How to Find a Winning Stock for 2022

2021 has ended on a high with stock markets around the world in recovery mode.

The Straits Times Index (SGX: ^STI) posted a good return of close to 10% for the year while the bellwether US index S&P 500 (INDEXSP: .INX) was up nearly 30%.

Many stocks enjoyed a strong recovery as demand returned and economic conditions improved.

As 2022 rolls in, it’s time once again to hunt for winning stocks that can lift your portfolio’s value higher in this year and beyond.

Some notable winners in 2021 included fintech company iFAST Corporation Limited (SGX: AIY), whose share price soared by 158%.

Others, such as PropNex Limited (SGX: OYY) and The Hour Glass Limited (SGX: AGS), saw their stocks surge by 119% and 152%, respectively.

So, how should investors go about identifying a potential winning stock for 2022?

Here are five attributes that you should look closely at before you deploy your money into a stock.

Competitive moat

It’s prudent to quickly assess the dynamics of the industry in which the company is.

As vaccines roll out globally and borders start reopening, there may be structural changes that affect the demand and supply of certain goods and services.

For example, glove companies such as Top Glove Corporation Berhad (SGX: BVA) have seen demand plunge as countries had stockpiled nitrile gloves in 2020.

And as 2021 saw a major vaccine roll-out, earnings also fell off a cliff as demand normalised.

By assessing the strength of a company’s moat, you can determine if it will continue to do well moving forward.

Gross margin

The gross profit margin is calculated by taking the gross profit of a business divided by its revenue.

A higher gross margin indicates that the business has strong pricing power, allowing it to survive better during tough times.

A high gross margin alone is not indicative of a strong business.

Investors also need to observe how consistent the gross margin is.

Procter and Gamble (NYSE: PG), a manufacturer of consumer products such as shampoo, diapers and detergent, has reported rising gross margins in the last three years.

The gross margin for its fiscal year ended 30 June 2019 (FY2019) stood at 48.6%, but have risen to 51.2% at the end of FY2021.

Free cash flow

Another sign of a great business is its ability to churn out large amounts of free cash flow (FCF).

FCF is what’s left after you deduct a company’s capital expenditure from its operating cash flow.

Businesses that generate consistent levels of FCF are more resilient when faced with adversity.

High levels of FCF provides management with more options as to how to deploy the money.

It could be used for share buybacks, an increase in dividends, or for opportunistic acquisitions to enhance shareholder value.

Dividends

The fourth attribute that investors should look for are businesses that have a long track record of paying dividends.

As mentioned earlier, companies that can produce consistent FCF usually are also able to maintain their dividend payments.

Dividend-paying companies usually possess a sturdy balance sheet and a robust business model.

These two attributes should allow you to have a restful night’s sleep even during economic downturns.

Some companies, such as Nike (NYSE: NKE) and Tractor Supply Company (NASDAQ: TSCO), have even managed to raise their dividends amid the pandemic.

Procter and Gamble has increased its dividend without fail for 65 consecutive years, well regarded as one of the most consistent dividend payers.

Businesses that can raise their dividends through thick and thin make great investments for the long term.

With such an impressive track record, investors can rest assured that the company has the potential to continue increasing its dividend.

Risks

The final attribute to look out for are the risks associated with the business.

As we transition to a new normal, there could be new risks emerging that could threaten business performance.

These risks may not immediately manifest themselves but may gradually show up over time.

It’s important to remain vigilant and to continue monitoring the business to ensure it can manage these risks well.

If you study how a company handled prior crises, you may also get a better idea of whether it can survive the next one.

By weighing the risks against the rewards, you can then arrive at a more informed investment decision.

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Disclaimer: Royston Yang owns shares of Nike, Tractor Supply Company and iFAST Corporation Limited.

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