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A common question I receive is how I identify new companies to research and whether I use stock screeners.
I use the free version of the Finviz stock screener sparingly. Stock screeners are not exclusive to a single user, and therefore, any stock screener output is readily accessible by all paying subscribers. I, therefore, derive no benefit from a subscription to a stock screener.
Furthermore, the output from stock screeners is not always reliable.
Another question I receive is whether I rely on lists of companies that have increased their dividend for a certain number of consecutive years.
Absolutely not!
I think historical dividend metrics is a crazy way by which to select potential investments. Why should the number of consecutive years a company has increased its dividend have any bearing on how a company is going to perform in the future?
If I do not rely on stock screeners then how do I come up with investment ideas?
Goal and Objectives
First and foremost, clearly define and articulate your goal and objectives and risk tolerance. Doing can help you easily eliminate thousands of potential investment opportunities.
Narrow The Universe Of Companies For Analysis
Once you clearly define and articulate your goal and objectives and risk tolerance, it becomes easier to narrow the universe of sectors and industries worth investigating.
I follow this approach because researching stocks is extremely time consuming. The research process, however, becomes progressively faster as I work my way through a series of companies in the same sector and industry.
Select Companies Within Your Universe Of Companies For Analysis
Within your universe of companies for analysis, you can prioritize the companies you wish to analyze.
Based on my investor profile, for example, I include the following parameters to identify companies worth researching.
- strong growth opportunities;
- clear competitive advantages;
- high barriers to entry;
- strong free cash flow generation;
- acceptable debt levels (I really like companies with no debt/low debt levels);
- management whose interest are aligned with shareholders; and
- exemplary capital allocation;
I focus almost exclusively on US companies and have no interest in directly investing in international companies; I do not understand financial statements for foreign companies. International exposure can be achieved by investing in US companies with international operations.
Among some of the sectors and industries I exclude for analysis are airlines, auto manufacturers, biotechs, gambling, marine shipping, utilities, real estate investment trusts, precious metals and mining companies, steel, tobacco, and micro- and small-caps.
By setting the parameters reflected above, I narrow the universe of companies for analysis.
Stock Screeners
Once I identify specific sectors and industries, I further narrow focus by screening for companies using the following parameters.
- Market cap (I focus on companies with a $10B+ market cap)
- Forward PE
- Long-Term Debt/Equity (the lower the better)
- Debt/Equity (the lower the better)
- Sales Growth for the past 5 years
- Current Ratio
- Quick Ratio
- Gross/Operating/Net Profit Margins
- Average Volume - I arbitrarily select an average volume of at least 200,000 shares traded daily.
This enables me to dramatically reduce the universe of companies I should research. I do NOT, however, make investment decisions based on stock screener output.
Other Investors
Many exceptional investors occasionally ask me for my thoughts on a particular company and/or suggest companies I might wish to review. Before they provide me their thoughts, I prefer to conduct my own analysis because I do not want their opinion to influence my decision.
Social Media
I limit my time on social media platforms because they can become a terrible waste of time.
Online Subscriptions
I waste no money on online subscriptions.
Media
I do not let general financial news influence my investment decisions. By investing in great companies, I expect management to determine how best to navigate their companies through different business conditions.
Fundamental Analysis (FA) and Technical Analysis (TA)
FA looks at the value and growth outlook for a company. TA essentially shows the demand for a stock and how the market perceives those fundamentals.
I disregard TA. A company's share price provides no indication of how a company is likely to perform over the long-term.
Initial Public Offerings
I avoid them. Period!
Spin-Offs
I occasionally look at spin-offs and the parent. Some might be good. Others not so good.
Broadridge (BR) has performed admirably after being spun-off from Automatic Data Processing (ADP). CDK Global, however, was a terrible spin-off.
When United Technologies (UTX) spun-off Otis (OTIS) and Carrier (CARR) and acquired Raytheon to become Raytheon Technologies (RTX), I decided to have exposure to all 3 companies.
Finding Stocks Through The Normal Course Of Life
As we go about the normal course of life, we invariably come across companies. Many of my existing holdings (see FFJ Portfolio Holdings) have been identified this way.
This method of identifying investment opportunities is unlikely to lead me to obscure micro- and small-cap companies. This is perfectly acceptable since I have no interest in such companies.
Final Thoughts
Identifying suitable investment opportunities is a daunting process unless we clearly define our goal and objectives and risk tolerance. If we can narrow the universe of sectors and industries we think meet our investor profile, the very time consuming task of analyzing companies becomes less daunting.
I currently have exposure to 7 Canadian and 50 US companies of which:
- 20 companies constitute over 66% of our total holdings; and
- 30 companies constitute over 80% of our total holdings.
Some investors on social media have low/mid 6 figure portfolios with exposure to 100+ companies. This, in my opinion, is akin throwing mud at the wall and implies the investor has not clearly defined their goal and objectives and risk tolerance. You can not possibly have over 100 'best investment ideas'.
This many holdings when a portfolio is this small means that a significant share price increase in one holding is likely to have a negligible impact on the overall portfolio.
The process I follow works for me. I encourage you, however, to find and follow a process that suits you.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
