|
Answer:
Dear
Tom,
As
you know from reading this column, diversification
is one of the most important factors involved in setting
up and monitoring any portfolio -- whether it's your
individual portfolio or one selected by and for club
members. So before you make individual stock selections,
you and your fellow club members should review our
previous columns on diversification
and asset
allocation.
Having
laid down the ground rules, let's take a look at the
current economic situation. The leading figures for
the first quarter are a key factor in stock selection.
During that time frame (January through March), a
number of companies reported increased net profit
margins -- and impressively strong increases. (Net
profit margin is the ratio of after tax profits, before
extraordinary items, to sales.)
In
a number of cases, the increase in net profits this
last quarter was due to higher oil and commodity prices.
Keep in mind that those prices may or may not continue
to rise.
The
leading industry groups
One
of the best ways to get an overview of the specific
industries turning in higher profit margins is to
look at the results compiled by Standard & Poor's
Corporation. S&P releases this information on a regular
basis. At the top of the list for the first quarter
you'll find the energy sector. Here's the lineup,
starting with the most profitable industry:
1)
Oil, gas & consumable fuels
2) Commercial banks
3) Insurance
4) Chemicals
5) Computers & related products
6) Metals & mining
7) Health care providers & related services
The
less strong industry groups
You
should also know about the laggards.
Airlines
Automobiles Automobile components
Beverages
Electric utilities
Electronic equipment & related products
Pharmaceuticals
The
bottom line
Your
investment club should discuss which industry groups
are of interest given your current holdings and then
select the strongest performers within those groups.
Depending
upon the club's investment philosophy, you may want
to pick winners in the laggard groups. After all,
industry performance is a cyclical thing. For instance,
although both the airline and automobile industries
are having a tough time, that doesn't mean they won't
recover. And, within those laggard groups, there are
at least one or two solid performing companies.
Once
you've made your industry selections, you can find
out which companies are: one, profitable; two, well
managed and three, not burdened with too much debt,
by studying the independent analysts' reports in Value
Line, available at most public libraries. Your
investment club, in fact, may wish to share the cost
of a trial subscription. Value Line's analysis
of over 1,000 publicly traded stocks is updated weekly.
For details: www.ValueLine.com.
Good
luck!
|
