Topic: How To Invest

Investor Toolkit: How our ratings system finds the best stocks: Part 1

Investor Toolkit: Top stock picks

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you specific advice and insights, such as how we select our top stock picks. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “Use our TSINetwork rating system to pick winning stocks.”

Every time we recommend a stock in one of our investment newsletters, we display our TSINetwork ratings (Highest Quality, Above Average, Average, Extra Risk, Speculative and Start-up) next to that stock.

We award these ratings on a point system. We give the points based on nine key factors that determine a company’s ability to survive a business setback and go on to greater success when conditions improve.

Companies with 11 or 12 points fall into the top category: Highest Quality. Those with eight to 10 points are of Above Average quality. Six or seven points means they are of Average quality; four or five points, Extra Risk; two to three points, Speculative; one or no points, Start-up.

This week in the Investor Toolkit, we’ll examine four of these key factors that help us make our top stock picks.

  1. One point for offering products or services that benefit from habitual behaviour: These are firms that sell products that consumers must buy, no matter what the economy is doing. These companies can add stability to your portfolio. Food outlets, such as Tim Hortons (symbol TIH on Toronto), a stock we analyze in our flagship advisory, The Successful Investor, are good examples of these types of firms.

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  1. One point for freedom from business cycles. Demand periodically dries up in “cyclical” businesses, such as resources and manufacturing. That’s why you need to diversify. Invest in utility, finance and consumer stocks, along with resources and manufacturers.
  2. One point for the ability to profit from secular trends, or two points for the ability to profit from two or more secular trends: These trends outlast ordinary business booms and busts, because they reflect ongoing social change. Free trade and rising environmentalism are just two examples of secular trends.
  3. One point for industry prominence—two points for industry dominance: Companies that are prominent, or dominant, in their industries are particularly well positioned to weather economic downturns and other setbacks, and fend off new competitors. Top stock picks in this category include firms like Saputo Corp. (symbol SAP on Toronto).

    The company is Canada’s largest producer of dairy products, including milk, butter and cheese. Its main brands include Neilson, Stella and Dairyland. It also has operations in the U.S. and Argentina. A substantial 97% of its sales come from dairy products, the rest from snacks and cakes.

    With its dominant position in Canada, Saputo is seeking out buying opportunities in the U.S. It has purchased a number of smaller dairy companies and made them more profitable.

    Facing rising costs and higher prices for milk, Saputo’s response is to improve its efficiency, chiefly by building a new Toronto warehouse to replace older facilities and merge some of its dairy operations. While these moves will cost $4.6 million, they are expected to save the company $6.5 million annually starting in fiscal 2012.

Next Wednesday, January 25, 2012, we’ll take an in-depth look at the other five factors of our ratings system and the benefits they offer.

As a member of TSI Network, you may have already seen Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada. If you haven’t yet read this new free report, click here to download your copy today. I’d also encourage you to share the report with a friend. It’s my “thank you” just for signing up for my free daily updates.

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