How to pick the best stocks

Picking stocks isn't about tips or hunches. It's a repeatable process: work out whether the business is any good, work out what it's worth, then only buy when the price is below that. Here's the method.

By Nathan Wickham-Hurd · Founder, Oak Growth · First-class Economics & Finance, MBA · Last reviewed July 2026

Two questions, in this order

Every stock decision comes down to two questions, and the order matters. First: is this a good business? Second: is it trading below what it’s worth? Get them the wrong way round and you end up buying cheap rubbish — the classic value trap.

Step one: judge the business

Does it earn well on its capital?

Return on equity consistently above 15–18% shows the company turns each pound of capital into strong profit. One good year is luck; a decade of it is a good business.

Does it generate real cash?

Accounting profit can be massaged; cash is harder to fake. Strong free cash flow means the profits are real and can fund dividends, buybacks or growth.

Is the balance sheet safe?

A debt-to-equity ratio below about 0.5 means the company isn't relying on borrowing to flatter its returns, and can survive a downturn.

Does it have a moat?

A durable advantage — a brand, a network, high switching costs — that stops rivals competing the profits away. See our guide to economic moats.

Step two: judge the price

A wonderful business bought at a terrible price is still a bad investment. Estimate the company’s intrinsic value — what the future cash it generates is worth today — and compare that to the share price.

The gap between the two is your margin of safety. Buying at a meaningful discount means you can be somewhat wrong about the business and still not lose money. That cushion is the whole point.

What to ignore: price alone. A stock near its 52-week low isn’t automatically cheap, and one near its high isn’t automatically expensive. Price history tells you nothing about value — only intrinsic value versus price does.

Step three: stay in your circle

Buffett’s rule: only buy businesses you actually understand. If you can’t explain how a company makes money in a sentence, you can’t judge whether its future cash flows are plausible — and the whole valuation rests on that.

Doing it consistently

The method is simple; applying it to hundreds of companies by hand isn’t. That’s the problem Oak Growth solves — it runs these tests across 1,000+ stocks and shows which pass all four quality pillars at a genuine discount.

See stocks that pass all four tests

Oak Growth applies these exact checks — returns on capital, cash flow, debt, moat and margin of safety — across 1,000+ US, UK and global stocks.

Explore Oak Growth

Common questions

How do you pick good stocks as a beginner?

Start by judging the business: consistent return on equity above 15%, strong free cash flow, low debt, and a durable competitive advantage. Only then look at price — buy when the shares trade below your estimate of intrinsic value.

What should I look for before buying a stock?

Four things: does it earn high returns on capital, does it generate real cash, is its debt low, and does it have a moat? Then check whether the price sits below intrinsic value, giving you a margin of safety.

Is a low P/E ratio a good way to pick stocks?

On its own, no. A low P/E can mean a bargain or a declining business. Combine it with return on equity, debt levels and cash flow to tell the difference between genuine value and a value trap.