The following article aims to explain the two critical questions every beginner asks before they get investing in the stock market – where to do your market research and how to do it (i.e. what do we look for in particular)?
Where to do your market research?
This part is pretty easy. Usually I find myself going on various websites:
- Finviz – this is a great website for both screener, and trend. I use it every now and then.
- Morningstar (this is my go-to) after I have zeroed in on the company I want to know more about.
- Google Finance – this provides me with a quick snapshot of the company. I also use the nifty stock screener to narrow the stocks I want to look into from the investment universe based on the various metrics (explained below).
So in general, I first use a screener to find some decent companies based on the metrics explained later on in the post. Then I use Morningstar to understand the company performance over a 10-year period and more.
How to do the research (what do we look for in particular)?
Below is a guide on the metrics I believe are key to picking out long term winners.
- ROE, ROIC, and to some extent ROA over a period of 10 years
- How well did the company do when the sector tanked, or when the markets in general were frothy? You are looking for companies that have had the ability to bounce back from a recession or a particular sector event, and went on to generate amazing returns.
- Does the company have enough cash? Look for companies that tend to keep enough cash for its day-to-day operations.
- Debt scenario – is the current debt and long term debt decreasing? Does the company tend to issue more equity to service its debt? Usually, if the company issues more equity to service its debt, it is a no-no.
- Moat – What specific advantage does the company enjoy, which cannot be copied by other companies and is unlikely to be lost in a longer run or due time. For instance, Google has enjoyed a near monopoly like situation when it comes to Internet usage.
- Earnings per share (EPS) – Some companies artificially raise their EPS by buying back its shares. What needs to be researched is if their revenues have increased during this time frame, and how did this compare to their EPS if their EPS was adjusted for the share buybacks.
- At times the best thing to do, is to buy a company with solid operations trading at its 52 week low. Buy it at times when people are really bleak about its future but do so after looking into its operations and fundamentals.
The above are very high-level ratio metrics. I would post a company analysis of a stock sometime in the near future.
Edit: Please checkout my analysis on Costco Wholesale on the link below:
I would be interested to know the factors on which you base your stock buying decision on. Share them in the comments below.