Stock market crash: 3 criteria to help you profit from the FTSE 100

first_img Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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. See all posts by Rachael FitzGerald-Finch “This Stock Could Be Like Buying Amazon in 1997” Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. 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Enter Your Email Addresscenter_img If you want to profit from the FTSE 100, I can’t think of a better time to do it than during/after a stock market crash. You see, even great companies can often be speculative investments. But a market crash can remove some, if not all, of the ‘speculative’ bit.Often, for many FTSE 100 companies, the price you pay can be far higher than the actual tangible value of the company on its accounts — its net asset value (NAV). Indeed, this is why many value investors will often look for stocks trading at prices close to the NAV figure. And after the coronavirus crash, there are definitely more of these firms in the Footsie.5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…And if you click here we’ll show you something that could be key to unlocking 5G’s full potential…However, a stock is not necessarily a great investment just because it’s trading near its NAV. If you want to profit from the bear market, you need to find a stock with three additional factors: a moderate price/earnings (P/E) ratio, a strong financial position, and a realistic prospect of future earnings.1. Moderate P/E ratio for the FTSE 100The P/E ratio is the current share price divided by the earnings per share (EPS). It gives a rough idea as to how a firm’s price compares with its actual value. My advice is to work this out this yourself using the average EPS figure from the last three years and the current price. This will give you the best estimate of earnings because it evens out fluctuations.The late financial sage Benjamin Graham advised limiting your company selection to stocks whose average P/E is no higher than 15. I can’t disagree with him, but bear in mind that a normal P/E range for one industry will differ from another one.Due to the crash, many Footsie companies will now be trading on a lower P/E than previously, meaning values are better aligned to prices. 2. A strong financial positionRight now, a company needs a sizeable pot of working capital to get it through the hard times. Benjamin Graham used a current ratio test of 2:1. This means that current assets should be twice the current liabilities. This ratio, and a long-term debt figure lower than the amount of working capital, are good indications that the firm will likely have the cash flow to survive the bear market.3. Prospect of future earningsA realistic prospect of future earnings implies a well-managed company with stable income and some year-on-year growth. It’s a good sign if a firm can grow EPS year-on-year for a decade or more, through different stages of the business cycle and varying economic climates. Positive earnings per share for the last 10 years is a good test. Even better if a firm has increased its EPS by one-third over that 10-year period. This test is tough enough to eliminate risky firms but not too restrictive when it comes to choosing stocks. The 10-year period is long enough to see if management knows what it’s doing, and will include good and bad times.  An investor needs to be realistic with expectations after a stock market crash. Forget brilliant company prospects for the time being. However, if you focus your stock picking on the above three criteria, I think you’ll find some good FTSE 100 investments to profit from in the future.  Rachael FitzGerald-Finch | Thursday, 7th May, 2020 | More on: ^FTSE Simply click below to discover how you can take advantage of this. Stock market crash: 3 criteria to help you profit from the FTSE 100 I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement. Image source: Getty Images last_img

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