In this post, I will go through the process that I have developed whenever I was asked to cover a new company that I wasn’t covering before during my 10y research career. You can also read this in conjunction with the post sharing my experience at a hedge fund.
1) Start with the Stock Price Chart
Then identify the key happenings when there were significant movements such as sudden spikes and sharp drops in both prices and volume.
Next, look for the turning points in price trends where there are clear re-rating or de-rating over a period of time. Start by researching for news around the turning point time period - as examples, it could be a change in management strategy, a competitor coming up with a new product.
Sometimes you may not be able to find anything specific. Then check the macro environment and overall market as well as the price movements of similar stocks in the industry. The reasons could be macro or affecting the industry as a whole so not specific to the stock. That’s why when one study a stock it always helps to know the peers.
Take notes on all the things that you felt have impacted the share price so you know what to look out for in the future. This is a framework on what to look for as well as what to ignore.
From an investment perspective, I would say a steady rising price trend is always a good sign. A common mistake novice makes is that after some research and analysis, they think they have identified a turnaround gem and start putting money in.
The are a couple of problems:
By doing research, you have probably increased your hit ratio from 50% to 55%. Meaning you can still be wrong 45% of the time assuming you have really increased to 55% that is, which is in itself a big assumption. What this also means is that you need to invest 100 times to get that 55% win so place your bets accordingly and don’t put like 50% of your portfolio in one stock after some research.
Even assuming you are right this time, the market needs time to reflect your research and you may lose money in between so mentally, you have to set a time frame as well as a stop loss, which is when you throw in the towel and admit you are wrong.
2) Go to Company websites and subscribe to their IR newsletters
To make sure you are aware of all the latest happenings from the official source. Don’t just rely on news. You have to always go back to the company for the official commentaries of what’s happening.
3) Watch the latest Webcasts, Read the Results Presentations
Also, check if management has attended any roadshows and conferences recently and see if there are presentations or even transcripts from them. Go through so you know what management is talking about currently in their business and also check to see if any analysts/investors asked questions and how did management respond.
Also have a look at the management profile (Chairman, CEO, CFO, COO or any other high profile management personnel), their work history as well as go through news to see what they have been saying in the media. Check the share prices of companies in their work history to get a sense of their track record and reputation.
4) Build a simple Model in EXCEL
This is to allow you to have a better grasp of the key drivers of revenue and expenses. Such that when an announcement is made or something happens, you can immediately go back to your model and see roughly how earnings could be impacted hence the impact to share price.
5) Identify the upcoming Catalysts
Try the best you can to build a timetable of upcoming events such as when is the next result announcement, the next ex-dividend date, upcoming board meeting, new product launches, scheduled media announcements or any major deadlines such as an acquisition or other corporate events. Also, look for availability of monthly data.
Have some view as to whether you expect the news to be positive or negative to share price, how much is priced in.
6) Find the Key Shareholders
It helps to know who you are actually on the same boat with. Try to find out who are the active players in the stock and do they trade often?
Are they mutual funds that have been invested for many years so are long term investors? But have they been getting out recently?
Or are there hedge funds or more retail investors driven? They may be more short term oriented so expect more volatility in share prices.