Many investors find it difficult to choose the right stocks. Some chase random recommendations, others follow market hype. But there is a simple, proven strategy that helps you identify strong, steadily growing companies — the kind that can build wealth over time. So, what exactly should you be looking for when investing in stocks?
Let’s say you’ve finally decided to move from saving to investing — maybe to one day buy your dream villa, a new car, or secure your children’s future education. You download the Boursa AI trading app, activate your account, and suddenly you’re facing hundreds of listed companies.
The big question now is: Where do you start? And more importantly, how do you choose the best stocks from so many options?
In this article, we’ll guide you through a practical, time-tested method based on fundamental analysis, designed to help you build a focused investment portfolio of 10 to 20 high-quality growth stocks.
The Golden Rule: Strong Companies Generate Strong Profits
When analyzing a company for potential investment, look for these three essential traits:
1. Strong Sales and Earnings Growth
The more stable and long-term the growth, the more likely the company will perform well in the future.
2. Stable or Improving Profitability
Consistent profitability indicates strong management and an ability to generate solid returns.
3. A Reasonable Price Relative to Earnings (P/E Ratio)
Even a great company can be a bad investment if you buy the stock at an overpriced valuation relative to its real, intrinsic value.
Step 1: Estimate Long-Term Sales Growth
Always start by estimating the company’s sales growth over the next five years. Your projection should be based on:
The company’s historical performance
Management’s public goals
Analysts’ forecasts
Industry-wide growth trends
Remember: sales drive earnings, so tracking this metric is critical.
Step 2: Estimate Earnings Growth
Once you’ve assessed sales growth, you can estimate the company’s expected annual earnings growth (EPS) for the next five years. Base your estimate on:
Historical earnings performance
Management's commentary
Analysts' reports and projections
⚠️ Caution: Many analyst estimates are overly optimistic. In most cases, it's safer to use a conservative growth rate that aligns with your sales forecast.
Example:
If current EPS is $1 and you project 15% annual growth, then EPS will be around $2 in five years.
Step 3: Estimate the Stock's Future Price
Estimating future EPS is crucial for the next step: assessing whether the current stock price is fair.
Many investors are great at finding high-quality companies — but end up buying them at the wrong price.
Using historical P/E ratios as a benchmark, you can forecast the highest and lowest likely P/E values over the next five years. From there, you can estimate the potential high and low prices of the stock.
Simple formulas:
High price = Estimated future EPS × Highest historical P/E
Low price = Current EPS × Lowest historical P/E
Example:
If EPS is expected to reach $2 and the peak P/E is 30, then:
2×30=$60 as the estimated high price2 × 30 = \$60 \text{ as the estimated high price}2×30=$60 as the estimated high price
Step 4: Estimate the Expected Return
Now that you’ve defined the likely price range over the next five years, compare it to the current stock price to decide if it’s a good buying opportunity.
Some stock analysis tools (including those built into the Boursa platform) divide this range into three zones:
Buy Zone: Current price is in the bottom 25% of the range
Hold Zone: Current price is in the middle
Sell Zone: Current price is in the top 25%
How Stocks Generate Returns
There are three main ways you can earn returns from owning a stock:
Dividends – cash payments from company profits distributed to shareholders
Earnings growth – which typically leads to an increase in the stock’s price over time
Valuation expansion – when the market increases the stock’s P/E ratio due to improved sentiment or performance
Final Thoughts: Investing Isn’t Just for Experts — It’s Your Opportunity Too
When selecting stocks, many investors aim for an average return of around 15% per year over five years — a target that could potentially double your investment. While this goal is ambitious and not guaranteed, the key is to focus on high-quality companies with positive long-term indicators.
Even achieving 10% annually — in line with the historical average of the S&P 500 — is a solid and respectable result.
In today’s unpredictable and volatile markets, fundamental analysis matters more than ever. For investors who follow a clear, long-term strategy, these times also bring exceptional opportunities.
The approach we shared here isn’t just for professionals. It’s accessible to everyone — and you can practice it using Boursa AI’s stock analysis tools or through our educational courses at Boursa Academy.
Start your investment journey today with a single step — one that helps you build a portfolio aligned with your vision and goals.
Do you already have a company in mind that you’d like to analyze using this method? Share it with us — and we’ll help you take your first step.
🔑 Key Terms
Price-to-Earnings Ratio (P/E Ratio) 💡 A financial metric used to evaluate a company’s stock price relative to its earnings.
Earnings Per Share (EPS) 💡 A financial measure that shows how much profit a company makes for each outstanding share. It is widely used in stock analysis to assess a company’s performance and profitability.
Dividends 💡 Cash payments made by a company to its shareholders from its realized profits — a way to share profits with the owners (investors).
