Day6 Education: 3 tips for choosing good companies

Hey, tigers:

We have introduced the first and second step of the classic strategies.

Let’s review first，Let's review the content of the previous days.

DAY1：5 practical knowledge of US stocks

DAY 2 Education：two directions of US stocks

Day3 Education：5 types of orders for US stock trading

DAY4 Education：Finish your order by useful functions

Day5 Education： Fundamental investing strategies

Today, I will continue to introduce the second step: how to choose a good industry and find a good company.
①Industry classification
②Good industry
③Find a good company

1. Industry classification:

Most of the industry classification standards for US stocks use GICS, which is one of the most authoritative classification methods for US stocks.ccording to the official classification of GICS, GICS has a total of four layers; including 11 economic sectors, 24 industry groups, 69 industries and 158 sub-industries.Of course, you don't need to memorize so many classification criteria, you only need to understand the 11 economic sectors.

The 11 economic sectors are Basic Materials, Consumer Staples , Consumer Discretionary , Energy, Finance, Healthcare, Industry, Information technology, telecommunications services , public utilities, real estate.

2. Good industry

@Tiger_Academy has selected four good industries for you, namely information technology, energy industry, medical industry and consumer staples industry.

This is not an selection randomly, here are the reasons for choice:The information technology industry includes sub-industries such as software and services, technical hardware and equipment, and semiconductors. These industries are hard technology industries, which attract the world's top technical people and have the strongest industry barriers. $苹果(AAPL)$ , $微软(MSFT)$ , $谷歌(GOOG)$ , etc.

In this industry, there are well-known companies all over the world.
The choice of the energy industry is due to global warming. In order to save the deteriorating ecological environment, major countries in the world are actively advocating the development of new energy industries and getting rid of the consumption of traditional energy. This process will incubate many clean energy companies with good future growth.

In addition to responding to the new crown epidemic that is raging around the world, another important reason for choosing the medical industry is that the aging of the global population is becoming more and more serious, and the reliance on innovative drugs and medical devices is also increasing.

Finally, there is the consumer staples industry, which is also known as one of the most prone to big bull stocks. Consumer staples have relatively stable demand, and these every day purchases are indispensable regardless of economic conditions.It is because of this very stable demand that the consumer staples industry is one of Buffett's favorite industries.3. Good companyIn the U.S. stock market, to find high-quality companies, you must also have two abilities:

①Can read financial reports

②will be valued
How to read financial reports?

We will talk about the details after this column, but today we will focus on valuation.
No matter how good a company's financial quality is, as long as the stock price is not cheap, you may take over at a high level and become a taker. Therefore, on the premise of confirming that a company's financial data is excellent, and finding a suitable transaction price, the probability of future profitability will be greater.
Generally speaking, you need to learn three valuation metrics, namely:
Price Earnings Ratio(PE);
Price-to-Book Ratio(PB);
Price-to-Sales(PS).
The first valuation indicator is PE, and its formula is: PE = stock price per share / earnings per share = total market value of the company / net profit of the company.
PE represents how many years it takes to invest in an asset to repay the capital. The smaller the PE value, the faster the repayment speed.
The second valuation indicator is PB, which calculates the company as follows: PB = stock price per share / net assets per share = total market value of the company / net assets of the company.
PB refers to how much you spend on buying an asset. When purchasing an asset, the lower the cost price, the better, so usually the lower the PB value, the better.
The third valuation indicator is PS, and its calculation formula is: PS = stock price / sales per share = company's total market value / company's main business income.
The more the main business income, the lower the PS value; therefore, the lower the price-to-sales ratio PS, usually means the greater the investment value of the company's stock.

Another point you need to remember is that for mature companies, PE and PB are usually combined for valuation, while for high-growth companies that have not yet made profits, it is more reliable to use the price-to-sales ratio PS for valuation. For cyclical industries, the market prefers to use PB for valuation.
These three values are in the Tiger Trade APP. After entering the stock code, click "Analyze", and you can see it.Taking Apple as an example, the current 5-year PE valuation of Apple is in the conventional area, which is in the middle position; the 5-year PB valuation is in the high area, which is in a relatively expensive position; in combination, the current valuation of Apple is in the past 5 years. Mid-high location, not cheap.

Well, the second step of the investment strategy, you have mastered it here.
The next issue, the final step in our strategy, uses technical indicators to choose buy and sell prices.
See you next time!