Selecting individual stocks is never an easy task. Business is a complex system. Why are some stocks better choices than others? For example, if you want to invest in a pharmaceutical company, should you choose Pfizer (PFE) or Johnson & Johnson (JNJ)? Which one? While it’s impossible to declare with certainty whether a stock will be a winner, there are some things to consider to help guide your decision.
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growth potential
A company’s future growth prospects, or at least the market’s perception of those growth prospects, is one of the biggest factors in determining stock prices in the market. PFE and JNJ are both mature businesses, so neither is expected to grow rapidly, but they’re still worth keeping an eye on. The easiest way for individual investors to get a feel for a stock’s outlook is to look at analysts’ average growth rates. Investment and research firms employ analysts who specialize in tracking specific companies, and their forecasts are usually fairly accurate. The analyst currently predicts that JNJ’s average annual growth rate over the next five years will be 4.84%. Pfizer, on the other hand, is actually expected to shrink, posting -1.23% growth in the same period.
evaluation
The reason why considering valuation is so important is because the price you pay ultimately determines your return on investment. Even the best business in the world can be a bad investment if you pay too much. One of the most common valuation metrics used for stocks is the price-to-earnings ratio (P/E). JNJ currently trades at a trailing 12-month P/E of around 10.5x, which is a pretty reasonable valuation for a high-quality company. Pfizer’s trailing 12-month P/E ratio is negative, indicating that it has actually been operating in the red over the past 12 months.
Edge: Johnson & Johnson
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Both PFE and JNJ are high-quality companies, but JNJ appears to be the better choice at this point, given its growth prospects over the next five years and the current price-to-earnings (or loss) relationship. That may not be the case in the future. Things change quickly in the stock market. Always do your own research before investing.
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This article originally appeared on GOBankingRates.com: Which pharmaceutical companies are the best investments?
