Screening for investment ideas – Chapter 2

Before starting this post on investment ideas, I would like to recommend all beginners (who have little to no experience in stock markets) to read The Little Book That Still Beats the Market by Joel Greenblatt. This book should give a basic idea about stock market investing.

As mentioned in the earlier post, the first step in the investment process is screening for names. Remember that we are not only looking for the right type of businesses to invest in, we are also looking for stocks which are attractively priced. A good business which is extremely expensive might not exactly be the best investment.

Stock screens

Stock screens are like quick snapshots showing the most important metrics of a number of companies. Data service providers like Bloomberg, Factset, Reuters have stock screens. There could be other free versions with fewer options as well. In frontier markets like Bangladesh investors will probably have to rely on a broker or try to make their own stock screens.

Here is a sample of a basic stock screen.

Business Uncertainty

Another interesting way to find opportunities would be to look at companies that were hit by negatives. Such negatives could include litigation, government regulation, executive departures etc. In many cases stock prices overreact downwards when these negatives hit the headlines. A good analyst can figure out a rough size and probability of these uncertain events. A lot of good ideas are generated in this way.

New lows list

This is a somewhat contrarian approach that should be used with caution. Basically we would find stocks which are trading at 52 weeks (it could be more) lows. The problem is that we might be looking at stocks which might go down considerably more. Nevertheless, we are just at the screening step and before investing money there is a lot to do.

Upcoming IPOs

New IPOs are a great source of idea generation as many people are not aware of these companies and a lot of people are not willing to do the extra work to study them. Depending on the state of the economy, some IPOs can be priced attractively for investors.

Other managers

Phil Fisher mentioned in his very popular book called Common Stocks and Uncommon Profits and Other Writings that he often used to discuss ideas with other investors. It’s a great source of idea generation and more so if the idea comes from good sources.

Press

Some names can be picked up from the media sources as well. My ex boss however used the media in a more contrarian way. If there was a lot of bad press in the media about a particular name he would become interested in it (and vice versa) as there was a chance that the stock got oversold.

Other than the methods mentioned above, there are other ways to generate ideas. One could think top down and figure out which sectors could benefit from economic growth (e.g. consumer) or changing demographics (e.g. products for older people in developed countries). I would highly recommend people to read The Investment Checklist: The Art of In-Depth Research

Asif Khan, CFA

Asif Khan is presently a Research Analyst (Financial Sector) for Exotix which is a frontier market focused investment bank. He has more than 6 years of work experience as equity analyst in both buy and sell side roles across Asian frontier markets. Asif is a CFA Charterholder and has a dual major in Finance & Economics from North South University.

One thought on “Screening for investment ideas – Chapter 2

  1. Although I’m a big fan of the contrarian approaches, like you said, they should be used with caution. Some companies are cheap for a reason. Someone once said “Cheap isn’t always good, expensive isn’t always bad”.

    Having said that, I would much rather sustain penalties from over-conservatism rather than face the risk of permanent capital loss resulting from the adoption of high risk trading. It’s like Warren Buffett said: rule no. 1 – don’t lose money. Rule no. 2 – never forget rule no. 1.

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