Ben Todd | Apr 16, 2017 | 3
How To Conduct the Research to Find Winning Stocks
For many people, the idea of sifting through financial reports on a regular basis is something of great abhorrence to them, and yet if you wish to invest in winning shares, you have to do a “fair” amount of research and work. However, you do not need fancy qualifications, and there are plenty of intelligent people who make highly complex models that are useless. What you need to do is find a happy middle ground where you are neither doing too little or suffering from paralysis by analysis.
Once you have finished reading this, you may read our article on how to figure out if a shares are valuable or not with the article “Things To Do Before You Start Buying Shares” A link to the article of the same name would be handy here.
Think Of It In Terms Of Betting On Horses
There is a world of difference between betting on horses and investing in shares, with the biggest being that you invest in shares over the long term whereas betting on horses is a very short-term affair. Still, think of your shares research in the same way you would think of horseracing research.
If you were betting on the horses from a certain trainer, you would check that trainer’s stats, how many winning horses it has had this season, and you would check the competition in comparison to that trainer’s horses. You can do a similar thing when researching your shares. You check the company itself to see if it is doing well, you see if it has any winning products, and you compare those products with those of their competition.
What Is An Annual Report?
If you are a shareholder, then the company will send you an annual report. If you are not a shareholder, you can often find their annual reports on the Internet. If you cannot find their annual report online, then do not invest in shares of their company.
The annual report will give you an indication as to how well the company is doing compared to previous years. It tells you if the company is making more money than it is spending, and it will give you an indication as to the strategic plan the company is taking for the future.
Here are some things to look for:
The Chairman’s Message
This is a part of the report where the chairman tries to reassure the shareholders about the state of the company and its future. It is heavily biased and will point out good things whilst missing out many of the bad things. If there have been some very public and above errors or problems, then the chairman will try to put a good spin on it.
+ Do not forget the message is highly biased.
+ The chairman may lie on the report, but it is a dangerous risk.
+ If big errors or problems are not addressed, then you cannot trust the company.
+ Consider the intellect of the person that wrote the message and ask if you would want him or her handling your money.
Operating Review Or Company Offerings
This is the part of the annual report that tells you what the company sells or does and how it is making its money. A company may be making similar amounts of money from the year before–but may be making less money on its core products and so has increased the price of other products to compensate. That is why you should read this part of the annual review so you can judge for yourself if the company is doing as well as the chairman says it is.
+ Consider how the company is selling its product/service and if another company is doing it better.
+ Read about how the company is distributing its product/service and if it will be affected by other factors such as declining retail sales or increased fuel prices.
+ Are their core products failing and what are they doing about it?
+ Have they introduced a new product/service that is powering their sales?
You may need a little financial teaching in order to fully understand and appreciate this part of the annual report. The P&L is the profit and loss section, which is also known as an income statement. It tells you how much money they made, and how much of it is profit.
The balance shows you what the company owns, what it currently owes, and what the company is worth. The assets are what the company owns; the liabilities are what the company owes.
+ The footnotes are sometimes known as the small print, and they often hide the company’s worst secrets.
+ Look at the performance review on the annual report. Check the shareholder’s return against how well the company is doing.
+ A healthy company should have more assets than liabilities.
+ Does the company have more debt this year than last?
Some people simply use the share data to judge whether they invest in the shares or not. It is a silly way to invest, and yet it does have some merit. In terms of horse race betting, it is the same as betting on a horse because it has won a bunch of times. It doesn’t take into account if the horse has become ill or its trainer has quit. Similar is true when looking at the share data and not doing further research. The shares may have done well over the last few years, but the annual report and further research may show issues that are not apparent based on the share data.
+ Use the history of the share price as just one avenue of research and judging.
+ Check for share information changes from one year to the next, such as if they have stopped paying dividends and such.
Learn more about the company with this section. It may not provide you with any usable information right away, but it pays to know what the company does and which lesser brands it owns. You may suddenly see a certain brand prosper, and if you know the company that owns the brand, you may be more inclined to invest further.
+ Learn more about the company to help you make decisions in the future.
+ Remember that this document is biased on purpose but shouldn’t lie.
The Chief Executive Report And/Or Management Issues
Read what is written–and see if you agree with it. If you find statements about the economy, competition, or anything else and it doesn’t feel right to you, then take it into consideration. If the chief exec is wrong in your mind, then maybe you shouldn’t invest your money.
+ Consider the person that wrote it and ask if you would let that person handle your money.
+ Do you agree with the report and the comments within it?
+ How much confidence does it inspire in you?
The Auditor’s Report
In this part, you are looking for indications on how truthful and fair the report was. The comments may mention inappropriate bias or that some elements were promoted more aggressively than others.
+ These are the people who check to see if the annual report is truthful and fair.
+ Even a truthful and fair annual report may be littered with bias, fluff and clever hiding techniques.
The Internet Will Help You Do Your Research
There are plenty of websites that will give you legitimate news about shares, and there are official and regulatory-owned websites that will give you the history on a company and its shares, along with information relating to business news and developments. Doing your research before you buy is imperative, and plenty of research on trusted websites is one way of improving your shares-investing success rate.
Keep a look out for how often the directors buy and sell shares. Consider the times they are doing it. Are they buying when the shares are lower priced, or when the company has hit a problem and they want to sure-up shareholder confidence? Are they selling as the share price is falling, or are they doing it when it is riding high on a peak?
+ If directors start selling when the share price is falling, then this is a bad signal.
+ If directors start buying when the share prices are low, it may be to stimulate a share price increase.
+ If they sell when the share price is high, then you shouldn’t worry–but it may indicate that they think the price will not grow higher any time soon.
You Cannot Trust Brokerage Reports
They are too biased. There are so few brokerage reports that are not self-serving (in some way) that it is impossible to tell which are honest and which are telling lies. Use brokerage reports as your final port of call. After you have done your research, check with them to see if what they say agrees with your conclusions.
Luckily, fewer people trust brokerage reports these days, so there is less chance of you being duped by one. What used to happen was that brokerage firms would issue reports and people would run out and buy the shares they suggested. This pushed the prices of the shares up, so the brokerages looked like prophetic gurus. Then the buzz would subside, the share prices would return back to what they were, and people would lose lots of money. The only ones that benefited where the brokerage’s “friends” that invested in the company’s/shares before they appeared in the brokerage reports.
If you are doing your own research, then create your own files on different companies on your computer. You may decide that it is too risky to invest in a company at this time. If that is the case, then keep the research you did and check it again in six months or a year to see if what you thought would happen has happened.