You’ve received a lot of information on various investing vehicles and styles, ideas on how to create your best investing strategy—driven by your personal risk profile, a primer on how to analyze stocks, suggestions on protecting your portfolio, and how to maximize your retirement savings.
I’m going to wrap up by answering these two important questions:
- How do you find investing ideas?
- What are the best resources for researching those ideas?
Pay attention and listen to the chatter around you…
Peter Lynch ranks as one of the best investment managers of all time. He took over the Fidelity Magellan mutual fund in 1977. When he retired in 1990, the fund had a 29% average annual return, beating the S&P 500 index in 11 out of 13 years and building the fund’s assets from $20 million to $14 billion.
He often said, “Our greatest stock research tools are our eyes, ears and common sense.” Lynch found many of his investing ideas by walking through stores, watching TV, listening to the radio, driving down the street, reading the newspaper, and talking with friends. In other words, he paid attention to what people were talking about and what they were buying.
If you love a particular product, investigate it. Is it a publicly-traded company? After all, who among us didn’t love Home Deport the minute we walked through its well-lit aisles with helpful salespeople? Some of us were smart enough to investigate the company and buy the stock.
This is a great way to gather ideas, but they are just ideas and must be investigated further to determine if they are valid investment choices and if they fit into your investing strategy.
Use Stock Screeners…
A stock screener allows you to narrow down the list of publicly-traded companies to a manageable number, by choosing certain ratios or parameters that fit your investing style or strategy.
For instance, you may be interested only in companies that pay dividends. That’s doable. Or you might be looking for growth companies, so you would want to get a list of companies whose sales and earnings are increasing. Or you might ask the screener for companies that are value-oriented, trading at low price-to-earnings (P/E) ratios. Or you may only be interested in stocks trading for less than $10 a share. The combinations are almost endless!
The screener runs your choices against its particular database of companies and returns a list of stocks that fit your parameters. With stock screeners, you can get as complicated as you want, and you can spend a lot of money on them. But if investing is your hobby, not your business, there are several very free screeners that are still quite good.
My number 1, go-to screener is Finviz, https://finviz.com/
The site has more than 50 different criteria you can choose to analyze your stock ideas. It includes both fundamental and technical parameters, as well as descriptive characteristics. You can also see charts and quotes.
Zacks, https://www.zacks.com/screening/stock-screener
Zacks has a rating system and is also very robust, but I think it is more difficult to use if you are asking for a lot of parameters, and screening for ratings requires a subscription. However, it offers some items that Finviz doesn’t, such as earnings surprises and analyst views on stocks. You can also save your screens and export results to a spreadsheet, which you can’t do with Finviz’s free screener.
Yahoo Finance, https://finance.yahoo.com/screener/new/
Yahoo’s screener is a good one for folks new to investing. It’s fairly simple to use, and allows you to set a number of parameters.
MarketWatch, https://www.marketwatch.com/tools/stockresearch/screener/
This screener is also simple, albeit less robust than some, but it’s a good way to get your feet wet.
I like to start with a broad range of parameters, and then narrow them down manually. However, if you are just starting out in your investing life, I recommend you start small. Just play with the screeners, see what you come up with, and then investigate them further on the following websites.
Websites
There are scads of financial websites out there, many with some fantastic data on hundreds, if not thousands, of companies. The investment brokerage with whom you place your trades, undoubtedly, has a website—and often a stock screener—that will help you in your research. But over my years of investing, I’ve collected a few favorites. Here is my list, and why I like them:
Big Charts,
http://bigcharts.marketwatch.com/symbollookup/symbollookupresults.asp
This is a great website for finding charts—current and historical.
Yahoo Finance, https://finance.yahoo.com/
Not as robust as it used to be, Yahoo Finance is still my number one choice for getting quick data on a company. It gives you trading history, current stats like insider and institutional holdings, 52-week highs and lows, company profile, recent analyst ranking changes, current news about the company, and a whole lot more.
Reuters, https://www.screener.reuters.wallst.com/stock/us/index?quickscreen=gaarp
This site gives you more than 50 ratios for the company of interest, along with comparison ratios for its sector, industry and the S&P 500.
Nasdaq, https://www.nasdaq.com/symbol/nasdaq
The Nasdaq site offers information on frequency of dividend payments, analyst research, charts, financial reports, stock comparison tools, and much more.
Market Watch, https://www.marketwatch.com/
This site has a lot of the same information that the others do, but I particularly like it for its sector and economic statistics. Here, you can easily see all the federal reports, estimates, and actual numbers that the government reports each week.
Now, for those of you who are interested in the technical side of investing analysis, these two sites, https://www.barchart.com/ and http://www.stockta.com/ will give you lots of charts and technical indicators that can help you decide if the time is right to buy or sell.
Analyst Reports
I love to read the reports issued by Wall Street analysts. There is an amazing amount of useful information to be had, including:
- Current rankings of stocks—can give you great ideas to investigate
- Rating changes or initiations—if you hold the stock, you’ll find out the reasons for upgrades or downgrades
- Number of analysts following a stock and their rankings—stay away from companies with too few or too many analysts following them (too volatile)
- Guidance changes—again, a good indicator of good or bad events
- Management changes or additions—could be good or bad
- Industry or sector information—analysts write fabulous industry reports, so if you happen to be a customer of a brokerage firm with a research department, I recommend that you definitely take advantage of reviewing the industry/sector reports they issue. They usually go into great detail, and will give you a fabulous overview of any number of industries.
But what I don’t do is consider that the analyst report is the Holy Grail of stock analysis. Here’s why:
Analysts are Predisposed to Highly Recommend the Companies that bring Business to their Firms
The 1929 stock market crash brought to light the blatant and unregulated insider trading that permeated Wall Street. One of the results of that catastrophe was the Glass-Steagall Act of 1933, which created the Chinese Wall—the “supposed” separation between a brokerage company’s research and its investment banking divisions.
Until then, brokerage firms were in their heyday, underwriting and issuing stock for companies, and their research departments hyped it to their retail customers, always with glowing recommendations—whether or not they merited it. You see, the goal was to sell the stock and make their investment clients and themselves—not their retail customers—rich.
The Glass-Steagall Act and the Chinese Wall were supposed to end that wholesale bias of research “ratings”, preventing the investment bankers from interacting with the research analysts. But in reality, that never happened.
In most brokerage firms, the majority of the research reports are still written on behalf of the firm’s investment banking clients. And even in the boutique brokerage firm for which I plied my trade in the ‘90s, it was routine for a research analyst to be “not-so-gently-persuaded” to write up a positive report on one of the firm’s investment banking clients.
Because the system makes it difficult for complete objectivity, investors need to be ultra-vigilant when it comes to digesting analyst reports.
Analyst Recommendations aren’t all that Accurate
According to S&P Global Market Intelligence, two-thirds of the companies in the S&P 500 index tend to post earnings per share that are higher than the consensus analyst estimate.
A study a few years ago by nerdwallet.com found that more than 70% of the analysts’ “buy” ratings were accurate. But when it came to “hold” ratings, only 20% were correct. And forget about “sell” ratings! In analyst parlance, that term hardly ever appears. After all, they can’t put a “sell” rating on the shares of their investment banking clients, can they? That would definitely lead to a boycott of that firm.
Consequently, most companies whose shares the analysts don’t like are given “hold” ratings and those “sell” ratings are generally confined to companies that don’t do business with the brokerage firm. In NerdWallet’s report, the number of sells was so small (33 out of 883), they were statistically irrelevant.
Does Outperform Mean Buy?
One of the biggest complaints I hear from investors is they can’t understand the analysts’ ratings. That’s because their terminology is often obscure. Just look at this chart FINRA put together (Figure 24) in an attempt to explain the ratings systems of three brokerage firms:
Figure 24: Rating Systems of Different Brokerages
| Firm A | Firm B | Firm C |
| Buy | Strong Buy | Recommended List |
| Outperform | Buy | Trading Buy |
| Neutral | Hold | Market Outperformer |
| Underperform | Sell | Market Perform |
| Avoid | Market Underperformer | Market Underperformer |
Clear as mud, right? The only thing that’s clear is that it’s almost impossible for an investor to interpret these ratings to actually determine if a stock is a buy, hold or sell.
Now, I’m not beating down all analysts. The fact is, as NerdWallet showed, they’re right 51% of the time. And sometimes they do go against the herd.
My point is this: Don’t take analyst ratings (if you can figure them out) to heart. There are just too many conflicts inherent in the system. Instead, utilize them for the unbiased information they contain.
Investment Newsletters
Now, I admit to being a wee bit biased as I’ve been in the investment newsletter business for more than three decades. Consequently, I’ve seen a lot of good newsletters and many more bad ones. But you can bet that those who have survived—and prospered—for many years have excellent track records and deliver for their subscribers.