The First Guest Post…
Today and for the first time, we will have a guest post, with Stock Market Tips, Views and Insights from Troy @ MarketHistory.org
Here you have a link directly to the blog. So let’s go to the post:
How to research a stock beyond its financials
It’s important to read the financial statements of every stock that you invest in or plan on investing in. Not doing so is a kin to a doctor diagnosing your specific illness without knowing about your overall health (e.g. are you on any medication, chronic conditions).
However, just reading the financials is not enough. There is so much more that can be learned about the company’s future prospects and current state outside of the numbers. The numbers can only tell you so much. They don’t tell you what future earnings and sales growth to expect. Of course, you can extrapolate past growth into the future, but that doesn’t work for more than 1-2 years. Industry winds change and competitors arise, which renders future projections based on the path irrelevant. In addition, a lot of numbers can be “massaged”. This was especially prevalent in the dot-com bubble era. In 2001, many companies such as Tyco and AOL had to restate earnings from previous years because of “accounting errors”.
Since earnings and sales growth drives long-term changes in the stock price, reading the financials doesn’t really help you predict the stock’s long-term direction.
The more effort you put into researching an investment, the more likely it will be profitable. Here are multiple sources from which you can learn more about the company you’re investing in.
Google what others think about the company
Whenever I encounter a stock, asset, or market that I am not familiar with, I always type in a quick query on Google to find out as much about it as possible. See what other investors are writing about.
Perhaps the writer’s outlook on the company is incorrect. But that’s ok. At least the author has illuminated various issues and concerns that the company MIGHT face somewhere down the road. It’s better to know both sides of the bull/bear argument than to just know one side. In addition, these writers will also mention many facts about the company that you may have missed. Some examples are:
- Has the company’s growth always been this consistent over the past 10 years? Is growth picking up right now?
- What’s turnover like at the company? Are key executives leaving?
- Are competitors announcing any major products?
Talk to employees
If you are serious about a company and plan on investing a large amount of money into its stock, why not take a road trip? Talk to employees at the company if you can. Employees on the front lines often know a lot about the business that reporters don’t. Ask the employees questions regarding how well the company is being managed, such as:
- Is there internal chaos?
- How good are corporate governance systems?
- Do employees enjoy their work, or are employees afraid to speak up about problems? (corporate cultures that are hostile to communication typically lead to disaster).
- Do any of the executives or employees on the top management team give you a “shady” feeling? Sometimes it’s hard to point out exactly what’s wrong with someone, but you just know that something is off about him/her.
Solid growth companies need to have strong, capable leadership. Companies who’s management team is not full of A players will eventually be bypassed by competitors. When ex-GE CEO Jack Welch was asked “what are your plans for the future of GE”, he didn’t talk about products. He didn’t talk about GE’s long-term vision. He simply said “my first job is to get the wrong people off the bus and get the right people on the bus. Then the company will take care of itself”.
Talk to customers
Find out more about the company’s products by talking to the customers that use it. Do they rave about the product? Raving customers usually are a good sign of the company’s long-term prospects.
What problems do the products have? These are areas in which competitors can potentially attack the company from. These are “weak points” in the company’s product line. With that being said…
Learn about the competition
Learn about competing companies in the same or related industries. A healthy and growing company will usually continue to do so unless competitors overtake it.
Find out what similar products competitors are building. Are the competing products anywhere near as good as this company’s products? How big (market capitalization) are the company’s competitors? Do the competing companies have a lot more cash in the bank compared to this company? Large and well-funded competitors are dangerous because they can afford to outspend this company and crush its business. Think of that cash as a war chest.
And you reader, what do you think about this? Do you agree?
If you wish to add something to this thoughts, please feel free to comment.