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How to Identify the Most Promising Companies in The Stock Market?

This year has been a challenging one for investors and conditions may not necessarily improve as the macroeconomic landscape is shifting rapidly in response to relatively uncontrollable variables such as high inflation and rising geopolitical tensions.

However, a decline such as the one equities have experienced this year is also creating incredible opportunities for investors who manage to identify the best companies in this vast universe.

A well-known adage in Wall Street says that when volatility increases sharply, all correlations go to one. This means that nearly all assets in the marketplace face a similar faith despite not being necessarily affected in the same way.

Think of the pandemic crash of 2020. Companies like Microsoft – a tech giant with a healthy balance sheet and a solid business – experienced a 30% decline in their share value despite their business not being as affected as others by the health crisis.

With this in mind, it is plausible to think that this bear market, which was primarily induced by the actions of the Federal Reserve, may be creating opportunities in the stock market that may last very little as investors will eventually realize that some stocks are just to cheap to pass on them.

In this article, we share some key characteristics that the best companies share that can help investors in identifying them while they are trading below their fair value. Some of the data you will need you may get from your favorite stock market app while some other information will require a bit more digging.

#1 – Strong brands and loyal customer base

Companies may experience one-time boosts in their financial performance due to certain events or while their products are trending. However, the best businesses, and those that survive the longest, are the ones that have a strong brand that has progressively created a deep bond with their customers.

These customers are not just going to ditch their favorite products just because a competitor popped up all of the sudden and that creates durable success. Warren Buffett, one of the best investors of our time, calls this an “ economic moat”. A sizable barricade that others can’t just easily walk over.

#2 – Pricing power

In an inflationary environment such as the one the world is entering, companies that can pass on price increases to customers without immediately reducing their business volumes and profits are going to do better than those whose price increases will have to be either absorbed in the form of lower profit margins or passed on with negative consequences.

Therefore, the most promising companies in 2022 are those that have strong pricing power. Think of Coca-Cola. Will people stop buying a can just because its price has increased by 10 cents? That is certainly unlikely.

#3 – Effective leadership

The leadership team of a firm is the captains of the boat. They are in charge of steering the ship appropriately to avoid the storm or navigate through it without taking as little damage as possible.

A management team that has made void promises for years and whose ability to execute is in question spells trouble, even if the business’s economics are good. In turn, an effective leadership team with a proven track record of wise decision-making and precise business acumen helps shareholders sleep better knowing that their venture is in good hands.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes

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