Has management been in place for a while? What is the management's professional background? Is the management well-suited for the job? Is the company an industry leader? Are there high barriers to entry for competitors?
  • Third, think about what items are only recently appearing in your shopping cart -- items you and your family could live without, but that only in the last couple of months have been on the list. Toys and electronics are often the exception to this rule. Inevitably, if everyone is looking to invest in a particular stock or industry, that stock or industry is probably already overpriced, meaning you may be buying high. And, as history has shown, what goes up eventually comes down.

    • Digging up Dirt

    Once you've chosen a few companies you're interested in, it's important that you know where to find information about them. The Internet is an excellent source. As a first step, you should go to the company's Web site to learn about its products, services, management team and performance.

    The Web sites of most public companies have an investor relations section that contains financial reports and other filings. Take a look at the company's annual report as well as its quarterly earnings information.

    You may also want to visit www.hoovers.com. It is a great tool for business research and provides the basics on a company, including its core business, top executives, main competitors, key financials and recent news stories.

    Buying the Stocks

    Generally, to purchase individual stocks, you will need to go through a broker. When selecting a broker, the choice between a full-service brokerage firm and a discount brokerage firm will depend on your investment club's objectives and needs. Instead of purchasing individual stocks, you may want to consider mutual funds. As the trip to the store may have been somewhat overwhelming, so may be the stock-picking experience. Instead, consider looking for funds that have some of the names of the stocks you are interested in buying.

    Mellody Hobson, president of Ariel Capital Management in Chicago (www.arielmutualfunds.com) is "Good Morning America's" personal finance expert.

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