Tuesday, October 6th, 2015

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Tips for Researching & Analyzing Stocks

So you’ve got a good tip on a stock – what next? Well, you could simply buy the stock and see what happens, hoping that your source was right. But that’s not the most prudent way to build a high-quality portfolio. Perhaps you’d better do some research first, in order to understand the company and its prospects.

Noted fund manager Peter Lynch is fond of pointing out that most Americans spend more time picking out a new refrigerator than they do on selecting new holdings for their portfolios. The funny thing is – your new refrigerator may cost you a cool grand and last ten years before it gives out, but a thousand bucks in your portfolio might be worth three or four thousand dollars in that same ten years – if you just set aside a fraction of the time and energy to understand your stocks as well as you know your refrigerator. Otherwise, it may only be worth an old refrigerator 10 years later.

Back in the good old days, researching a stock meant calling or writing away to a company to ask for their investor information packet, going to the library, or asking your broker for a research report. Often, the data was months old, but that was as timely as it could get.

Today, you’ve got megabytes of research, news, data and analyses right at your fingertips on the Internet – often available instantaneously as soon as it’s published. Funny thing, though, all that online data hasn’t really changed much for the long-term investor. Sure, you don’t have to wait for weeks for the mail to arrive with an investor’s packet from the company. You, along with the millions of other investors who are following the market, have access to the same information at nearly the same time, and that’s generally a good thing. And it takes you less time to carry out the research you need to do before you invest, leaving you more time to spend with the family, mow the lawn, or investigate other stocks.

But long-term investors are still looking for essentially the same information about a company that they did 10 or 20 or even 40 years ago, and with the same goal of understanding a company’s core fundamentals and operations. Knowledge is power, as the old saying goes, and the more you know about a stock, the better decision you can make about investing in it.

Here are the critical pieces of research you should seek out before you invest. (It should go without saying that it’s not enough to download a file from a Web site to your PC – you need to read it, as well.)

  • The company’s annual report. You can request a copy of the most recent annual report from the company, but often they’re published on the company’s Web site, too. Most times, they’re produced in Adobe Acrobat format, so you can download them and print them out in the same format as the printed version. But if you don’t want to tie up your printer for hours printing out the report, you can also review it online. Annual reports are sent to shareholders of record, and the report describes the progress made by management in the most recent year. Securities and Exchange Commission rules make it clear that a company can’t whitewash its problems, despite all the glossy pages, color photos, impressive graphics and upbeat charts. Dig into the text of the management’s discussion and you can find reference to the company’s problems and potential problems, and what they intend to do about them.
  • SEC filings. Publicly traded companies in the US are required to make other regular reports to shareholders and the Securities and Exchange Commission. The key reports are the quarterly reports (known as 10-Q reports), an annual report (10-K, which is increasingly replacing a glossy printed report at many companies) and the proxy statement. The quarterly and annual reports are produced in the same format, with lots of financial statements along with the management’s discussion and copious footnotes. The proxy statement is produced each year just prior to the company’s annual meeting, and it includes information about the board of directors, the compensation of executives and shareholder motions that may be under consideration during the upcoming meeting. You can download all of these reports from the SEC’s EDGAR web site.
  • Recent news. In order to keep up with changes in a company, you should follow the news on a regular basis. You can usually find current and archived press releases on the company’s web site, and these can be a useful (if unflaggingly optimistic) source of information about recent events. You can also find press releases, as well as a collection of news stories from third parties, on Yahoo! Finance. The news articles here often counterbalance the company’s own take on recent events, often providing you with an outside perspective. If the company has been in the news in the last couple of days, Google News can give you links to stories from newspapers and Web sites all around the country.

One last tip. It can be overwhelming when you start digging online and discover the vast amount of research and information and varied opinions that are available. Dig a bit deeper, though, and much of what you’ll find may not be worth a plug nickel. The key to effective stock research is to know what’s important to your long-term approach to investing, and to filter out the irrelevant noise and useless chatter.

If you make it your goal to know your stocks as well as you do your stove, you might stand a better chance of not getting burned by your portfolio.

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