The Three Ingredients That Make a Good Stock

Andy Snyder|October 24, 2022

Is a good stock always a good stock?

It’s a tough question. It gets to the heart of what we do.

For traders, what’s good isn’t always the question. In the short term, things like momentum, technicals and volatility matter.

We’ve dedicated several columns over the last week to proving that identifying stocks that do well by these criteria can lead to some outstanding gains, no matter what’s “good.”

But what about long-term investments… where money compounds like snow on a mountaintop? Some years are hot, some are cold. Sometimes there’s a lot of snow, sometimes there’s very little. But with time, a mighty, unstoppable glacier is formed.

We’ve seen plenty of them.

But what makes a good long-term stock? Not just one that’s a winner this week or next… but one that consistently outperforms and puts serious long-term gains into your portfolio?

Loyal readers know the Manward answer. It comes from our dear friend Alpesh Patel… the man whose business card with the U.K. government simply reads “Dealmaker.”

We brought Alpesh into our humble little group last year… making yours truly the only one of our contributors who hasn’t worked with royalty (so far).

Alpesh made a name for himself in the global investing sphere by answering the question above. To make his point, he’s traveled the world, penned innumerable columns and appeared on countless TV shows.

We’ve added our own nuances to the idea, but it boils down to just three simple ingredients: growth, value and income.

These ideas are so powerful that we incorporated them into the name of Alpesh’s research service, GVI Investor.

Get any of those three ideas right… and you’ve got a recipe for a good stock.

Easy as 1, 2, 3

Growth is probably the hardest of the three to nail down. For the last two decades, the market has paid a premium for growth. With ultra-low rates, growth was easy to come by. In many cases, companies could simply take on some debt to buy it.

But that’s changed quickly. It’s refreshing. Companies that are growing despite the current headwinds are actually onto something. We detailed the direct-to-cell sector last week, an industry with strong, organic growth.

With rates on the rise, growth is harder to come by… which makes companies with double-digit earnings or sales growth very strong prospects.

They’re good stocks.

Next, when it comes to finding good deals in the stock market, there is a reason value investors are among the most successful. There’s a reason so many books and so much research are devoted to the idea.

Out of all the disciplines, it’s the simplest.

That doesn’t mean it’s the easiest. It just means we have all the tools we need. Using those tools properly and having the patience to wait for the numbers to line up are the hard parts.

Value greats like Warren Buffett just had a rough couple of decades. With record-high prices, good values were hard to find.

But patience tends to get rewarded. There are some incredible values out there.

Find a good value, and you’ve found a good stock.

And finally, shares that pay us always have a strong long-term reward. Investment income is the backbone of long-term investing. Income-producing stocks don’t rely on the whims of a fickle market. They don’t rely on share price appreciation. And they don’t rely on, as many are wont to say, a “greater fool.”

Their worth doesn’t come from share price appreciation… but from how much income they put in our pockets.

The higher rates climb, the more important – and the more valuable – strong income producers become.

When looking to create an unstoppable glacier of wealth, income is a fine place to start.

The bottom line is, yes, a good stock is always a good stock… no matter the market conditions.

If you’re looking to invest for 12 months or more, start with these basics and add on as you narrow your search.

Alpesh has quite an add-on up his sleeves. It’s a proven way to maximize the benefits of all three ideas above.

It's why he flew from London to Baltimore to make this important announcement.