How to Research a Stock Before You Invest

by on September 24, 2013

Being employed as a stock research analyst taught me a thing or two about what it takes to find a good stock to invest in.  It taught me that while many companies’ stocks look cheap or attractive on paper, they are usually cheap for a reason.  If you’re willing to research the company of the stock you want to invest in before you pull the trigger and buy it, then here are some tips that may help.

Good Stock versus Good Company

The first thing to know about finding a good investment is the difference between a good stock and a good company.  In my opinion, you only want to invest in good companies.  Good companies may or may not be good stocks at any given time.  Let me elaborate by giving an example.  Let’s say there’s a company that you find that is trading at only a few times earnings and that looks like it has the potential to double or triple in price if the stock can catch up to the same valuation multiples of others in its peer group.  This may look like a good stock because it is cheap and appears to have great potential.  However, in almost every case, the company that is trading for the really low price is a really low quality stock.  I’ve seen it hundreds of times and have even been tempted to invest in these cheap stocks.  The outcome is rarely very good.  Kind of like the old addage “you get what you pay for”.

The second thing to know is that you may have found a great company that you want to invest in.  You’ve done your research and can’t find any reasons the company could falter and the growth and quality looks great.  That doesn’t mean the stock is a good investment.  As an example, if you remember when Google, a Wall Street darling, went public many years ago.  The stock quickly shot up from $100 to $600 and the growth was great.  However, if you bought the stock at $600 you’d have to wait for about 5 years before it grew into this valuation.  That’s because great companies are often envied and desired by so many people that their valuations get out of whack.  The good news is that most great companies will eventually have an opportunity when they are also a great stock to buy.  Finding a great company that not very many people are interested in is perhaps the best way to make money.

Research the Business Model and Trends

This one is obvious, but many people tend to overlook the business and trends of the company they want to invest in.  Quite simply, look at the company you are researching and see what business model they follow.  Find out if it is sustainable and what advantages they have.  Also, look at all the trends affecting that industry and that company and make sure the company you are researching can come out on top of its peers.  You can find information like this by reading industry news articles, company filings from your company and other peers, and by finding investment research from your broker or other source.  Look for companies that can continue their upward trends in both sales and profit growth for at least the next 5 years.

It’s All About the Management

I’m not kidding when I say that the single most important asset a company has is its management team.  If you don’t believe me just look at what happened to Apple when Steve Jobs took over (and when he left).  Before you buy any stock make sure management has the ability to run the company as well or better than other companies in their peer group.  You can do this in several ways, but the best way is to look at managements’ biographies, which you can find at many sources.

For example, let’s say I wanted to find out more about one of the managers of a company that I was researching called sBioMed.  I would start by finding Stephen MacMillan on linkedin.  Then I would look for independent bios on Stephen MacMillan using Google and check sites like wikipedia.  Finally, I would visit the online SEC filings to find more information on that person.  By reading all of these articles and finding any other related news articles or press releases, you should be able to get a feel for that person’s reputation and skills.  Do this for as many managers as you can to make sure the management team you are investing in is one that can handle both good and bad times with as much class and diligence as possible.

Do More Stock Research

Don’t stop yet.  Keep doing your research by looking at all the financial websites and digging into things like earnings estimates, average trading volume, market cap, funds that hold this stock, earnings and revenue history, performance versus their peers, performance versus the overall stock market.  Look at every detail you can and make sure all the pieces of the puzzle fit together.  If you don’t find any big questions marks when you’re done, then you’ve probably learned how to research a stock and might be ready to buy it.

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