3 things I look for when buying stocks for my Stocks and Shares ISA

There are many different ways to invest within a Stocks and Shares ISA. Some people like to invest in dividend stocks to generate income while others like to load up on penny stocks in the hope of generating explosive gains.

Personally, I try to find stocks that have the potential to generate strong, market-beating returns over the long run, but that donât carry an excessive level of risk. With that in mind, here are three things I look for when selecting stocks for my ISA.

A long-term growth driver

Whenever Iâm assessing a stock, the first thing I look for is a long-term growth driver. Iâm looking for a trend or theme thatâs going to help push the companyâs revenues higher (such as digital transformation, the ageing population, etc)

If I canât see a long-term growth driver, I almost always pass on the stock. Because I’ve found that companies that are growing tend to be better investments than those that are not.

Plenty of quality

If a company/stock meets the first criterion, the next thing I look for is âqualityâ. Now, quality means different things to different people. However, I typically define it is as a company with:

A wide economic moat (meaning competitors canât easily steal market share)
A solid-track record in terms of top-line growth
A high level of profitability (I look at return on capital employed or ‘ROCE’)
A solid balance sheet
A good management team

Why do I focus on quality? Because research shows that over the long run, high-quality businesses tend to be better (and less risky) investments than low-quality ones.

We can see this in the performance of the MSCI World Quality index. It has returned about 13.6% per year over the last 10 years versus 11.2% for the regular MSCI World index.

A reasonable valuation

Finally, I look for a âreasonableâ valuation. I acknowledge the fact that if a company is top class, itâs probably going to have a higher price/valuation than a company thatâs a dud. Therefore, Iâm willing to pay up for quality. I just donât want to overpay.

So, for example, I might be comfortable with a price-to-earnings (P/E) ratio in the 20s or 30s if a company is world class. Iâll probably pass on a stock if the P/E ratio is over 100, however (not always though).

A stock Iâve been buying

What does this all look like in practice? Well, one stock Iâve been buying this year is Salesforce (NYSE: CRM). Itâs a leading software company that specialises in customer relationship management solutions.

The big trend this business is benefitting from is digital transformation. With Salesforceâs solutions (which now include AI agents), businesses can potentially be far more productive and efficient.

In terms of quality, thereâs plenty. Salesforce has a high market share, sticky customers, a founder CEO, a good track record in terms of revenue growth, a rising ROCE, and a solid balance sheet.

Finally, the valuation seems very reasonable. Currently, the P/E ratio is in the low 20s, which isnât high for a world-class software company.

Now of course, this stock isnât perfect. Today, Salesforce has quite a lot of competition â which is a risk.

Overall though, I see a lot of appeal (and believe it’s worth considering). To my mind, this stock has the potential to deliver attractive returns in the years ahead.

The post 3 things I look for when buying stocks for my Stocks and Shares ISA appeared first on The Motley Fool UK.

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Edward Sheldon has positions in Salesforce. The Motley Fool UK has recommended Salesforce. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.