5 ways to select the best stocks to buy now

Jon Smith explains some of the ways he trims down a list of the potential best stocks to buy now to allow him to make smarter decisions.

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As of September, there were just over 2,000 listed stocks on the London Stock Exchange. That’s a large amount, considering that I like to research any potential stock that I’m considering buying. Logically, it would help to have a few different ways to trim down my watchlist to a much more manageable size. Then I can pick a handful of the best stocks to buy now. 

Weighing up income versus growth aims

First, I need to filter based on my objective. Primarily this will come down to whether I’m looking for income or growth. The best stocks to buy now from a dividend point of view are unlikely to be the same as those with high growth potential. So I need to make a choice and then move on.

If I’m looking for income, then I’d filter based on the dividend yield. An easy way to start is simply getting rid of any stock that isn’t paying much of a dividend at the moment. For example, if I cut out any FTSE 100 stock with a dividend yield of less than 1%, I’d eliminate 25% of the index. This is a quick and easy way for me to reduce the stocks I’m considering.

If I’m looking for share price growth, it’s a little harder. I could think that I’ll only look at stocks that have gained 10% or more in the past year. But sometimes the best stocks to buy now for growth are those that have seen a share price drop recently. Or a stock might have seen strong growth over the past two years but just missed out over a shorter time frame. 

Therefore, I’d filter both for stocks that have seen large gains or large losses over both a one and two-year period. 

Filtering down to find the best stocks

With my reduced list, I can now try to be more specific in what I target. I could look to select certain sectors. For example, if I’m seeking income stocks within financial services, I can apply this sector-specific tilt. I can use this either to pick sectors that typically contain the sort of stocks I’m looking for, or to choose those that I think could perform well into the future.

Another way I can try to find the best stocks to buy now is to look at the latest quarterly earnings reports. As a case study, I might have found HSBC in my filters for a growth stock. I can then look at the latest Q3 earnings and see that it beat expectations. This can provide the short-term impetus needed to decide whether momentum is with the particular stock.

On the flipside, a stock might pass through all the above filters, but its latest results might be disappointing. This is important as it’s the results that are hot of the press that give me the best indication of how the company is performing right now. 

Overall, there are many ways I can try to find the best stocks to buy now. By dividing my list into income and growth stocks, along with other specific filers, I can hopefully give myself the best chance of getting them.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

jonathansmith1 has no position in any share mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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