How To Speed Up Your Stock Research In 10 Minutes?
With so many publicly traded companies in the US stock market, it is overwhelming and mind-boggling to narrow down and figure out the kind of companies you would like to invest in. Apart from investing in index funds, which give you exposure to the entire stock market and limit your risk through diversification, you really need some sort of a checklist or a guide to narrow down your investing universe if you plan on investing in individual stocks independently.
As you are reading this you might wonder, do I need to pay a stockbroker or subscribe to a newsletter or stock picking service that does all this work for me? Well, you could (at the expense of extra fees), however, if you want to be confident in picking individual stocks on your own, this article is for you. In this article, I will go through a series of questions you can use to decide within 10 minutes whether a given company stock is worth your time and weed out the less-promising stocks. In the end, you will be able to identify companies with good fundamentals and shareholder equity which can form the basis for further in-depth research for a possible long-term investment.
All this by paying no extra fees. Let’s get started.
Does the Company Meet a Minimum Quality Requirement?
Rule out all companies with negligible market capitalizations and those that trade on pink sheets. Also, avoid foreign companies that do not regularly file their financials with the SEC or file their full financials only once per year.
Finally, although recent company IPOs are exciting and full of hope, stay away from them. IPOs are rarely bargains and companies usually decide to go public only when they think they’re getting a better higher price. Usually, recent IPOs are infants with a short-term track record. However, spin-offs from large companies can be considered since spin-offs have long operating records and the parent company no longer wants to manage it. You might get an attractive price.
Has the Company Generated Operating Profits During Its Existence?
Although the answer to this question is simple, it will definitely keep you out of trouble. Very often, companies are losing money for years as they are investing in research to come up with a rare drug, or a product or service that will blow people’s mind.
Unfortunately, that might also blow up your returns and portfolio in many cases. A company with a single product or service might make or break a company and unless you are interested in buying a lottery ticket alternative, take a pass on such companies that have yet to prove their potential of earning a single dollar.
Does the Company Generate Cash Flow from Operations?
Companies which have negative cash flow from operations will seek out to either take on more debt, sell bonds or issue more shares to fund the company operations. This will likely make the firm riskier and reduce your share as a shareholder.
Is the Return on Equity (ROE) Above 15 percent with Little to No Leverage?
15 percent can be used as a minimum requirement. If a company is not able to generate over 15 percent ROEs for 8 out of 10 years, it is not worth your time. You should also look into whether these ROEs have been generated by taking on more or minimal leverage.
A good approach can be comparing ROEs with the company’s competitors within the same industry. However, a good company with good ROE and minimal leverage will be able to sustain tough times and still make money.
Is the Trend in Earnings Growth Consistent or All Over the Place?
If a company has a rising trend in earnings growth over 5–10 years, it is definitely worth looking into. However, if the earnings growth is all over the place, you might want to check if it is because of the industry or if the company is getting whacked by its competitors.
Does the Company have a Good Balance Sheet?
A good measure is to look at the company’s debt-to-equity ratio. A ratio of less than 0.5 can be used as a minimum requirement. Such companies are hard to find. If you find a company with a ratio over 1.0, consider the following:
- Does the company operate in a stable business? — For instance, consumer staple industries can withstand more leverage than companies which are economically sensitive.
- Is the company taking on more debt relative to its total assets? — In an already leveraged firm, you don’t want to see more debt.
- Is the debt easy to understand? — If the 10-K filings don’t help you understand the debt, take a pass.
Cash is King! Is the Company Able to Produce Free Cash Flow?
Prefer companies that generate free cash flow, the more the better. At times, companies might reinvest cash wisely in the business to create economic value that will pay off well in the future. Think companies like Starbucks. In that case, these companies might have negative free cash flows for some years.
Hence, don’t be quick to rule out these companies. If they have solid ROEs, answer all the questions above and you believe the company is spending its cash wisely, definitely consider it.
Has There Been an Increase in the Number of Shares Outstanding Over Last Few Years?
This would mean the company is granting many stock options to employees or is looking at buying other companies. If that’s the case then your ownership stake in the company will be diluted. However, if the number of shares is decreasing, that means the company is buying back shares and returning the excess cash to the shareholders, thus, increasing your ownership stake. Make sure that the company is not buying back shares when the stock is overvalued.
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
— Warren Buffett
The above questions should guide you and enable you to become more confident in your individual stock picks. Note that they are starting points, no more or no less. Although these questions might not cover every possible scenario, they will definitely help you in eliminating poor investments.
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The content in the above article is for information and educational purposes only. It is not intended to be investment advice. Please consider the risk involved and your personal financial situation before investing or seek a duly licensed professional for investment advice.
I Have Also Written About…
- Stock Investing: Reading A Company’s Annual 10-K Report: https://medium.com/datadriveninvestor/stock-investing-reading-a-companys-annual-10-k-report-6befb9d1f4d8
- Fundamental Analysis Using Company’s Income Statement: https://firstname.lastname@example.org/stock-investing-fundamental-analysis-using-companys-income-statement-37b0d80531f1
- Fundamental Analysis Using Company’s Balance Sheet: https://email@example.com/stock-investing-fundamental-analysis-using-companys-balance-sheet-153531d98f8b
- Fundamental Analysis Using Free Cash Flow Statement:https://firstname.lastname@example.org/stock-investing-fundamental-analysis-using-free-cash-flow-statement-454beaa7f00
- Fundamental Analysis Using Key Ratios: https://email@example.com/stock-investing-fundamental-analysis-using-key-ratios-ed02f32e88ae
- Stock Investing: Know When To Sell?: https://firstname.lastname@example.org/stock-investing-knowing-when-to-sell-a7bc5edcd4c5
Amrut is a Full Stack Software Engineer who is passionate about tech and Software Development in Web and Mobile. He likes to write about coding, investing, finance and economics. He strongly believes in adding value to people’s lives through quality work. He also loves to watch and discuss American Football.