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