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3 steps I’d take today to find top stock picks for 2021

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Finding top stock picks for 2021 may seem like a tough task to some investors. The 2020 stock market crash and an uncertain economic outlook mean the prospects for many companies are difficult to work out.

However, I would focus on companies with solid financial positions and wide economic moats when they trade at low prices.That way, it may be possible to unearth the best shares for 2021. They could produce the strongest performances over the long run.

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Judging financial strength among potential top stock picks

The uncertain economic outlook means that today’s top stock picks may be those businesses with solid financial positions. They may be able to more easily overcome what could prove to be a tough period for many industries and regions over the coming months.

Analysing a company’s financial position can be done by taking a look at its annual report and recent trading updates. They provide information on areas such as its debt levels, which is always important when weighing up an investment. They can also show how many times its operating profit covered interest costs and the amount of liquidity it has available. All of these areas can make a real difference to its ability to survive what could be a volatile 2021. They can impact how it is able use an uncertain period to its advantage in terms of making acquisitions and innovating.

Analysing a company’s competitive position

Top stock picks for 2021 may also be those companies that can outperform their sector peers via a competitive advantage. For example, they may have a unique product, enjoy strong brand loyalty or have a lower cost base than rivals. This can make a real difference to their profitability both in difficult economic circumstances and when a period of strong growth takes place.

Therefore, focusing on a company’s competitors could be a sound move. It may highlight the strengths and weaknesses of a business that are not always obvious. They may make an impact on how successful it proves to be from an investment perspective.

Ensuring a margin of safety is obtained

As ever, the top stock picks of today could prove to be those companies that trade at a large discount to their intrinsic values. In other words, their share prices currently undervalue their long-term financial prospects. This may provide them with greater scope to deliver capital appreciation over the coming years.

Assessing a company’s value, in terms of metrics such as price-to-earnings (P/E) ratio and price-to-book (P/B) ratio, on a standalone and relative basis could be worthwhile. It may allow an investor to determine which companies in a specific sector offer the best value for money. They may be among the top performers in 2021 and beyond. And they could have the biggest positive impact on an investor’s portfolio.

A Top Share with Enormous Growth Potential

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Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business (yes, despite the pandemic!).

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has previously helped it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 it returned a whopping £150m+ to shareholders in dividends and buybacks!

And here’s the really exciting part…

While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

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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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