Find your investing niche

Look into these types of stocks

February 22, 2023

PRESENTED BY:

Thousands of stocks trade in the stock market every day.

It makes narrowing down your stock picks daunting. I mean, think about it…how are you supposed to filter through every public company?

Well, what if I told you there’s a simple trick to cut down your sample size to just a fraction of what you had before?

I’ll explain after a quick word from our sponsor:

It’s the gym, for your finance brain.

5-minutes per day is great, but like it or not, real gains come after putting in hours for years.

Capital Gains is an educational newsletter spun out of The Diff: a deeply analytical newsletter that applies concepts in finance, economics, and corporate strategy.

The problem is that those concepts aren’t taught in school, so the analysis tends to appeal to founders, VCs, hedge fund managers, and the like.

Whether you’re on a finance career track, trying to understand what your company’s stock options package means, or just curious about how the economy works, Capital Gains gives you the mental models you need.

Subscribe here for the free weekly email!

Now back to today’s email 🤝

Although there are thousands of stocks to choose from, there are roughly 10 categories they all fall in.

Knowing these categories helps define what kind of investor you are, and allows you to focus on a specific type of stock.

When you focus on one type of investment, you become really good at analyzing those companies.

You’ll know what to look for, what to avoid, and what to expect.

To quote the legend:

Risk comes from not knowing what you’re doing.

Warren Buffet

So today I’m going to break down 10 types of stocks and provide examples for each.

Let’s get into it.

1. Blue-chip

Well-established companies with a market cap of at least $10 billion.

Characteristics:

  • Less volatility

  • Solid financials

  • Reputable brand

  • History of growth & dividends

  • Weathered multiple economic downturns

Examples: $KO, $AAPL, $MSFT

2. Growth

Companies that are expected to grow faster than the average company.

Characteristics:

  • Higher risk

  • No dividends

  • High P/E ratio

  • High appreciation

  • Competitive advantage

Examples: $AMZN, $TSLA, $GOOGL

3. Value

Companies whose stock price is cheaper than it should be.

Characteristics:

  • Higher risk

  • Low P/B ratio

  • Low P/E ratio

  • High dividend yield

  • Low stock price relative to industry

Examples: $JPM, $PG, $VTV (Value ETF)

4. Dividend/Income

Companies that regularly pay shareholders a percentage of earnings.

Characteristics:

  • Strong cash flows

  • Moderate volatility

  • History of dividend payouts

  • Rising yields & appreciation

  • Large-established companies

Examples: $LOW, $TGT, $XOM

5. Penny

Companies whose stock price is $5 or less.

Characteristics:

  • High volatility

  • Low Liquidity

  • Smaller companies

  • Trades over the counter

  • Limited company financial history

Examples: $SB, $REI, $EAF

6. IPO

“Initial Public Offering”

When a private company becomes public by selling shares on a stock exchange.

Characteristics:

  • High volatility

  • High risk

Examples: $HOOD, $COIN, and $RBLX in 2021

7. ESG

“Environmental, Social and Governance”

Standards socially conscious investors use to evaluate investments.

Characteristics:

  • Fair wages

  • Sustainability

  • Ethical supply chains

  • Corporate transparency

  • Diverse board of directors

Examples: $MSFT, $NVDA, $NKE

8. Cyclical

Stocks that are impacted by macroeconomic changes.

Characteristics:

  • Higher volatility

  • Moves with economy

  • Typically consumer discretionary

  • Lower returns with weak economy

  • Higher returns during a strong economy

Examples: $NKE, $SBUX, $GM

9. Noncyclical

Stocks that perform well regardless of the economy.

Characteristics:

  • Essential products/services

  • Relatively stable in bear markets

  • Stable growth during bull markets

Examples: $T, $CAH, $KO

10. Common/Preferred

Common stock: Voting power, but no priority during liquidation event (most common)

Preferred stock: No voting power, but priority during liquidation event.

Investing becomes easier once you find a “niche” to invest in.

You can be a dividend investor, a growth investor, or a value investor.

Your investing niche dramatically decreases the number of stocks you have to analyze.

This ends up being less work for you, but it also leads to higher-quality research.

And profits are highly correlated with the quality of your research.

That’s it for today’s email.

Wolf.