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How Do You Research Your Investments?

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August 23, 2012 – Comments (10) | RELATED TICKERS: GEN.DL2 , NVDA , VIG

I am curious as to how Fools research and do their due diligence. While talking with a friend the other day it struck me how seemingly inefficient it can be to successfully research a company and become well-versed in its operations. This undoubtedly changes given the type of industry a company belongs to; the complexity of a life sciences company such as GenOn (NYSE: GEN) or how the newest NVIDIA (NASDAQ: NVDA) GPU improves upon the previous generation will be a little more difficult to grasp.

It seems to me like most investors travel to different websites, read tons of articles, dig through financials, etc. That’s how it should work, but it can be quite time consuming.

So, as part of my survey, here’s a series of questions you could think about and answer. Answer one, all, or just reply with a generalized comment about how you go about researching a company.

1.     How much time do you spend researching stocks?

2.     How many different websites do you consult?

3.     What website(s) do you use?

4.     How important is a company’s balance sheet to your decision for an investment? (Be honest here, even if you have no idea how to read financials.)

5.     If you look into a company’s balance sheet, what website/program do you use? Is it the most time consuming part of your research?

6.     What 3-5 metrics do you consider most important?

Any other comments welcome.

BlacknGold

10 Comments – Post Your Own

#1) On August 23, 2012 at 10:05 PM, trustyfrog (98.98) wrote:

I always have a list of stocks I keep an eye on for potential future investments.  The list changes every so ofen.  Some stocks find their way on the list via screen or simply because of a product or service I feel has potential.

I do preliminary work before the stock makes the list.  I'll usually start by locating any disqualifiers that I deam unnacceptable.

I then become as familiar with what the company does as I can.  If I like what I see here, I try to think how the businesses might perform in varrying economic environments.

 If I conclude that the company is positioned to perform well in environments I anticipate seeing in thenear future, it will likely make my "watch list" unless the space is littered with competition or has low barriers to entry.

Once on watch, I'll pay attention to  price action, news developments, press releases, confrence calls, seminars, etc...

If I see things I like at this point, I'll dig into 10qs, 10ks, 8ks, etc...

A lot of times I'll go to the company's website to look at old press releases & reports.

 I spend a lot of time looking at the financial statements.  Sometimes, I'll find off-ballance sheet stuff or other red flags that will result in me abandoning the company as an potential investment.

When I re-allocate or add a new position, I'll have a few ideas I really like, so I'll choose my favorite option.

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#2) On August 23, 2012 at 11:04 PM, rd80 (98.14) wrote:

1.     How much time do you spend researching stocks?
      Too much, which isn't enough.  Once I've discovered a stock that looks interesting, maybe a five minute scan of fundamentals.  If that looks promising, easily another 1-4 hours or until something turns up that says 'no.'  Usually, the next step is a watchlist to follow it for a while.

2.     How many different websites do you consult?
      5-10

3.     What website(s) do you use?
       Yahoo! Finance, Fool, company's investor relations page, WSJ, Barron's, SEC, FINRA

4.     How important is a company’s balance sheet to your decision for an investment? (Be honest here, even if you have no idea how to read financials.)
     Very.  Lots of leverage isn't an automatic deal breaker, but it's a key factor.

5.     If you look into a company’s balance sheet, what website/program do you use? Is it the most time consuming part of your research?
      Yahoo! Finance, SEC filings. Time depends on the balance sheet complexity.  First step here is a summary look at the Yahoo balance sheet page, then maybe a dig into the 10Q and/or scan of the company's bonds at FINRA.  For C, it can be very time consuming; for GHM it takes a few seconds.

6.     What 3-5 metrics do you consider most important?
      Tough question.  It depends on the company - I expect a utility to have very different metrics compared to a tech company.  For a first cut, I look at PE (both ttm and forward), current ratio, dividend yield and payout ratio.  I also like to look at the past four quarters' reported earnings to see if the company tends to beat estimates or not.

Disclosure:  I'm long C and GHM.

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#3) On August 23, 2012 at 11:18 PM, shamapant (84.46) wrote:

1. A lot. Generally I spend multiple hours on multiple days...it really depends on the complexity of the company and the amount of confidence I need in order to invest. I'd say 15 hours at the minimum prior to investing.

 2. Very few, most of my research is in the filings themselves. I generally check seekingalpha/google for information on bull/bear theses that other investors have written to see if there's anything I've missed. I also check morningstar for conference call transcripts. For a quick overview, though, wikiinvest.com is great.

3. Wikiinvest.com, seeking alpha, fool.com, a number of investment blogs...the internet isn't a huge part of my research.

4. HUGELY IMPORTANT. I get really uncomfortable w/ companies trading highly above asset reproduction value, although quality companies often deserve to trade higher. Also, balance sheet is important to check on debt claims and movement of inventory and receivables,etc. It's really a crucial part of the process.

5. It's not the most time consuming part,it's actually fairly quick compared to other stuff. I don't use a website, I look at the balance sheet myself so I don't have to rely on the trustability of other websites.

6. Intrinsic Value(never buy without calculating it), ROIC, ROE, debt/equity, EV/EBIT.... 

 I'm currently reading a book, "The Investment Checklist," it seems perfect for answering your question.  

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#4) On August 24, 2012 at 4:02 PM, IlanBigfoot (82.32) wrote:

 1.     Maybe a few hours a week, whenever I have free time.

 2.&3. Maybe 10: Yahoo, Fool, MSN Money, Magic Formula, Options Calculators, S&P reports from Etrade, etc. etc. I'm trying to learn to program so I can automate my data draw. I also like Value Line at the library. Investor's Business Daily occasionally has good ideas, but I'm not a momentum investor generally. 

4.&5.     I do look at the balance sheet on Yahoo. If the equity has declined over the years or has a lot of debt vs. cash, it better be really cheap! It is not time consuming, but I really should spend more time reading the annual reports.

6.     Low P/E and high ROE & yield is a great start. I also like a good long history of earnings and dividends and declining or at least flat share count.

 

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#5) On August 24, 2012 at 6:01 PM, TMFBlacknGold (98.82) wrote:

@trustyfrog

 Thanks for your comment. I also keep a watchlist and wait for something to trigger or tip my interest into adding a new position. It seems like you have a solid, logical regiment you follow for investing - I like that. I also find it interesting that you save 10Qs and 10Ks for last (nothing wrong with that obviously). Is that because it is the most time consuming?

 

@rd80 

Thanks for your comment. It sounds like you spend a lot of time researching as well. Interesting that you look at FINRA - I've never heard of doing that but I'm going to look into it as well. I absolutely agree with you that certain metrics, or balance sheet lines, are more important than other depending on the industry.

 

@shamapant

Thanks for your comment. I certainly subscribe to your idea about digging into transcripts from cc's and wikiinvest. Although I have noticed that some companies have outdated profiles. Is that also an issue for you (still has valuable info)? Kudos for not letting accidental misprints on balance sheets screw up a possible investment - sounds like something from "It's Earnings that Count". Thanks for the book. I checked it out and ordered a copy for myself. A little expensive, but it looks like its worth it.

 

@IIanBigfoot

As an engineer I am pretty well-versed in MATLAB, so I have a simple screen-scraping program I wrote to gather information from Google Finance. I would like to add more features to it, but I have convinced myself to learn JAVA and Python to write a real program that is not dependent on a static HTML code (screen-scraping is pretty primitive).

Share count is something I like to look at as well. What good is rising shareholders' equity if share count is also rising? Thanks for your comment.

 

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#6) On August 24, 2012 at 6:07 PM, TMFBlacknGold (98.82) wrote:

To all,

 If you read my reply to @IIanBigFoot you'll get the hint that I am seriously considering creating a software tool to make researching equities much less time consuming. It seems like the five of us (so far) have the desire to spend a considerable amount of time devouring articles, balance sheets, cash flow statements, income statements, cc's, etc. to get things right. Wouldn't it be nice to have the capability to look at all of those things more efficiently? I think so.

I'll be posting things here every one in awhile to get a feel for what the community spends the most time with and what they want that they don't currently have at their disposal. 

Fool on 

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#7) On August 24, 2012 at 6:21 PM, ikkyu2 (99.29) wrote:

Before I start, I'm going to say that I think you're asking the right questions and I appreciate the chance to read others' replies.

1.     How much time do you spend researching stocks?

A few hours a week.

2.     How many different websites do you consult?

2 main ones and a few others.

3.     What website(s) do you use?

Fidelity.com and caps.fool.com always get looked at.  I often use finance.google.com, seekingalpha.com, and the own website of the company I'm researching.

4.     How important is a company’s balance sheet to your decision for an investment? (Be honest here, even if you have no idea how to read financials.)

I would say that it is the most important thing I look at, with the income statement being a close second.

5.     If you look into a company’s balance sheet, what website/program do you use? Is it the most time consuming part of your research?

No, this is easy.  Fidelity.com uses a service for their data, which formats the balance sheet into a standard form that can be compared to other companies.  I like to look at the last 3 years' and the last 4 quarters' sheets closely to see trends.

I often read the last quarterly and last annual report, as well, and especially the post-report conference call questions; these transcripts are found on Seeking Alpha.  Unsurprisingly, the big I-banks' financial analysts often ask quite pertinent questions and sometimes the tone or tenor of the questions is more interesting than the actual answers.

6.     What 3-5 metrics do you consider most important?

In order: Total long-term debt; P/E with total cash backed out of the market cap; dividend yield; PEG ratio, again adjusted for a real comparison; and short interest.

Total long-term debt to me is a Boolean variable: is it zero, more or less; or is it significantly greater than zero? The two sets of companies defined by this metric behave completely differently.

I would add that if you are looking at a company, you should be looking at least a few other companies in the same sector, until you feel like you could notice an outlier.  For instance, profit margins are gargantuan in specialty engineering firms; smaller in restaurants; and nearly zero in supermarket companies.  For instance:  If you don't look at 5 or 6 supermarket companies, a profit margin of 0.5% might alarm you, when in fact that's a pretty good margin for a Safeway or a Kroger's.

 

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#8) On August 24, 2012 at 6:24 PM, ikkyu2 (99.29) wrote:

On the same topic, I would point out that some people are good at certain sectors, and some are not.  I am good at valuing consumer retail, both discretionary and staples; good at valuing restaurant stocks; and terrible at valuing tiny speculative pharma and biotech names.

If you look at my CV, you'll see that I'm a physician, graduated honors in biochem from Harvard, have an advanced degree as well in how to run clinical trials, have worked on quite a bit of medical research, and have never even worked in a retail shop or a restaurant.  I was as surprised as anyone to learn where my strengths and weaknesses were when it came to valuing companies.

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#9) On August 27, 2012 at 4:15 PM, TMFBlacknGold (98.82) wrote:

@ikkyu2

Well said and worth a repeat (its all about perspective):

"I would add that if you are looking at a company, you should be looking at least a few other companies in the same sector, until you feel like you could notice an outlier.  For instance, profit margins are gargantuan in specialty engineering firms; smaller in restaurants; and nearly zero in supermarket companies.  For instance:  If you don't look at 5 or 6 supermarket companies, a profit margin of 0.5% might alarm you, when in fact that's a pretty good margin for a Safeway or a Kroger's."

Also, I'm not sure anyone knows how to accurately value speculative pharma or "baby biotech" as zz calls it. Even approved drugs have a difficult time getting marketed and adopted by physicians, so putting a Phase III behind you doesn't necessarily mean anything.

In the end the underlying theme is to stick to what you know. If you can make money investing in restaurants, then who can blame you for choosing such an investment?

 

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#10) On August 28, 2012 at 8:52 PM, TMFBlacknGold (98.82) wrote:

I always look at goodwill and intangibles. If the two added together make up more than 20% of total assets or are growing over the last several quarters I consider it a major red flag and will likely not invest.

Inventory is always another good thing to consider - but it means more in certain sectors and scenarios (high growth companies will usually have an increasing inventory to keep up with demand). 

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