What's the folly with this stock selection strategy

Question

I am very leery of investing in Stocks over here. I have tested some other Asian markets and gotten some returns.

Rather than have my money depreciate (less interest than Current Inflation ), I'd safely set it aside, but where should I put it? When FaceBook IPO came out I thought of buying some 2K FaceBook stocks, but after reading around a bit I decided against this. This was a mistake as it would be valued close to 100K today.

I have the following questions:

1. How do I identify stocks like Facebook - a company performing well that takes out its IPO. Are there any companies that look to be in a similar situation?
2. I have used the Google finance stock screener which produced the attached image. I asked for ROI TTM % age > 20 part of the criteria . One such result seems misleading for this criteria: OTCMKTS:RNFU Rongfu Aquaculture, Inc. @0.0030 0.0000 (0.00%). The slopes heading down, how is this a +VE ROI? Is there something amiss with these results?
3. Can you suggest a better criteria

Thanks in advance.

Answer 1

You are probably going to hate my answer, but...

1. If there was an easy way to ID stocks like FB that were going to do what FB did, then those stocks wouldn't exist and do that because they would be priced higher at the IPO. The fact is there is always some doubt, no one knows the future, and sometimes value only becomes clear with time.

2. Everyone wants to buy a stock before it rises right? It will only be worth a rise if it makes more profit though, and once it is established as making more profit the price will be already up, because why wouldn't it be? That means to buy a real winner you have to buy before it is completely obvious to everyone that it is going to make more profit in the future, and that means stock prices trade at speculative prices, based on expected future performance, not current or past performance. Now I'm not saying past and future performance has nothing in common, but there is a reason that a thousand financially oriented websites quote a disclaimer like "past performance is not necessarily a guide to future performance". Now maybe this is sort of obvious, but looking at your image, excluding things like market capital that you've not restricted, the PE ratio is based on CURRENT price and PAST earnings, the dividend yield is based on PAST publications of what the dividend will be and CURRENT price, the price to book is based on PAST publication of the company balance sheet and CURRENT price, the EPS is based on PAST earnings and the published number of shares, and the ROI and net profit margin in based on published PAST profits and earnings and costs and number of shares. So it must be understood that every criteria chosen is PAST data that analysts have been looking at for a lot longer than you have with a lot more additional information and experience with it. The only information that is even CURRENT is the price. Thus, my ultimate conclusive point is, you can't based your stock picks on criteria like this because it's based on past information and current stock price, and the current stock price is based on the markets opinion of relative future performance.

3. The only way to make a good stock pick is understand the business, understand its market, and possibly understand world economics as it pertains to that market and business. You can use various criteria as an initial filter to find companies and investigate them, but which criteria you use is entirely your preference. You might invest only in profitable companies (ones that make money and probably pay regular dividends), thus excluding something like an oil exploration company, which will just lose money, and lose it, and lose some more, forever... unless it hits the jackpot, in which case you might suddenly find yourself sitting on a huge profit. It's a question of risk and preference.

Regarding your concern for false data. Google defines the Return on investment (TTM) (%) as:

Trailing twelve month Income after taxes divided by the average (Total Long-Term Debt + Long-Term Liabilities + Shareholders Equity), expressed as a percentage.

If you really think they have it wrong you could contact them, but it's probably correct for whatever past data or last annual financial results it's based on.