smartwomansecurities
Date
Finding and Researching
Investment Ideas
Speaker
Position
Company
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Announcements
• Please enter any SWS related
announcements here.
Last Seminar Recap
• There are many different types of companies and stocks, which
change with time.
• As an investor, you have to understand what meets your
investment goals and invest in those types of stocks and
investment vehicles.
• The stock market has many moving parts, but understanding
how the process works is important when investing.
• Investors are not always rational, which leaves opportunities
for you to invest. Make sure you don’t become an irrational
investor.
• Some of the best stock pickers in the world rely on a few
fundamental investment rules, which should help guide you as
well.
Tonight’s Agenda
• Market Update
• Investing in Stocks – Issues to Consider
• How to Invest
• Types of Accounts and How to Get Started
• Introduction to Investing Summary
Market Update
• Have speaker comment on what
happened in the markets for past
week.
• We encourage speakers to create a
slide of important occurrences (see
next slide for example).
Market Update Example Slide
• There were mixed technology results as Apple &
Microsoft posted solid positive third quarter earnings;
raising concerns about semiconductor valuations
• Merrill Lynch wrote down $7.9b in losses from
subprime losses, which adds more wariness around
the health of the housing market.
• Bank of America announced 3,000 job cuts, which
adds concern to the state of the economy.
• Crude oil futures climbed above $92; analysts expect
it to surpass $100, a strong sign for the economy.
• S&P500 gained 2.3% on the week; DJIA was up 2.1%
while the NASDAQ was up 2.9% as investors seemed
less concerned about risks in the credit markets.
Getting Started
Index Funds or Individual Stocks?
• So you’ve opened an investment account: now,
what stocks do you invest in?
• One approach would be to put your money in an
index fund and make the returns of the market.
– This is the best option for those who don’t have the time,
energy, and interest in researching stocks.
– If you can’t commit the time, look into index funds.
– They are much better in terms of fees than mutual funds and
typically returns are just as good, if not better. Hence, less
cost, equal or better return = good idea.
8
Getting Started with Stocks
• Alternatively, you could try to beat the market on
your own, by doing the research and picking stocks
that you think are strong buys.
• This is what we do in SWS and what we’ll hopefully
help you learn how to do.
• With this approach, some things to ask yourself:
- What is your time horizon of investment?
- What level of risk are you comfortable having?
- What type of stock (growth, income, value, etc.) makes
the most sense for these goals?
How to Begin?
• How do you begin thinking about
which stocks are good investments?
• How much of “what you know” can
translate into a good stock pick?
– Like everything else, we recommend looking at
trends in the macro marketplace and in your
everyday life
o One of Lynch’s picks was L’eggs, because his wife saw an
emerging trend where women wanted to buy high-quality
pantyhose in convenient places. You can find great investments
around you, but you also have to do work on the companies!
How to Begin?
• While researching a company is critically important
(we’ll learn more about this later), finding a
company with good potential really helps out the
end result.
• That way you won’t be researching every company
in sight or one at random.
• You want try to identify a company that might be a
good investment early on –it’ll save you a lot of
time later.
• Some reasons why a company might look like a
good investment include:
– The stock is undervalued (in other words, it’s cheap!)
– The company has a great business model that will stand the test of
time – it still might be expensive, but at least you have a starting point.
– There is an industry trend that could be favorable for the company.
– And many, many more that you’ll start to realize.
Finding Investment Ideas
How to Start?
• While researching ideas is critical, finding a list of
potential ideas is just as important.
• You want to start with investment ideas that have
potential, rather than looking at every stock or
companies at random. That process is time
consuming and often in the end, less fruitful.
• Coming up with a starting list of companies that
actually have real potential is a great way to start.
• Now, the important part is how to come up with that
list in the first place.
• Let’s take a look at how different companies have
performed in the past.
How do Sectors Perform?
Annual Percentage Returns by S&P Global Sector (2000-2009)
• As we saw in
week 1, no one
sector leads
every year in
terms of stock
performance.
So, we can’t
just rely on a
certain sector.
Source: IShares, S&P Global Sector Index,
14
What about Huge Companies?
• How did the huge companies that you probably
know perform in 2009?
• Here is the performance for the top 10 largest
companies in the S&P and their performance.
15
Source: http://www.articlesbase.com/investing-articles/2009-stock-market-review-what-happened-1751266.html
Or the S&P?
• Now, let’s take a look at the top performers in all of
the S&P 500 for 2009. Remember that the S&P 500
are larger companies and more liquid stocks.
• How many of these companies do you know? Look
around you – they’re everywhere!
16
Source: http://www.articlesbase.com/investing-articles/2009-stock-market-review-what-happened-1751266.html
Big Vs. Small
• Top performance doesn’t always have to be from
big companies or companies that you know. There
are thousands of small companies that are publicly
traded.
• Many products or services that you use every day
are probably provided by public companies.
• And often times, these stocks can be the best
investments! Why?
– They aren’t as well followed by Wall Street or investors.
– If you do research, you’re probably one of the few.
– You can find hidden gems that other people aren’t paying attention to.
17
What about Small Companies?
• Let’s hop in a time shuttle to take a look at some
past small company top performers. The date: 2005
• Below is stock performance for the top performers in
all of the US stock market for a 10 year period
(1996-2005).
18
http://www.fool.com/investing/small-cap/2005/12/29/the-markets-10-best-stocks.aspx
What’s in Common?
• The greatest stocks of the past decade are not the ones you'd
expect. Microsoft isn't on the list. And Starbucks doesn't crack the
Top 50.
• These companies are obscure. Hansen Natural, the greatest stock
of that decade, sold all-natural juices and sodas since the 1930s.
Chico's sold clothes to women in their 30s. SCP Pool with 45%
annual returns sold swimming pool supplies and chemicals
wholesale!
• At the beginning of the period (1996), none of these companies
were heavily followed by the pros on Wall Street, and even more
incredibly, some still weren’t even after the end of the decade in
2005.
• Finally, none of the companies were worth more than $200 million
in 1996. And even in 2005 after 10 years of incredible growth,
seven of them were still small caps! Only Chico's, NVR, and
19
American Eagle moved comfortably into mid-cap status.
http://www.fool.com/investing/small-cap/2005/12/29/the-markets-10-best-stocks.aspx
Top Performance Bottom Line
• The greatest stocks of the (1996-2005) decade were:
– Obscure
– Ignored
– Small
• Now, this doesn’t mean you can’t find great opportunities in
large caps (look back at those first few charts).
• But, it does mean that there are often times a great deal of
opportunities in small caps.
• So, make sure to keep your eyes alert for both – those large
companies, but also those smaller, more obscure, and likely
ignored companies.
20
http://www.fool.com/investing/small-cap/2005/12/29/the-markets-10-best-stocks.aspx
Where to Find Ideas?
• There are always investment ideas around you –
just think about what you are seeing, buying, and
interested in. Here are some questions to get you
started:
– What restaurant did you eat at this week?
o Perhaps you went to Chipotle (CMG), a fast growing chain.
– What products do use every day?
o You probably use an ipod, iphone, ipad, or perhaps all three! Apple (AAPL) makes them all!
– What companies are increasing hiring on campus?
o Is it J.P. Morgan (JPM) or General Electric (GE)?
– What websites do you frequent regularly?
o Are you always on Google (GOOG) or Facebook (still private)?
– What type of car do you drive or aspire to have?
o Perhaps it is a Ford (F) or a Toyota (TM)?
– What company picks up your trash everyday?
o Is it one of the two huge companies, Republic Services (RSG) or Waste Management (WM)?
21
Ideas Around You
• Where else in your life can you find ideas?
– Read the newspaper – what companies are being written
about? Are there ideas you can glean from here.
– Read magazines – BusinessWeek, Fortune, Forbes,
Economist, and many more are all great ways to look at a
business, sector, or industry.
– Talk to your friends and family – What are they buying,
where are they working, what experiences do they have with
different companies?
– Keep your eyes alert for different opportunities – Many great
investments come from your everyday life.
– And start thinking about company and industry trends (more
on this next week) – What’s happening in the world around
you and how is that going to affect companies.
22
The Deeper Dive
• Remember that just because you buy a product or
use a service, that doesn’t mean the stock is a
good investment. It just means you need to do
more investigation.
• However, if it is a company that you are using, then
lots of other people might be too, so it could be
worth more work and research.
• The one main thing is that you have to open your
ideas to opportunities around you.
23
Where Else?
• If you have your eyes open and you’re still at a loss,
don’t fret, there are other ways to find ideas that
might help you get started.
• We’ve found a few sources that we recommend to
look to for guidance and ideas.
• But, the most important thing to remember is that
these sources are for idea generation, not immediate
investment.
• You want to do your own independent work to
determine if you think a stock is a good investment.
• These sources could be just plain wrong sometimes!
24
Guru Focus
• Guru Focus is a website that tracks the investment
activity of the top value investors in North America.
• It offers free and paid subscription options. The free
version allows users to access information with a
quarterly delay where $200 per year allows them to
view the most recent activity of top value money
managers.
• In addition, the website also has forums, articles,
investment screens, and other useful services.
• Where: www.gurufocus.com
http://www.gurufocus.com/news.php?id=87863
Magic Formula
• Magic Formula is a website founded by Joel Greenblatt, a
well known investor. It is a screen that attempts to generate
a list of good quality companies trading at low prices.
• The list of companies is generated by searching thousands
of companies and ranking them based on two quantitative
factors: return on capital and earnings yield.
• It takes quite a bit of work to go through the list before
deciding which ones are worth further investigation.
• Magic Diligence however can help with this, as its author
takes ideas from Magic Formula and writes investment
reports about them. While the Magic Formula is free, Magic
Diligence costs $89 per year.
• Where: www.magicformulainvesting.com
http://www.gurufocus.com/news.php?id=87863
Value Line
• Value Line tracks approximately 1,700 stocks in over 90
industries, publishes reports four times a year, and publishes
weekly full-page reports on approximately 130 stocks.
• While an annual subscription is available to individual
investors, you may be able to access the online version
through your local library.
• The Value Line Ratings and Reports (R&R) sheets contain a
wealth of information, including records such as the earnings
per share for several years, depending on the company.
• Value Line is a well-respected research firm providing
services that are wonderful sources of good investment
ideas.
• Where: www.valueline.com or through your library
http://www.gurufocus.com/news.php?id=87863
Value Investors Club
• Value Investors Club is another website run by Joel
Greenblatt. It is a club whose members share their
investment ideas with each other.
• It is open to the public, however, only about 250
people are allowed to submit investment write-ups.
Those who are not accepted as contributing
members are still allowed to view these write-ups
but with a 45-day delay.
• In value investing, it usually takes longer than 45
days for the market to adjust its mispricing, so this
delay does not disadvantage noncontributing
members too much.
• Where: www.valueinvestorsclub.com
http://www.gurufocus.com/news.php?id=87863
13-F Filings
• A 13-F filing is a document that hedge funds are
required to submit quarterly listing their stock
investments. By looking at 13-Fs you can see what
portfolio managers are buying and selling.
• You can look at what top investment managers (look
at Guru Focus to determine who they are) are
buying. From here, you can see if any are worth
doing more work on.
• You can subscribe through Super Investor Insight for
$149 per year or access it through one of many
blogs for free, although this requires you to do a bit
more work finding them.
• Where: www.superinvestorinsight.com or blogs
Investing Blogs
• A great method for finding investment ideas to research is
reading other people’s blogs. There are thousands of blogs
dedicated to investing. Most of these authors love to share
their ideas with other investors, and they do it for free.
• While other sources such Value Investors Club limit who can
publish investment research, anyone can start a blog. This
can be good and bad. Because Greenblatt limits who can be
a contributing author on Value Investors Club, this ensures
high quality write-ups, but on the other hand, it keeps good
ideas from being exposed from other investors.
• The negative aspect of reading blogs is also its strength –
anyone can have a blog. As an investor, you have to decide
on your own which blogs are worth your time.
• Where: all over the internet
http://www.gurufocus.com/news.php?id=87863
Investing Blogs
• Here are some recommended blogs to get you started:
Blog Name
Alex Bossert
Blogvesting
Buying Value
Contrarian Value Investing
Fat Pitch Financials
Joe Ponzio’s F Wall Street
Learn Stock Market Investing
Old School Value
Simoleon Sense
Stock Market for Beginners
Street Capitalist
The Inoculated Investor
The Rational Walk
The Stock Advisors
Value Huntr
Wide Moat Investing
http://www.gurufocus.com/news.php?id=87863
URL
http://alexbossert.blogspot.com/
http://www.blogvesting.com/
http://buyingvalue.com/
http://www.contrarianvalueinvesting.com/
http://www.fatpitchfinancials.com/contributors/
http://www.fwallstreet.com/blog/
http://www.stockmarket-investing.com/
http://www.oldschoolvalue.com/
http://www.simoleonsense.com/
http://www.stocks-for-beginners.com/
http://streetcapitalist.com/
http://inoculatedinvestor.blogspot.com/
http://www.rationalwalk.com/
http://www.thestockadvisors.com/
http://valuehuntr.com/
http://widemoatinvesting.wordpress.com/
Deeper Dive
• Whether the investment lead comes from a particular
blog, Guru Focus, or Value Investors Clubs, it is only
the beginning of the research process.
• You should never make an investment decision based
solely on a report provided by one of these sources,
however they can be a great jumping off point.
• If you really want to be a good investor, you will
perform your own due diligence to make sure that the
investment idea fits into your investment strategy.
http://www.gurufocus.com/news.php?id=87863
Researching Investment
Ideas
Why are You Better?
• Investing can be nerve racking – how can you be better than
lots of other investors?
• Rely on three competitive advantages:
– Better Information – DIG DEEPER!
o By conducting your own analysis and really getting to know the
company and industry, you’ll be doing more than a lot of people.
o Focus on the factors that matter and due your own work on them.
– Better, More Robust Analysis
o Learn about business cycles, pay attention to industry and company
trends, and forecast secular shifts that might be a positive or negative.
– Objectivity
o Take advantage of market psychology when it is wrong – surprisingly,
this is a lot!!
34
Research Overview
• Researching your investment ideas is pivotal in
determining if they’re good investments or not.
• You’ll want to look at qualitative factors about the
company as well as the industry. You’ll also want to
analyze the company’s financials.
• We’ll learn more about how to analyze a company
through qualitative and quantitative means over the next
few weeks, but first, we want to give you an overview of
how to go about getting started.
– What do you need to know in the first place?
– Where do you find this information?
– How do you learn more about a company or industry?
35
http://www.kellogg.northwestern.edu/student/club/imc/Downloads/Stock%20pitch%20primer%20(Nov%202007).pdf
The Quick and Dirty
• You need to do a fair amount of work to be able to
analyze a stock, but keep in mind that it can be
broken down to these few points:
– Get a solid understanding of the company, operations, and
strategy.
– Understand the industry and company’s key value drivers.
– Understand the company financials and what they mean for
the business.
– Don’t rely on other people’s work or thoughts – do your
own!
– And remember, Peter Lynch estimates that the top stock
pickers are right 60% of the time, so don’t stop even if you
get it wrong.
36
Company and Industry Analysis
• We’ll spend a lot of time on financial analysis in
upcoming weeks, but solid company and industry
analysis is a very critical element.
• It allows you to understand the qualitative aspects
of a business, which the numbers only further
demonstrate.
• This analysis is especially important early on in
your research as it can help you rule out potential
investments or narrow your field.
37
Company Analysis
• When you look at a company, you want to get a solid
understanding of the firm, operations, and strategies.
• Firm Overview
–
–
–
–
What is the age of the firm?
Where is it in its economic life cycle (start up, growth, mature, decline)?
Where is it headquartered?
What is the company history?
• Key Lines of Business
– How many lines of business are there?
– Is the company diversified?
38
http://www.kellogg.northwestern.edu/student/club/imc/Downloads/Stock%20pitch%20primer%20(Nov%202007).pdf
Strategy
• Major Products and Services
– What are the characteristics of the products or services?
o Commodity?
o Specialized, quality?
• Primary Markets
–
–
–
–
How do sales break down geographically?
How many major customers does it have?
Is it dependent on a few customers?
Are the markets diversified?
• Current Operating Strategy
–
–
–
–
–
Is the company growing organically (from within)? --Google (GOOG)
Or is it growing through acquisition (buying other companies)?
Is the company restructuring or in a turnaround situation? --Ford (F)
Is the company in decline or downsizing? --NYTimes (NYT)
Or is the company mature and in steady state? --McDonalds (MCD)
39
http://www.kellogg.northwestern.edu/student/club/imc/Downloads/Stock%20pitch%20primer%20(Nov%202007).pdf
Management
• Management
–
–
–
–
–
What is the quality of the management?
What are their strengths and track record?
How long have they been with the company or in the industry?
What is their relevant experience?
What is their reputation?
• Corporate Governance
– What is the quality of the governance?
– Who is on the Board of Directors and how do they oversee the business?
– Are there any major red flags?
40
http://www.kellogg.northwestern.edu/student/club/imc/Downloads/Stock%20pitch%20primer%20(Nov%202007).pdf
Where do You Find this Info?
• Company Analysis
– Read the company’s annual report
o There is great info in the Management’s Discussion and Analysis section
– Reading any publicly available reports on the company
o See if you can find some online reports or reach out to an analyst at a bank to see if they’ll send you theirs.
– Talking to customers, competitors, investors, analysts, etc.
o There is nothing better than trying to talk to people who have interactions with the company.
– Reading presentations
o In the Investors Relations section of the website, there are often recent company presentations.
o They’re often only online for a few weeks, so save a copy before it’s gone!
– Attend an investors conference or watch a presentation
o There are lots of conferences hosted by investment banks on particularly companies.
o Look on the company’s website for upcoming events.
o Contact an analyst to see if you can attend or if that’s not an option, see if a webcast or a video presentation
is on the company’s website.
– Listen to a earnings call.
o Most companies host a quarterly earnings call for investors.
o You can call in and listen to the call and get an update on what is happening.
o It’s a great way to see what is going on now.
– Doing your own work
o Looking at a restaurant company, go check out the local franchise and kick the tires.
o If it’s a small company, see if you can’t call the Investors Relations contact. You never know, they might be
willing to talk to a student!
41
Industry Analysis
• You also want to learn about the industry and what that
means for the company?
• Competitors and Market Share
– Who are the competitors in the industry?
– What is the market share for each of them?
– Are any competitors taking or losing share? Why?
• Competitiveness Level
– Is the competition domestic, foreign or both?
– What are the characteristics (strengths, weaknesses, strategies) of the major
competitors?
42
http://www.kellogg.northwestern.edu/student/club/imc/Downloads/Stock%20pitch%20primer%20(Nov%202007).pdf
Industry Structure
• Production Profile
– Is it a labor or capital intensive industry?
– Is it a unionized industry?
– Are there any constraints on raw materials, labor, or other inputs?
• Business Drivers
– What drives success in the industry?
– What drives returns of companies in the industry?
• Growth Profile
– What are the historical, current, and projected rates of growth?
• Seasonal or Cyclical Patterns
– How sensitive is the industry to the business cycle?
– Is it a cyclical (goes up and down with the economy) business or defensive (stays
relative stable despite the economy?
43
http://www.kellogg.northwestern.edu/student/club/imc/Downloads/Stock%20pitch%20primer%20(Nov%202007).pdf
Industry Dynamics
• Regulatory Environment
– Is it a regulated industry? If so, who regulates it?
– What are the future outlooks for regulation?
• Macro Conditions
– How sensitive is the industry to macro conditions (interest rates, inflation,
consumer confidence, oil prices, etc)?
– What is the market share for each of them?
– Are any competitors taking or losing share? Why?
• Technological Change
– Is there a lot of innovation in the industry?
– Is that a positive or negative thing for the company?
– How have they reacted in the past?
44
http://www.kellogg.northwestern.edu/student/club/imc/Downloads/Stock%20pitch%20primer%20(Nov%202007).pdf
Where do You Find this Info?
• Industry Analysis
– Read industry reports
o Look online for reports on the industry – you can often find some great ones on various components of it.
– Find out as much as you can about the industry online
o Look online to see if you can learn more about the history, trends, growth, market share, etc.
o You’d be surprised at how much is available online and with the use of Google.
– Talk to investors, analysts, or others in the field
o See if you can’t tap the brain of someone who works or invests in the industry.
o The insight they’ll have can be invaluable.
– See if there are industry publications
o You can often find trade magazines or journals that can be helpful.
– Attend an industry conference
o Most industries have conferences for people in the business.
o See if you can attend or watch a presentation online – they’re great for learning.
45
Research Gets Easier
• With time, your ability to research
investment ideas will become better and
better.
• At first, it can be daunting to research an
industry that you are not familiar with or
have no experience in.
• The important part is to create a plan,
have clear deliverables, and decide early
on how you’re going to do your research.
• And trust us, the more research you do,
the easier it becomes!
46
Seminar Recap
• Finding a company that has investment potential makes your
job a lot easier.
• To find investment ideas, start looking around you – what
companies do you utilize services and products from each day?
• There are some great resources online and elsewhere to come
up with ideas, such as various investing blogs or investor
records.
• Company and industry analysis is very important to conduct,
so have a clear process and plan for how you’re going to
approach it.
• And don’t forget researching gets easier the more you do it!
47
Coming Up
Week 4:
• Understanding company and industry trends
• Analyzing an industry
• Completing qualitative analysis of a company
Weeks 5-7:
• Learning how to analyze a company through its financials
Week 8:
• Putting it all together with an investment recommendation
Weeks 9-10:
• Guest lectures/presentations
“Investing without research is like playing stud poker and never looking
at the cards."
- Peter Lynch