Apprenticed Investor: Six Keys to Stock Selection

This suggests that even the best stock in a lousy sector will do poorly when that sector is out of favor. At the same time, any old company in a hot sector will do well.

For example, personal computers went nowhere after all of the Y2K upgrades were completed. Indeed, even Dell (DELL Quote) has been range-bound for the past three years. The same goes for the networking stocks -- what company is better than Cisco (CSCO Quote)?

On the other hand, you could have thrown a dart at oil companies such as BP (BP Quote), ConocoPhillips (COP Quote) and Exxon Mobil (XOM Quote) or homebuilders, including Toll Brothers (TOL Quote) and Pulte (PHM Quote), and they have been screamers in the past year.

Checking out the sector also gives you an idea of who the competitors are.

The same advice about individual charts also applies to sectors -- watch those sectors near the bottom of the performance rankings for signs of an impending turnaround.

Only buy stocks in good sectors.

What's Your Thesis?

Why buy this particular stock, in this sector, and why now?

That may sound like an obvious question, but it's often overlooked. You should have a specific reason to buy something, one that you can articulate in a sentence or two. It can be something fundamental, i.e., fiber to the premises. Have you found an overlooked value, do you have some insight into a new product, do you believe the new management can turn the ship around? All that is part of your investment thesis.