Categories: Stock Markets

Cherry Picking in Stocks – Definition, Importance & Factors to be Considered

Having a profitable investment portfolio is every investor’s dream. Every investment in the portfolio always staying positive is a rare chance. If there was a sure shot formula to such a successful portfolio every investor would lap it up. However, investors can still have a successful portfolio based on careful analysis of the markets and cherry picking stocks that can yield good returns. 

Given below is the meaning of such cherry picking of stocks and related details for the same. 

What is the meaning of cherry picking?

Cherry picking is the art of picking quality stocks that have consistently performed better in the past. These stocks usually have a sound business model and a product that is time-tested and proved to be a worthy investment. Cherry picking of stocks is used by mutual fund managers as well as individual investors to make their fund or the portfolio respectively strong and profitable. Individual investors can follow top mutual funds as well while cherry-picking stocks as a time saving tool rather than carrying out an in-depth analysis. 

What are the factors to be considered while cherry picking stocks to invest in?

There are several factors to be considered while cherry-picking stocks that have to be considered by investors or mutual fund managers. Some of such common factors are mentioned below. 

a. Understanding the basics of the stock market

The first step while investing in stocks is a thorough understanding of the markets. Cherry picking stocks allows the investor to pick the most profitable and consistently performing stocks. Such a basis for cherry picking can be by referring to successful mutual fund managers too. However, blindly following a fund manager can be risky as the risk and return profile of the fund can be different than that of the investor. Hence, it is important to learn the basics of the stock market and all the relevant concepts before cherry picking the stocks and making a portfolio.

b. Select the approach to cherry pick stocks (target sectors or top stocks)

While picking stocks investors should first select a particular sector or a class of stocks that they want to base their portfolio on. Such selection will ensure that the risk-return profile of the investors is maintained. Also, the investors will not be bombarded with multiple stocks in the system that can potentially generate good returns. 

c. Keep track of the latest developments in the market

After selecting the target sector or a particular class of stocks for investment (like blue-chip stocks, mid-cap stocks, etc.) it is also important to keep track of all the latest developments and changes in the market related to such stocks. This will help the investors navigate the market volatility better and avoid any chances of major losses. 

d. Understand the company profile

Understanding the company profile is another important aspect that cannot be ignored while cherry picking the stocks. The various factors relating to the company profile that has to be monitored by the investors are mentioned below. 

1. Products and stage of the product in the market

The products of the company have to be able to adapt to the changing needs of the industry and need to be preferably market dominant. This will help in ensuring the stability of the stock in times of market volatility. 

2. Sales and profit projection

The sale and profit projections of the company have to be quite strong and have to be on an increasing trend on a year on year basis. A strong business model or product of the company can back such increasing sales and profit projections and ensure that the stock is a top-performing candidate that can be cherry-picked in the investor portfolio 

3. Management

The management of the company has to be quite competent to drive the business to profitability. The management should be capable of making sound business decisions that protect the viability of the business as well as ensure constant progress. This reflects in the stock price of business and makes the stock a prominent asset in a portfolio.

4. Research and development potential

The company should also invest in research and development to further enhance the efficiency and profitability of its product. The level and extent of research and development can be in line with the size of the company or as per the industry parameter.

5. Capital requirement

The capital requirement of the company also has to be considered by the investors. The projected capital requirement of the company will rely on its future prospects (like an expansion of business, diversification, etc.) which have a direct impact on the stock prices.

e. Avoid the risk of being overzealous

It is also important to be aware of the risk of over-diversification while investing in stocks. There are many stocks that are dominant in each sector or have been performing well. Such stocks can tempt investors and may divert them from their basic profile and risk-return expectations as well as increase their cost of investment which can further dilute the returns. Hence, it is advisable for the investors to stay away from being over-diversified.

Conclusion

Cherry picking stocks is one of the easiest ways of ensuring a sound portfolio from the sea of investment options available in the stock markets. It is also a good option for new or risk-averse investors to create their portfolio by referring to a few mutual funds that match the risk as well as returns expectation of the investor. 

FAQs

Can cherry picking of stocks be simply based on any mutual fund?

Investors can base their portfolio on a mutual fund but they have to ensure that such a fund has a similar risk profile. The returns of such funds also have to be more or less consistent or a top performer in their segment of stocks

Is market analysis necessary while cherry picking stocks?

Yes. Market analysis is a crucial part of the investment process as the investors have to know about the risks of investing as well as the viability of their investment.

What is the biggest advantage of referring to a mutual fund while cherry picking stocks?

The biggest advantage of referring to a mutual fund while cherry picking stocks is the time saved in the detailed analysis of such stocks to create a profitable portfolio.

What are the most common types of stocks that are often cherry picked by investors?

The most common type of stocks that are often cherry picked by investors are blue chip stocks or stocks that are pioneers in any particular sector.

Akshatha Sajumon

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