3 Steps I’d Take to Identify Top Stock Picks for November 2020

Here’s how I’d unearth top stock picks with long-term growth potential during today’s uncertain economic environment.

Gold medal

Image source: Getty Images.

Discovering top stock picks may be more difficult today than it has been in recent years. The economic outlook is extremely uncertain. This could mean that many companies face challenging operating conditions that have a negative impact on their financial prospects.

As such, buying businesses with solid financial positions alongside long-term growth potential may be a sound move. Purchasing such companies when they trade at low prices may be possible due to weak investor sentiment. This could lead to impressive capital returns in the long run.

Top stock picks with long-term growth potential

A company’s long-term growth potential is likely to have a large impact on whether it proves to be a top stock pick. This year has arguably seen a more rapid shift in consumer tastes and habits than has been the case for many years. For example, the popularity of purchasing goods online has increased. Similarly, the green economy’s growth prospects seem to have gained momentum this year as governments across the world seek to invest in a low-carbon future.

As such, identifying whether a company has the right business model given the prospects for its industry may be a logical strategy for an investor take. For example, a retailer with a major online presence may be better prepared for changing market dynamics. Even if a company does not have the right business model, a plan to achieve that aim may mean that it can become a more dominant operator within its sector.

Financial strength

Of course, any top stock pick will need to survive the short term in order to prosper from any long-term economic recovery. As such, a second step for investors to take may be to analyse a company’s annual reports to gauge its financial strength.

Some companies have overlooked the importance of having a strong balance sheet over the past decade. The economic boom and improving consumer and investor confidence have led some businesses to take on excessive debt or prioritise projects with low returns. As such, it is important to check their debt levels, cash flow and overall financial position to ensure that they can survive the current economic difficulties. Businesses with solid finances may even be able to extend their market dominance at the expense of weaker peers.

Accessing low valuations

Undervalued companies could make the most appealing top stock picks at the present time. Investor sentiment is currently weak towards a number of sectors. This could mean that investors can purchase high-quality businesses while they trade at low prices.

The past performance of the stock market shows that buying stocks for less than they are worth has been a sound means of generating high returns. Using the same strategy in the current environment may prove to be equally successful when used to build a diverse portfolio of high-quality companies that are held for the long run.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

stock research, analyze data
Dividend Stocks

How Much to Invest to Get $500 in Dividends Every Month

TSX dividend stocks such as Enbridge, TD Bank, and Telus, can help you earn $500 in monthly dividend payments.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

Clean Energy Play: Is Brookfield Renewable a Good Stock for a TFSA?

Add this top renewable energy stock to your self-directed TFSA portfolio for significant long-term and tax-free wealth growth.

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Powerhouses: Canadian Stocks to Fuel Your Portfolio

These two top Canadian dividend aristocrats are some of the top stocks on the TSX to buy now and hold…

Read more »

Dial moving from 4G to 5G
Dividend Stocks

This Undervalued Dividend Stock is Worth Buying Right Now

Want an undervalued dividend stock with long-term potential and a juicy yield? Here's an option you may regret not buying…

Read more »

A worker gives a business presentation.
Dividend Stocks

1 Stock I’m Buying Hand Over Fist in July Despite the Market’s Pessimism

This top dividend stock is going through a rough patch, but don't let that count out all the growth we've…

Read more »

financial freedom sign
Investing

2 Stocks With Millionaire-Maker Potential

These two top Canadian stocks are among the best on the TSX, and each has the potential to be millionaire-maker…

Read more »

Piggy bank next to a financial report
Stocks for Beginners

Is It Finally the Right Time to Buy Bank Stocks?

Canadian bank stocks are some of the most secure investments out there, but of them all, this bank stock is…

Read more »

clock time
Investing

3 Blue-Chip Stocks Every Canadian Should Own

Want some reliable blue-chip Canadian stocks to buy and hold for the next 10 years? These three stocks are worth…

Read more »