One of the big problems for those that work day-in and day-out in the stock market is that they tend to have tunnel vision when it comes to picking stocks. Even worse, the tunnel often looks backward, not forward. You would think that it would be very easy for them to figure out how to invest, but this is not always the case. All too often they are picking stocks based on what happened in the last market cycle and not what is happening right now in the stock market. Focusing on one or two financial indicators will work for one market cycle, but not the next. What this means is that investors will have above average returns for a few years, and then below average returns for the next few. As more than 80% of all money managers fail to outperform the market, it is easy to see that this one or two factor approach is not the way to build wealth over time.

How to Invest Money in the Stock Market

Over the past 30 plus years, I have assembled a massive database of stocks with all of the individual companies’ financial data as well as their price movements. My staff and I are constantly sorting though this data to find exactly what it is that will help propel stock prices higher at any given moment. With the help of this database and our sophisticated statistical tools and measurements we can identify what is working NOW on Wall Street, not yesterday. The view is always better through the front windshield than in the rearview, and that’s what we want to do for our subscribers. We want to find what is going to work now and tomorrow, not what used to work.

An Eight-Point Checklist

Now, I approach stock-picking like a lot of folks approach buying a car. When you go to buy a car you look at the gas mileage, the warranty, the horsepower, etc.  You want to know what you’re getting in a stock, so you need to look “under its hood. That’s why I insist on checking a company’s fundamentals.  Things such as sales growth—are they selling their product at a good clip and increasing sales? Or earnings growth—is the company making money and increasing its profits quarter to quarter?

I focus on eight fundamentals in particular. These are fundamentals that I am constantly stressing:

1. Positive Earnings Revisions. I like to see stocks that have had their earnings estimates increased by Wall Street analysts. This usually tips us off to a stock that’s about to “beat earnings.”

2. Positive Earnings Surprises. Speaking of beating earnings, I also look to see if a stock has been able to beat its earnings estimates, and by how much. This is an important number to watch because it often tells me about a stock that Wall Street isn’t paying much attention to or doesn’t yet “get.”

3. Increasing Sales. I also like to see a company that can grow its sales over time. Why? Because it’s one number that is hard to fake. My background is in accounting, and I’ve always made sure to steer away from companies that use questionable accounting practices. Sales growth is a solid indicator.

4. Expanding Operating Margins. This simply tells me if earnings are growing faster than sales. A company that’s able to expand its operating margins is usually a company that has a dominant position in its industry. This company can raise prices without seeing a drop-off in sales. That’s a nice place to be.

5. Free Cash Flow. This tells me how much money a company has left over after paying for the costs of its business. Having a strong cash flow is important because it allows a company to invest more resources in growing its business.

6. Earnings Growth. This is at the heart of all good financial analysis, and I rely on it as well. As long as any company is able to grow its earnings consistently, its stock will do well.

7. Positive Earnings Momentum. It’s not enough for me to see a company's earnings growth—I also want to see its rate of growth increase.

8. Return on Equity, or ROE. This is the gold standard. ROE tells me how efficiently a company is managing its resources. I can’t interview every senior manager at a company, so I like to think of ROE as a report card for management.

Together these eight fundamentals will help you find the best stocks on Wall Street.  There are a number of websites out there (Yahoo Finance, MSN Money, etc.) that allow you to access such information on virtually any stock—quickly. 

Of course, I give investors like you FREE access to my extensive stock-rating database, PortfolioGrader Pro.  Simply log in and you can analyze nearly 5,000 stocks on these eight fundamental criteria (plus a special quantitative variable that measures buying pressure.)

How to Measure What’s Working NOW

We continually test and check which variables are strongest right now and weight our stock-picking models accordingly. Sometimes one factor will be having a bigger impact than the others. Thanks to our extensive research we will find this and change our models accordingly. So simply log in to PortfolioGrader Pro regularly for advice on the right stocks at any point in the market cycle.

Or sign up for one of my investing services, where I’ll do all heavy lifting for you, filling you in on the shifts taking place on Wall Street and recommending the best stocks to buy and sell. Click here for more details on each.

Our goal, as always, is to provide investors with the smoothest possible path to the big profits that can be had by investing in the best growth stocks at the right time. Focusing on what is working right now in the stock market rather than what worked yesterday or last year is an important way we aim to accomplish this.

Interested in learning more about the 8 must-have variables of a winning stock?  Check out my new best-selling book, The Little Book That Makes You Rich.

P.S. Now that you know what makes a stock worth buying, how do you when it's time to sell it? Check out my article on the 2 critical factors I look for when it comes to selling.