Debt Free

There are many rules to help you pick stocks or other investments out form the crowd. There are probably nearly as many of them as there investors doing the picking. Here are three that you can use to help give your investment portfolio some added zing as you head into the New Year.

Stock Picks Rule Numero Uno
Pick the stock of a company that just became, or is about to become an industry standard. One of these that’s received some press recently is Dolby Labs. I’ve been familiar with this company for many years because I owned a business in the audio / video industry and have been involved in it for decades. Not only has Dolby been the standard in cassette tape noise reduction since the dawn of time, they weren’t content to develop technology for a format with a limited lifespan.

Dolby labs has also been one of the three main companies producing surround sound formats for theatrical movie releases, and  Dolby Digital has been the standard in home surround since the days when it’s predecessor, Dolby Pro-Logic, ruled the roost. Now Dolby has gone and gotten their Dolby Digital + and Dolby Digital True HD appointed the official audio formats of the both next generation video disc standards (too bad the industry couldn’t agree on just a single next-generation video disc format, but that’s a story for another day), HD-DVD and Blu Ray Disc. They are also in car audio, cell phones, and personal media devices.

Like Microsoft(MSFT) in the early years, they are debt free and have substantial cash reserves in the bank. Dolby has fantastic consumer brand recognition, thanks to years of putting their logo in front of people in theaters, on cassette tapes and on consumer and professional audio equipment. They have only been public  Since early 2005, have an operating margin of almost 40% and their year of year quarterly revenue growth is over 25%. Even better, unless they get complacent, they should continue this for years, because they are in a growing market and they have only 1 direct competitor in the consumer space. That is DTS Inc., a good company, but they are 1/3 the size, only 20% of the revenue, and without Dolby’s portfolio of technologies, patents, and licensing deals.

Stock Picks Rule Numero Dos
Look for stocks of companies that are well positioned in small markets that are about to become very large markets. They can be production, development, or supply companies. One example here would be the bio fuels industry. In addition to the cachet such investment possess because they are perceived to be green and environ-friendly, it is a market positioned for dramatic growth in the not to distant future. Currently there are many small companies competing for dominance in the space. As the price of petro-products continues to increase, it makes the development of bio fuels economically attractive. A company or two will emerge to dominate the industry and form the backbone of a new fuel economy.

As an indicator of the growth potential in this market, the USDA reports that 75 million gallons of biodiesel were used in 2005 for transportation. This is but a drop in the bucket compared to the 38 billion gallons of diesel fuels used for transportation. The growth here will be tremendous. In 2006 the city of Cincinnati alone used 1.8 million gallons of biodiesel to power city vehicles.  In August of 2007, Louis Dreyfus Corp. of France opened the world’s largest (for a brief period) biodiesel plant in Claypool Indiana. Using Soybeans, this plant produces 88 million gallons of biodiesel every year. That is 15% more than the entire United States used of the fuel only 2 years previously.

There were 165 commercial biodiesel plants operating in the U.S. by August of 2007. The 4 other largest biodiesel plants were owned by -
- Delta Biofuels – Mississippi – 80 million gal – opened May 2007

- Archer Daniels Midland Corp. (ADM) – North Dakota – 85 million gal – opened August 2007

- Green Earth Fuels of Houston LLC – Texas – 86 million gal – opened July 2007

- Imperial Grey’s Harbor – Washington State – 100 million gal – opened in August 2007

Numerous others produce between 20 and 50 million gallons of the stuff annually. The demand for this fuel should only grow, especially as some of the problems with ethanol fuels, such as the 20% gas mileage penalty and the hydroscopic nature that makes it difficult to transport by pipeline (requires truck transport, which is much more expensive than pipelines), receive more publicity. Weather the huge use of soybeans for biodiesel substantially drives up the price of soybeans remains to be seen; any commodities investors out there?

 

Stock Picks Rule Numero Tres
Choose the stock of a company that is legislated into prominence. Anytime legislation is passed requiring, or restricting the use of a company’s products or services, there are investment opportunities created. In the case of the requirement of product or service, demand will increase. In the case of restriction or outright bans, demand for alternative products and services will grow.

An example is when states require their residents to be insured. That creates a larger market for insurance companies allows greater profits. When the U.S. and foreign governments legislated certain safety features in automobiles, such as airbags, there was obviously greater demand for all components of them.

That is one reason astute investors watch the legislative process like hawks scanning a field for mice. There are investment opportunities created in the halls of government every day. Watching for them can show you when you can profit from an opportunity, or when it is time to cut and run.

Use these 3 rules to help pick stocks that will grow your portfolio in this new year (and beyond).

 

 

UPDATE: 11-11-08 With the upcoming Obama presidency, there is a likelihood that the demand for biodiesel will continue to grow, even considering the recent drop in gasoline prices. This is due to president elect Obama's stated goals to reduce carbon emissions, which can be accomplished in part through the increased use of biodiesel. Biodiesel derived from soybeans cuts into foodstocks, driving up food prices, so look for other sources of biodiesel to be promoted, such as algae. Look at companies that are invested in new biodiesel technologies.

Take a look at this if you're trying to find good stocks to buy: Choosing stocks is no simple matter, especially if you're trying to live a normal life. It takes plenty of digging to find the best stocks to buy. Sadly most people just don't have the time or expertise to do that effectively. Recently, software has been developed that can be far better at choosing stocks than most humans. Here is an example of some of the recent stock picking software that bears looking into: Click Here to See the Stock Picking Software