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Boston Beer Co Inc (SAM), Virtus Investment Partners Inc (VRTS), Bio-Reference Laboratories Inc (BRLI): Seven Steps to Find Winning Stocks

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Last year I had a problem. I had taken some profit on part of my investment in Apple Inc. (NASDAQ:AAPL) and needed somewhere to put the gains.

I bought three stocks, and two of them enjoyed significant run-ups. I nearly doubled my investment in one of them within six months. The third has dropped slightly.

Apple Inc. (NASDAQ:AAPL) had experienced a nice run up over the previous few years (and I had realized a tidy gain), but the company missed earnings targets and announced reduced guidance going forward. Competitors are starting to encroach into the high end of the smartphone and tablet markets where Apple was dominant for many years. Analysts are downgrading the stock.

Boston Beer Co Inc (NYSE:SAM)Knowing when to sell a stock is just as important as knowing when to buy. I wanted to keep the profits I made in the growth portion of my portfolio and try to keep the momentum going, and it looked like a good time to realize at least some gains in Apple. (I still hold some shares. With Apple’s recent announcement about increasing its dividend and buying back stock, it appears that my investment will continue to pay off.)

I applied some of what I learned from The Motley Fool staff and fellow bloggers and columnists, from investment books written by people like Peter Lynch (One Up On Wall Street), and from other investors I knew.

Seven steps to find a winner

I generally look for companies with the following characteristics:

1. EPS growth in the range of 15 to 25% per year

2. P/E not too much higher than the growth rate unless the company has a significant competitive advantage (value is part of the process)

3. Not too big (revenues and market cap around $1 or $2 billion – bigger companies are often too unwieldy to grow rapidly)

4. Low debt levels (long-term debt to equity preferably near zero)

5. Strong management in place (with compensation not tied to short term performance – a long term view is best)

6. A business I can understand (Peter Lynch always said “buy what you know”)

7. Plenty of free cash flow (cash helps fuel future growth)

I identified a few companies that seemed to meet the criteria and I narrowed the list down to three:

1. Boston Beer Co Inc (NYSE:SAM)

2. Virtus Investment Partners Inc (NASDAQ:VRTS)

3. Bio-Reference Laboratories Inc (NASDAQ:BRLI)

Boston Beer Co Inc (NYSE:SAM) met all of the criteria. It fit into the size criteria well, with a market cap of about $1.4 billion. It was growing and, at the time, its P/E was in line with its EPS growth rate of about 24% per year. The company had no debt, and the chairman was the guy who started the company, Jim Koch. Boston Beer Co Inc (NYSE:SAM) still uses an old Koch family recipe for its signature product, Sam Adams Boston Lager beer, which I know well.

Virtus Investment Partners Inc (NASDAQ:VRTS) also met the criteria, and the numbers looked even better than those of Boston Beer Co Inc (NYSE:SAM). It was growing at a rate of 70% per year and had a P/E less than 10. It also had almost no debt, the original CEO, George Aylward, was still in charge (the company was a spinoff) and I understood their product (various types of investment instruments). It was also considered one of the best places to work for in the Greater Hartford area, an intangible that’s not easily quantified.

The numbers for Bio-Reference Laboratories Inc (NASDAQ:BRLI) also looked good. The company was growing in that sweet spot in the mid-20% range and the P/E was about 20 at the time. It had little debt and the founders of the company were still in charge.

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