How I look for great stocks and 4 winners I found

Every investor is different and what we seek can vary. Some like safer bets like term deposits and bonds, while others are willing to take on more risk in the hope of getting a much higher return. To each his own.

When I look for promising stocks and winning companies, I have at least three initial steps to weed out less desirable companies to save myself time in searching.

1) Understandable business

If I'm going to need a new uni degree in chemical engineering or biology to fathom what a company does and how it will make money in the future, I'd rather pass on it. A good retail stock like Super Retail Group Ltd (ASX: SUL), or a slice of shares in the high growth Domino's Pizza Enterprises Ltd (ASX: DMP) fits my "circle of competence". Buy what you know and comprehend.

2) Strong financials

I have to see that a company isn't over leveraged with debt, has ample earnings and makes a very healthy return on its own investments. If they can't, how I will as a shareholder make any real money over time?  Check for high profit margins, return on equity and low debt compared to net earnings.

One powerhouse is REA Group Limited (ASX: REA), the operator of realestate.com.au. Revenue and earnings growth was at 30% and more in FY 2014, with net profit margin and ROE around 35%. This market leader's PE is a high 35, but earnings growth is forecast by analysts to be – yes, you guessed it – almost 30% annually over the next two years. That makes for a reasonably priced stock. You want rock solid companies that will be around for years.

3) Pattern of growing earnings

Any company large or small can have one great half year or year when earnings fly up. Still, does it have a track record of growing earnings consistently?  I can't predict what its profits will be in the future, yet if it can't show it reliably raised earnings in the past, how can I believe it will in the future at all?

Law firm Slater & Gordon Limited (ASX: SGH) has been growing its network of law practice offices across Australia and in the UK very successfully. Similarly, the company's earnings per share have expanded since 2007 remarkably. As you can see below, the company's EPS went from about 13 cents per share to 31.2 cps, more than doubling in about seven years. Look for reliable earners because they are more predictable.

Slater & Gordon    Annual earnings per share (cents)

Source: Morningstar