Stock Investment Research

You hear every day how "analysts" are raising or lowering their stock ratings. Ever wondered how they come up with those stock ratings and just how accurate they are?  Well, I was a stock analyst for close to ten years and can tell you first hand that you can do your own stock investment research and come up with answers that are just as accurate as theirs.  I'll try to break down into simple terms some of the techniques they use. If you are interested in learning more, there are thousands of books devoted entirely to this subject.  However, I would recommend keeping things simple and not getting too technical.

There are two steps to choosing the right stocks to invest in.  First, do your investment research.  This means learning about the fundamentals of the company, including their products, services, business goals, management depth and other intangible assets.  Once you've done this, it's time to apply various stock valuation techniques in order determine if the stock is priced attractively and if you should buy it.

In this section, I'll discuss how to do your own stock research.  To learn about stock valuations, visit the stock valuation section.  You'll need to take the results of both techniques into account before making your investment decision.

Let's get started by looking at the different ways to research stocks.  And by research, what we really mean is that we are going to find out as much information about the company as possible and then use that information to deem whether or not the company merits your investment consideration.  Use the following methods to formulate an overall opinion about the quality of the company you are considering.

Annual and Quarterly Reports

Each company files quarterly and annual reports with the SEC, which are called 10-Qs and 10-Ks.  They include a lot of information about the company and how the company does business, including competition, long term risks, as well as fully explained sales and cost analysis.   Read these statements over to learn about the company you are researching.  The more of these statements you read from different companies, the more you will learn to take away valuable information about the companies.  These forms can be found through any finance website such as yahoo or google.

Press Releases

Press releases are distributed through any finance website or on the company's website.  They can be released at any time and often cause stock prices to rise or fall sharply.  Go back in time and read the press releases to understand what the company deems important and what the current issues are with the company.  Press releases often announce new contracts, mergers and acquisitions, management changes, and of course earnings releases.  Watch for new press releases everyday to keep up with the companies you are researching.

Industry Reports

Every industry has an expert or organization that follows it.  Many of these industries are private and only offer full information for exorbitant prices.  However, most industry analyses offer some of their information for free.  Stock analysts also offer industry reports.  Sometimes you can buy these through a finance site or brokerage.  Also, you can always call or email the organization or analyst and ask them for a copy.

Analyst Days and Other Webcasts

Most companies have analyst or investor days.  You probably won't get an invitation but it is worth contacting the company and asking if you can attend.  They are often broadcast on the web so you can attend them for free.  Also, if a company you are following is presenting at an upcoming conference, ask them if you can attend.  They will likely put your name on the guest list so you can get in for free and learn about them and other companies in their industry.

Conference Calls

Companies host conference calls that are streamed via the web.  Some are scheduled weeks in advance, like for earnings reports.  Some are scheduled just a few minutes in advance, for suprise news.  These calls are available to anyone and you should listen to as many as you can.  You will learn how management thinks and acts and can better form your investment decision.

Competitive Analysis

Do your own competitive analysis.  Compare everything about the company you are researching against other companies that are like it.  Is it's market share growing?  Are its margins as high?  Is it growing faster or slower than others.  If your company is better than others in its industry, it usually trades at a premium in price to the others.  Only buy companies that are on the upswing.

Intangible Assets

Look for intangibles that make your company stand out.  For example, Dell and Apple both make computers but Apples brand name is an intangible that stands above the crowd.  Other intangibles to take into account are patents, ability to make accretive acquistions, and the quality of the company to attract talent.

Management Depth

You can find the history and background of the core management team in their 10-K filing.  You can also do some searches on the Internet that can tell you more about the individual leaders of the company.  More importantly, listen to the conference calls and look at their track records to make sure they are good.  Good management, especially in bad times, can make all the difference.  Look for experience and a history of success.

Company Goals

Find out what the goals of the company are.  Are they to grow existing business rapidly, grow by acquisition, help the environment, protect their assets, etc.  Make sure they meet your investing goals.  Watch for companies that are increasing spending faster than sales.  Although they are likely adding to future sales growth, they can go through periods of slow earnings growth in the near term.

Contact the Company

Have any questions about the company you are researching?  Call them!  That's right, call their corporate headquarters and ask for investor relations.  Or email them.  They can probably answer most of your questions.

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Stock Investment Strategies

Recommended ways to invest in the stock market:

Don't try to time the market. As tempting as it is to try, it is not possible to time the stock market. People have written millions of pages of research on this topic and NO ONE has ever found a legitimate way to determine its trends.

Use cost averaging. By buying stocks on a periodic basis (like once a paycheck, once a month or even once a year), you will always be buying at an average price. If you try to time the market, you may be buying at a high or low valuation.

Take taxes into account. When you buy stocks, try to hold them for more than one year so you get taxed at the long term capital gains rate, which is currently 18%. If you sell your stock before one year, you will be taxed at your ordinary income tax rate, which is almost always higher than 18%, sometimes twice as high.

Invest as much as possible into tax-sheltered 401K, 403B and IRAs. By investing in tax deferred plans, you are able to invest money and not worry about the tax implications. With 401K and 403B plans, you get to invest your earnings before taxes, so the investment will grow on a higher base. For example, if you received a paycheck for $2,000 gross pay and taxes were taken out, you'd be left with only $1,200 or so to invest. The investment return on $1,200 could be substantial, but if you could invest that same $2,000 in a tax deferred account, you would be investing and earning a return on $2,000 instead of $1,200. Also, many employers offer matching investments that could make that $2,000 investment equivalent to a $4,000 investment. Put as much as you can into these tax deferred investments.

Diversify your investments. Don't just invest in stocks. It is better if you diversify your investments into other asset classes including real estate (a house), cash (savings account or CD) and maybe even bonds. That way, if one asset class really underperforms, you will have some exposure to the better performing assets.

Diversify your stocks (mutual funds). When investing in the stock market, don't load up on just one or two stocks. Diversify your investments across many stocks. If your portfolio is not large enough to buy 15 or more different stocks, you should consider purchasing one or more mutual funds to ensure diversification.

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