Three Benchmarks for Investing in a Stock

Buying stocks that you can hold in your portfolio for years and years is quite a different process than buying a stock that you expect to sell next week! Of course, there is never a guarantee that once you buy a stock with an eye to the long-term you'll never have to sell it, either. But identifying companies that are more likely to turn in a solid performance over the next five to ten years is not that difficult, if you focus on three key areas. The three key benchmarks of long-term stock analysis are Growth, Quality, and Value.

Growth
Long-term stock investors hold one truth to be self-evident -- that ultimately, over the years, there is one factor that can always drive a stock's share price higher and higher. That single factor is the growth of a company's earnings (the company's profits). In turn, a company's growth is ultimately dependent on the company's growth of sales or revenues. Companies who can sustain growth of sales and earnings over the years are likely to be rewarded with ever-rising share prices. On the flip side of the equation, companies with no profits can rarely be identified as solid long-term holdings because its impossible to predict when (or if) those companies will ever be able to maintain growth over the years.

Quality
The second benchmark is quality. Obviously, if you are looking for stocks that you can buy and hold for many years, you want to own good, solid, well-run companies. The keys to running a company well are held by the company's management -- but since you can't conduct in-depth interviews with the CEO and other members of the management team, you'll have to look at some other criteria. For instance, how do the company's profit margins stack up against their competitors? And has the company generated a decent return on the investments of shareholders over the years?

Value
Simply finding good, growing companies isn't enough to make a successful investment, however. You have to know when it's the right time to buy a particular stock. Buying a stock when it is undervalued (when compared to its history) serves to enhance your possible total return. In addition, knowing the potential upside of your investment, as well as the potential downside, is key to making sure you have a good shot at your target rate of return.