How I Research Stocks - Step-by-Step Fundamental Analysis

Summary

The video details the stock research process of a portfolio manager, starting with screening companies based on growth and other metrics to narrow down ideas. It then involves understanding the business model, finances, management strategy, and valuation to determine if a stock is attractive. Additional steps include a final review, playing devil's advocate to challenge assumptions, and organizing findings for future reference when monitoring the investment.

Takeaways

• 😊 The video provides a high-level overview of the presenter's stock research process as an investment analyst
• 💡 He notes that stock picking is difficult and most people may be better off investing passively or hiring professionals
• 📈 His process involves screening potential stocks, understanding the business and finances, evaluating strategy and valuation
• 📊 Analysis involves qualitative business research and quantitative financial statement analysis
• 🔍 He looks for competitive advantages, quality management, growth potential and reasonable valuations
• 🤔 Conflicting opinions and playing devil's advocate helps validate assumptions and analysis
• 🗒️ Taking detailed notes and summarizing research helps quickly get up to speed when revisiting a stock thesis
• 📰 Keeping up with news and developments is an important part of ongoing research for invested stocks
• 💰 The video is sponsored by Morning Brew, a free daily business and finance newsletter
• 👍 The presenter welcomes feedback to improve his stock research process

Q & A

What is the main topic of this video?

The main topic is explaining the stock research and analysis process used by the video host in his job as a portfolio manager and investment analyst.

What are some key things the host looks at when researching a company?

The host looks at understanding the business and its operations, analyzing the financial statements and metrics, evaluating the company's strategy, assessing valuation, and reviewing competitive positioning and risks.

What framework does the host use to categorize information on the company?

The host uses the SWOT framework - Strengths, Weaknesses, Opportunities and Threats. This allows him to categorize information as either internal or external factors.

Where does the host find information to research companies?

Sources used include annual reports, investor presentations, earnings call transcripts, industry reports, news articles, and meetings with company executives.

What are some key ratios and metrics examined?

Key ratios and metrics looked at include revenue growth rates, profitability margins, liquidity ratios, return on capital and equity, EPS trends, among others.

What valuation methods are used to assess the stock price?

Valuation methods used include relative valuation (P/E, P/B, EV/EBITDA) and discounted cash flow analysis.

What happens if a stock is not attractively valued after the analysis?

If the valuation is not attractive, the stock gets added to a watchlist to monitor for future buying opportunities at better prices.

Why does the host say stock picking is difficult?

Studies have shown that most people are not able to beat market returns from stock picking over the long term. It requires extensive research and skill.

What investing style does the host tilt towards and why?

The host tilts towards value investing, which involves buying high quality companies trading at discounts to intrinsic value.

How can an investor determine if a company has a durable competitive advantage?

Look for characteristics like market leadership, switching costs, network effects, low-cost production, patents, and brand value as signs of an economic moat.

Outlines

00:00

😊 Intro and Disclaimers

The host Richard introduces himself and the Plain Bagel channel. He states that this video will provide a high-level overview of his investment research process as an analyst. He provides two disclaimers upfront - first, that he is not recommending stock picking for most people, and second, that there are different valid approaches to research apart from fundamental analysis which is his focus.

05:00

📚 Understanding the Business

Richard explains the importance of deeply understanding the business operations, including segments, revenue streams, geography, customers, suppliers, employees, regulators, management, KPIs, etc. He mentions relying on regulatory filings, investor presentations, analyst reports, and public information to build this understanding.

10:02

📈 Understanding the Finances

Richard details analyzing financial statements and metrics to understand the company's financial health, growth, profitability, liquidity, and solvency. He also compares to industry peers. He notes the importance of watching for red flags and understandingadjusted figures.

15:03

📅 Understanding the Strategy

Richard explains reviewing management's strategic priorities and plans for spending and financing growth. This includes assessing feasibility, risks, and past track record. Information can be found in regulatory filings, presentations, call transcripts, and expert research.

💲 Valuation

Richard mentions using relative valuation (multiples) and discounted cash flows to value stocks. He also considers qualitative aspects and current events influencing price. Attractively valued stocks meeting earlier criteria are bought, while others are added to a watchlist.

📝 Review and Finalize

As a final step, Richard reviews notes, plays devil's advocate, and documents a thesis. Well-organized notes help quickly get up to speed in future and contextualize negative news.

Keywords

💡investment research process

The step-by-step method the narrator uses to analyze and evaluate stocks he is considering investing in. He describes it as his own personal process which includes screening stocks, understanding the business, analyzing financials, evaluating strategy, valuation, and finalizing research notes.

💡screening

The initial filtering process to narrow down a list of potential stocks to research further. It involves setting specific criteria like revenue growth, profitability, and debt levels to only analyze companies meeting those thresholds.

💡competitive advantage

When a company has something such as proprietary technology, strong brand loyalty, exclusive rights, or a unique business model that distinguishes it from competitors and makes it difficult for other firms to compete.

💡SWOT analysis

A framework for categorizing a company's Strengths, Weaknesses, Opportunities and Threats. Used to evaluate internal positives and negatives as well as external factors that can help or harm the business.

💡margin

A metric that measures a company's profitability by comparing profits to revenues or other benchmarks. Analyzed to evaluate how efficiently and profitability a firm is operating.

💡growth investing

An investment strategy focused on finding companies expected to have high rates of earnings growth, even if they have high valuations. Contrasted with value investing's focus on buying undervalued stocks.

💡capital expenditure

Money a company spends to invest in maintaining or upgrading its assets rather than on day-to-day operations. Analyzing CapEx gives insight into management's strategic priorities.

💡discounted cash flow

A valuation method that forecasts a company's future cash flows and then discounts them back to the present to calculate what an investor should fairly pay for the stock today.

💡technical analysis

Evaluating and predicting stock prices by analyzing previous price patterns and trends rather than focusing on the underlying financials or qualitative factors of the business.

💡thesis

The core logic and evidence-based reasoning behind making an investment decision. Having a clear thesis helps evaluate if new developments fundamentally change the investment case.

Highlights

I work as a portfolio manager investment analyst for my day job

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

I type notes as I'm going I do typically categorize stuff under the SWOT framework

I calculate a bunch of margins and ratios that again give that profile about how the company is growing how profitable they are

I also really like common size financial statements where you put everything as a percentage of a key figures

I've seen a lot of companies fail by doing something that they have no experience in doing

Building out a checklist of things you want to explicitly look for

There's relative valuation which is looking at multiples things like the price to earnings multiple

The more detailed approach is an absolute valuation such as a discounted cash flow

I will simply move it to a watch list at which point I will monitor it

Paying too much for a stock does increase your risk of capital impairment

When times get tough and you know say something negative develops about the business, that a lot of people are spooked

See 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

Once you've found a stock and especially once you've invested in it to keep researching the company

Morning Brew sends a business finance and Technology newsletter directly to your inbox every day of the week

Transcripts

this video is sponsored by morningbrew

visit the link in the description below

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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

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

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keep an eye on a bunch of outlets to try

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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

see in the next one