How To Shortlist Stocks For Analysis.

shortlist stocks for analysis

There are more than 14000 listed companies in USA .There are nearly 4000 listed companies in National Stock Exchange(India). There are various ways to invest in these companies like stocks bonds or derivatives. Each has difference method of analysis.

Track or analyze all this companies is not possible because :

  • Fundamental analysis of company is time consuming process it may take 2 days just to analyze one company considering you have knowledge of industry and all its competitors. If investor have to understand its competitors also then it might take month.
  • Limited capacity of human brain we cannot consume such large amount of data and more than that we cannot accumulate it.
  • We cannot have expertise in all fields.
  • There are number of instruments in stock market along with stocks like futures,  options, LEAPS ( long term equity anticipation securities)  for which you have to do different short term analysis where we have to analyse totally different factors affecting price trend .

Because of above reasons above reasons it is necessary to shortlist stocks to focus on few .

What Warren Buffett thinks about this ?

When Warren Buffett was asked by interviewer that  there are 14000 listed companies on Stock exchange how to find best one for investment.

To which Warren answered start with A’s. This is not possible for ordinary person like us. What we can do is to identify few stocks that have potential to grow and then analyze each of them.  

This post has list of methods which I follow to shortlist stocks for analysis.

Method 01: News

Newspaper magazines publish articles or case studies on companies also there are recommendation columns which briefly describe merits of company (do not blindly follow recommendations, analyze first ). If you any interesting particular element about such companies then  you can move on to further research about that companies.

Shortlist stocks

Now-a-days business news channels take interviews of management of many companies which can be very helpful to gain insight into companies. In such interviews management talk about their business model future strategies and competitive advantages.

There are some news which do not tell about any companies but are still helpful for shortlisting companies like business shutdown news always good for competitors.

News related to cyclical industries like less output in underlying commodity is good opportunity to invest in downturn of influences companies. Media is best medium to shortlist track understand special situations like mergers acquisitions corporate restructuring, turnarounds buybacks, etc.

Method 02: Scuttlebutt

Scuttlebutt technique was introduced by legendary investor Philip Fisher through his book common stocks and uncommon profits.

If you want to learn how to invest by looking at what is happening around you then surely buy this book.

What is scuttlebutt technique?

It is all about observation and asking people who may have information about respective topic. You don’t even need to have any hardcore accounting knowledge for it just understanding basic terms in accounting will be fine. This is the best way to find hidden multibagger companies before any one in wall street.

Also Read : How To Analyse Balance Sheet Line By Line

Here are some examples of scuttlebutt techniques.

  • While buying grocery you observe that there is new product on shelf that is selling like nuts. Then you pick that product know which company is selling product whether company is listed  and then do further analysis of company.
  • You see any grocery chain whose stock is falling but every time you pass from it you see store is always crowded with customers and you decide to take a contrarian view and invest in stock.
  • You do a research and find a company worth investing but you decide to interrogate dealer of companies product and you came to know that their competitors are doing even wonderful job.

Example :

There is company named MoneyPlant Inc. whose factory is in you area. You have read in newspaper that stock of MoneyPlant Inc. has fallen 50% because promoters have sold all their stake in company . Opposite to that what you see that more trucks of goods are sent out of factory like never before,you also ask factory worker who is friend of yours he tells same that pace of production is more than before. Now you are confused about what to believe. fortunately you decide to take a chance and invest in company.

What happens after one and half year is that market realizes its mistake and push stock upward to previous levels. You have doubled money because of information advantage you get from scuttlebutt technique.

Method 03: Screeners

There are many screeners like Gurufocus.com  and  www.screener.in  (for India) . You can apply filters and set category of stock you want. I think this is the best technique to find undiscovered stocks.

shortlist stocks using screeners

What possible filters you can apply.

  • Market cap of 10 million to 250 million. ; many undiscovered stocks are found in this cap range.
  • No stocks below 5 million. ;because this are penny stocks and so are very risky.
  • Stock converted form loss to profit. .;  to look for undiscovered turnaround opportunities.
  • Positive free cash flows for last three years. ; to knock out bad operating businesses.
  • Particular revenue growth.; finding growth companies.
  • Low price to free cash flow per share ; strong cash flow stock at cheap prices.
  • Low Price to Earning and high return on equity  ; undervalued stocks.
  • High promoter holdings.; generally considered as good sign.
  • Low mutual fund or institutional holdings. ; low institutions buying increases chances of getting undervalued opportunity.

You can decide filter either by your own experience, by interviews of successful investors, Their writings or by your investment checklist.

One recommended book for creating checklist and filters in sreeners to find undiscovered stocks is One up on the wall Street which is written by best fund manager in the world Peter Lynch.

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