0:02 this video is sponsored by morningbrew
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0:06 today
0:07 ladies and gentlemen welcome to the
0:09 plain bagel I'm your host Richard coffin
0:10 today's video is a bit of a peek behind
0:13 the curtain to show you how the bagels
0:15 are made and discuss my own investment
0:18 research process as a investment analyst
0:20 I've had this requested quite a few
0:22 times over the years given that I work
0:24 as a portfolio manager investment
0:26 analyst for my day job and I figured
0:28 what the heck I would cover things at a
0:30 high level go through my general
0:33 step-by-step process and it's not a very
0:35 formal one I do change things up every
0:37 now and then but hopefully uh people who
0:38 want to go through this process
0:40 themselves find a bit of value in it now
0:41 if you notice before we get started
0:43 firstly this isn't a recommendation that
0:45 people should necessarily stock pick or
0:47 do their own stock research I think most
0:48 people are better served putting their
0:50 efforts elsewhere either hiring a
0:52 professional or just investing passively
0:54 countless Studies have shown just how
0:56 difficult it is to beat the market with
0:57 stock picking so unless you're
0:59 passionate about researching stocks
1:00 you'll probably find this all very
1:02 boring and strenuous with no guarantee
1:04 of strong performance and secondly while
1:05 this is obviously my own research
1:07 process us there are different ways to
1:09 research a stock there's technical
1:11 analysis which focuses on past prices
1:13 there's quantitative analysis which
1:15 focuses on analyzing the relationship
1:17 between different quantitative variables
1:19 and then there's fundamental analysis
1:20 which is my own approach of
1:21 understanding the underlying business
1:23 and within fundamental analysis there
1:25 are different styles as well I do
1:27 generally tilt towards value investing
1:28 which is trying to buy a great company
1:30 at a great price but there is also
1:32 growth investing which I do hold some
1:34 growth companies where you pay up a
1:35 little bit more but they have a larger
1:38 potential to grow their profits into the
1:39 future this video will be divided into
1:40 chapters so you can skip between the
1:42 different sections I'll try to provide
1:44 alternative tools to the paid ones I use
1:46 at work and I'll also throw up a few
1:49 terms and and whatever on screen so that
1:51 you can have something to reference
1:53 later on and for the purpose of saving
1:54 time I won't try to Define every
1:57 individual metric that that comes up and
1:59 we'll generally like mentioned keep
2:00 things high level so with that out of
2:02 the way let's jump into it the first
2:04 step as you can imagine is screening for
2:06 ideas and finding the stock that you
2:08 want to research the whole research
2:11 process takes quite a long time it has
2:13 taken weeks at times but obviously
2:14 you'll want to narrow down your list of
2:15 potential stocks so you don't waste your
2:18 time doing this whole process only to
2:20 find that you don't really care for the
2:21 company now screening isn't necessarily
2:23 a formal process I do sometimes just
2:25 research a stock because I want to or
2:27 there's been an interesting recent
2:29 development but I do have a screener
2:31 that I regularly refer to a screener
2:33 lets you filter the universe of stocks
2:35 so that you only have a list of
2:37 companies that meet certain criteria I
2:39 generally keep it pretty broad but we'll
2:40 look for things like Revenue growth
2:42 being profitable as well as keeping debt
2:43 within a certain range from there I'll
2:45 typically put the tickers through an
2:47 internal tool that summarizes all their
2:49 key financial information onto a
2:51 one-page summary not to make any
2:53 decision off of but again just to get a
2:56 quick overview of how healthy or
2:57 unhealthy the company is and whether
2:59 it's something I want to look into
3:00 covering things like past financial
3:03 performance expected consensus estimates
3:05 moving forward their debt levels a bunch
3:07 of sales just again summarized on a page
3:09 to see if there's anything of Interest
3:10 here now once I have the company that I
3:12 do decide I want to do this deep dive
3:14 into the second step is understanding
3:16 the business
3:18 makes sense I know that sounds obvious
3:20 but as an investor you really are a part
3:22 business owner so I do try to take the
3:24 mindset of understanding the ins and
3:25 outs of the company in the same way I
3:27 might if I were to buy a private
3:28 practice and that means understanding
3:30 all the company's segments and what they
3:33 do how they earn their money uh the
3:34 nature of the company's revenues and
3:36 whether they're contractual recurring or
3:38 seasonal where the company operates in
3:41 terms of geography customers suppliers
3:44 employees Regulators management anyone
3:45 that plays a role in how this company
3:47 will perform and depending on which
3:48 sector the company operates within also
3:50 make note of their key performance
3:53 indicators or kpis which again are kind
3:55 of sector specific allow you to compare
3:56 companies that are within the same
3:59 sector but also requires a bit of
4:00 Industry background information and
4:02 there are times where I don't research a
4:04 company because I don't yet have that
4:05 familiarity with the industry it
4:07 operates with and you do have to operate
4:10 as mentioned many times by others within
4:12 your circle of competence where you feel
4:14 comfortable now this part is mostly
4:15 qualitative there will be say
4:18 quantitative figures that come up but a
4:19 lot of it is again just understanding
4:21 the details of the operations
4:23 what this company does so where does
4:25 someone find all this information well
4:28 outside of a Google search which is not
4:30 a bad idea to give you an overview of
4:31 the company a good idea is to start with
4:34 the annual report or 10K in the US as
4:36 well as the most recent quarterly report
4:38 if that doesn't also apply to the 10K
4:40 all of which you can find on Edgar in
4:42 the U.S Cedar here in Canada or the
4:43 company's investor relations page
4:45 because they do do a good overview of
4:48 the company's business the risks
4:49 applicable and key financial information
4:51 from there I like to go through investor
4:53 reports and recent 8K filings which
4:55 provide important updates about the
4:57 business and I do have access to a lot
4:58 of paid for research which I'll
5:00 typically go through the external
5:03 analysts reports on this company I also
5:04 might look up commercials tutorials
5:07 customer reviews find any information I
5:09 can about them now as you expect that's
5:11 a lot of details so I do type notes as
5:13 I'm going I do typically categorize
5:15 stuff under the SWOT framework which is
5:17 strengths weaknesses opportunities and
5:19 threats strengths and weaknesses are
5:20 internal factors for the company
5:22 opportunities and and threats are
5:24 external factors and that just lets me
5:27 quickly categorize stuff I'll also write
5:29 questions that I want to get to later if
5:31 there's something I don't understand or
5:32 a risk that I've thought of that I want
5:35 to look into I kind of do a parking lot
5:38 of ideas that I want to go back and
5:40 research at a later point and my goal
5:41 through all this is trying to find
5:43 Quality Companies companies that have a
5:45 competitive Advantage an attractive
5:47 business model and as Warren Buffett
5:49 likes to put in a mode something that
5:51 sort of protects them from competition
5:52 all right so once we understand the
5:54 business the next step is understanding
5:56 the finances where we get into the
5:58 numbers obviously this is very number
6:01 heavy and does require an accounting
6:03 background to understand the different
6:05 segments that you look at but generally
6:06 I'm looking at the company's financial
6:09 position in terms of debt how solvent
6:10 they are their capital structure and
6:13 whether they can meet their payments the
6:14 company's growth profile their
6:16 profitability and again where they have
6:18 areas for improvement a lot of this as
6:20 you would imagine does really boil down
6:21 to analyzing the financial state
6:23 statements the income statement which
6:25 tells you how the company performed in
6:26 the given year in terms of accounting
6:28 earnings the balance sheet which gives
6:29 you the snapshot of what the company
6:31 owns and what they owe as well as the
6:33 cash flow statement which is similar to
6:34 the income statement but shows you where
6:36 cash is actually moving within the
6:38 business not just accounting earnings
6:41 and accounting costs where money was
6:42 actually spent and earned now I
6:44 typically start by calculating a bunch
6:46 of cumulative average growth rates which
6:48 I'll throw out the formula for but I'll
6:50 do this formula over a 5 10 or 15 year
6:53 period to get an idea of what the
6:54 average growth rate over these periods
6:57 are for revenues and profit measures I
6:59 also really like common size financial
7:00 statements where you put everything as a
7:03 percentage of a key figures so for the
7:05 income statement that's revenue for the
7:07 balance sheet that's total assets and
7:08 this is a great way to look from year to
7:10 year to see what costs are getting
7:11 bigger which ones are getting smaller
7:13 relative to the amount of Total Money
7:15 that the company is earning then I'll
7:17 calculate a bunch of margins and ratios
7:20 that again give that profile about how
7:22 the company is growing how profitable
7:24 they are and different operational
7:27 solvency liquidity things that tell me
7:28 the General State of Affairs it's also
7:30 here where I'll carry out a sort of pure
7:33 analysis comparing this company to ones
7:35 in a similar space based primarily off
7:38 of these Financial details as well as
7:39 the key performance indicators found
7:42 earlier and I have at times pivoted to a
7:45 new idea based on this peer comparison
7:47 because something else looked more
7:49 attractive once I really got down to the
7:50 numbers now throughout this whole
7:52 process and earlier with the overview of
7:54 the business I do carry out a check for
7:59 red flags I call it forensic analysis in
8:00 understanding the business I want to
8:01 know what the related party transactions
8:03 are how management is compensated any
8:06 conflicts of interest and in terms of
8:08 finances any accounting Shenanigans
8:11 unfortunately you can't always rely on
8:12 the figures as they're reported
8:14 companies do at times fudge the numbers
8:16 for example it's really common for
8:17 management to highlight what's called an
8:19 adjusted figure which is where they take
8:20 an accounting figure but then make some
8:22 changes to it so that's more
8:24 representative of what they believe the
8:25 company has done it's not to say that
8:27 that's always nefarious but it's really
8:29 important to look into what the
8:30 definition of that adjusted figure is
8:33 and what they are adding or taking out
8:35 of this number because the reason it's
8:36 adjusted is that it doesn't meet
8:39 accounting rules or regulations now in
8:40 terms of where to find all this
8:43 information I primarily rely on a data
8:45 terminal that my company pays for which
8:47 unfortunately just isn't an option for a
8:49 lot of people they are very expensive
8:51 there are free versions out there with
8:53 not quite as many features but they're a
8:55 good starting point for getting again
8:56 the financial statements easily
8:58 accessible and if you can get something
9:01 with an Excel add-in Kudos because that
9:03 really makes it easier to pull the data
9:05 that you're looking for into the
9:07 template you want when it comes to
9:09 things like pure analysis or just the
9:10 specific metrics that you want to look
9:12 into I've made a crazy amount of use out
9:15 of excel templates and programs that
9:18 pull data terminal information and one
9:19 of our sort of proprietary things for
9:22 example is a peer comparison scorecard
9:25 where based on the industry there are
9:27 different metrics that are populated to
9:28 compare companies at a very high level
9:31 and quickly see how they look on
9:34 different kpis finances all that stuff
9:36 so I'll include some free Alternatives I
9:37 can't really vouch for many of them but
9:39 I have heard of them and if you're
9:40 relying on a service for data make sure
9:42 you understand how the data is pulled
9:44 whether it's aggregated whether they
9:45 make any adjustments to it because it
9:48 makes it really important when trying to
9:50 research a company is being able to rely
9:53 on the data all right step four
9:54 it's taking longer than I expected but
9:56 step four is understanding the strategy
9:59 everything we've done so far is the sort
10:02 of historical perspective on things at
10:03 this point I want to know what the
10:05 opportunity moving forward is this
10:06 includes going over the Strategic
10:08 priorities of management as well as
10:10 where they plan to spend money what the
10:11 capital expenditure is moving forward
10:14 will be a couple of expenditures I don't
10:15 think I've talked about but found in the
10:17 cash flow statement and it covers the
10:19 money the company is investing in itself
10:21 I also want to know how they'll be
10:23 financing those plans so I'll consider
10:24 whether they're taking on more debt or
10:27 issuing shares or hybrid instruments
10:29 which get a little complicated
10:31 regardless of what the plan is what I'm
10:33 looking for is to evaluate its
10:36 feasibility the risks involved and the
10:38 company's track record for doing what
10:40 they say they will do moving forward
10:41 I've seen a lot of companies fail by
10:43 doing something that they have no
10:46 experience in doing so it helps when a
10:48 company if they are a Serial acquirer
10:51 where they buy a bunch of businesses it
10:52 helps when they have a history of doing
10:54 that successfully sleep and growing
10:56 their company as a result actually
10:58 optimizing the companies that they bring
11:00 in under their umbrella rather than just
11:03 spending investor money to put growth on
11:05 the accounting statements when they
11:07 aren't actually improving their business
11:08 one way you can evaluate the track
11:11 record is by looking at the 5 10 15 year
11:15 average or some variation thereof of Roi
11:16 figures which includes return on Capital
11:19 employed return on invested capital and
11:22 return on Equity among others but those
11:24 are ones that I look to look at and you
11:25 can do a qualitative review of
11:26 management as well in terms of their
11:27 experience or tenure with the business
11:29 one of the things I found really helpful
11:32 myself as an analyst as a quick tip is
11:35 building out a checklist of things you
11:36 want to explicitly look for and this is
11:38 a checklist that you build out as you
11:40 research companies and you think of
11:42 things that you want to look for when
11:43 trying to determine what the mode is
11:45 whether they're a healthy business all
11:48 this stuff I have my own checklist that
11:49 I've built over time just an example of
11:51 one thing on there is whether the
11:53 company adds value for all the
11:54 stakeholders or are there any
11:56 stakeholders outside of competition that
11:58 will lose from operations and that will
12:01 present a risk to the business's success
12:02 in terms of where you can find
12:03 information about the strategy for the
12:05 firm you can typically find it in those
12:07 regulatory filings the 10K will
12:09 typically have some sort of high-level
12:12 strategic objective for the business but
12:13 you can also look at investor
12:15 presentations which again will highlight
12:17 it and transcripts from earnings calls
12:19 are great because management is often
12:21 asked questions about what they expect
12:23 to do moving forward and the challenges
12:25 they expect you might also find
12:26 transcripts from the different
12:27 conferences management have gone to
12:30 which you again might be able to find on
12:31 the Mr relations page and also through
12:32 my company I've been able to meet
12:35 Executives and have calls and attend
12:37 in-person meetings with Executives from
12:39 different companies in terms of research
12:40 in the industry again I do have some
12:43 paid for services which really help I do
12:45 really rely on the data terminal as well
12:47 as some expert inputs and new sources
12:49 but in terms of news that's actually a
12:51 good thing that most people can access
12:53 is just researching news about about the
12:55 industry you might be able to find some
12:57 different research stats about total
12:59 addressable market and whether things
13:01 are growing or Contracting so once I
13:02 understand the business I understand
13:04 their finances and I understand their
13:06 strategy from there I'll look at the
13:07 actual evaluation for the stock it's
13:09 something I leave later on into the
13:12 process because I don't want my earlier
13:13 steps to be influenced by whether the
13:15 stock is expensive or cheap even though
13:17 that is important their number of
13:19 methods for doing this at a high level
13:21 there's relative valuation which is
13:23 looking at multiples things like the
13:25 price to earnings multiple EV to a bit
13:26 of free cash flow yield things like that
13:29 which you can compare historically to
13:31 what it's been in the past as well as to
13:33 peers to see what related companies or
13:35 companies in the same industry are
13:36 trading at to see whether you're above
13:39 more expensive or below that level the
13:41 more detailed approach is an absolute
13:43 valuation such as a discounted cash flow
13:45 which I do do from time to time for
13:47 companies where you actually forecast
13:49 all the line items of different
13:51 financial statements to forecast their
13:53 free cash flow into the future year
13:56 discounted to today's price so that you
13:58 have an idea of what you should pay
14:00 today for that future performance I like
14:02 to change the variables to see how the
14:04 company's stock price would be in
14:05 different circumstances and what's
14:07 justified in terms of the Stock's price
14:09 I'll also consider the more current
14:12 events around the stock recent lawsuits
14:14 current headlines press releases which
14:15 you can again find on the company's
14:18 website and I'll try to understand what
14:21 variables in this you know realm are
14:23 influencing the current stock price as
14:24 it tends to be the more recent stuff
14:27 that sways prices in the short term it
14:29 doesn't matter much as a long-term
14:31 investor but it does help with the entry
14:33 point and I do consider some technical
14:34 aspects of the stock and more
14:36 qualitatively things like whether
14:38 management is buying or not but really
14:39 at this point if I like the company and
14:41 I think the valuation is attractive
14:42 relative to what it could potentially
14:45 earn then I'll likely be investing at
14:47 this step now the problem is that stocks
14:49 that have gone through all the previous
14:51 sort of filters and steps at this point
14:53 tend to be the most expensive you know
14:55 the stocks that have great growth track
14:57 records great profitability excellent
15:00 management all that perfect stuff
15:01 uh they tend to be more expensive
15:03 because investors recognize that and
15:05 they bid up the stock price accordingly
15:06 but if the company is not attractively
15:09 valued it isn't all for naught at this
15:10 point I will simply move it to a watch
15:12 list at which point I will monitor it
15:13 I've already done the fundamental
15:16 research and we'll have more flexibility
15:18 to hop into the stock if there's a dip
15:21 in the price given a current event I can
15:22 quickly analyze the current events see
15:25 if it's material or not and then take
15:27 advantage of any movements in the stock
15:29 price I will also dollar cost average in
15:31 companies I really like and generally
15:33 speaking that's a sound strategy for
15:35 Diversified investors but I always have
15:37 an eye on valuation paying too much for
15:39 a stock does increase your risk of
15:41 capital impairment so I at least want to
15:42 ensure that the price on paying is
15:45 within a reasonable range so that's a
15:46 valuation step and finally step six
15:49 we've made it this far is to review and
15:51 finalize notes for future reference at
15:52 this point I'll have an idea of whether
15:55 I want to buy this stock now or wait but
15:56 I will also seek answers to fill in the
15:58 gaps address those questions that came
16:00 up throughout the research process I
16:02 also try to play Devil's Advocate and
16:04 find conflicting reports about uh say
16:06 the thesis I've sort of developed with
16:08 this company find opposing opinions to
16:10 try and Sanity check some of my
16:12 assumptions I also have the benefit of
16:13 being able to then share it with my team
16:15 who have more experience with
16:17 researching stocks and myself and I
16:19 typically write up a formal report but
16:21 we'll still organize my notes regardless
16:23 just so that they're easier to digest in
16:25 the future making sure things are bullet
16:27 points providing a sort of summary that
16:29 I can quickly reference in the future so
16:30 I can get up to speed about my company
16:33 and the thesis I have for it and also
16:35 points I want to follow up on and the
16:36 reason why I think this step is really
16:38 important is not only because when a
16:39 Stock's On Your watch list you can
16:41 quickly review things and get back up to
16:43 speed up with the company but when times
16:46 get tough and you know say something
16:48 negative develops about the business
16:50 that a lot of people are spooked is
16:51 going to challenge their future
16:53 performance you can go back and see what
16:55 the fundamental business is and what you
16:57 believe the value lies in what your
16:59 thesis about the company is and that
17:01 will make it easier evaluate whether
17:03 that has fundamentally changed or if
17:06 this new development is just noise that
17:08 you can generally ignore and focus again
17:10 on the long-term prospects of the
17:12 business you've invested in so that's my
17:14 investment research process as an analyst
17:15 analyst
17:18 we made it thank you for sticking to the
17:20 end I know I didn't really get into all
17:21 the nitty-gritty about the specific
17:24 things I look at but that is really out
17:25 of respect for my employer they were
17:27 gracious enough to let me do this video
17:29 they don't have the perfect Krabby Patty
17:31 secret formula but uh you know they do
17:34 have proprietary stuff that uh it's in
17:36 their interest to keep as I've hopefully
17:38 highlighted this is an ongoing process
17:39 once you've found a stock and especially
17:41 once you've invested in it to keep
17:43 researching the company not to get
17:45 caught up in in the day-to-day
17:47 happenings but do regularly review it
17:49 and make sure you're not missing
17:50 anything so thanks again for joining me
17:52 and before I sign off I do want to give
17:53 a quick thank you to our sponsor
17:54 morningbrew as I mentioned keeping up to
17:56 date on the news is an important part of
17:58 the research process I've always had to
17:59 keep an eye on a bunch of outlets to try
18:01 and get an idea of the important
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18:59 thank you guys for joining me today I
19:00 hope you found this video helpful if you
19:02 did please make sure to like subscribe
19:03 all that good stuff it does help the
19:04 challenge tremendously and let me know
19:06 your thoughts on the research process
19:08 both positive and negative genuinely
19:10 because I am always trying to improve it
19:13 this is not the NLB processes so I'm
19:15 always happy to hear feedback thanks
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