As a savvy investor, you are constantly looking for good stocks, right? I typically start my research with a company that I know and like. That way learning more about their business won’t be so boring. So let’s do a real world example. I am going to go through my entire investment process but with one difference. I will not name the company. Why? I don’t want you to think that this is investing advice and also to show that this can be applied to any company you want.
The first step I will want to take is to determine what my starting point is for the research. Let’s say that I want to invest in a company that is committed to alternative energy. The first thing I would do is head over to Morningstar and begin my screening. Morningstar holds a huge database of American stocks as well as Canadian stocks. I’m going to start with the energy sector and look for a stock with potential in the alternative energy space. I selected a few other criteria and my screen returned some interesting companies. I am going to pick one arbitrarily to start my in depth research.
Once I pick a company, I go to their home website and the investor relations page. I chose a company that does business in Canada and the US. Let’s look at the share price. It looks to be steadily increasing.
That tells me that they have good management. It also signifies a stable company. Then I look at their market cap. Market cap is a measure of how large the company is relative to their market. In mathematical terms, it is the share price multiplied by the shares outstanding. Higher market cap usually signifies more investors willing to pay a higher price. But everything is relative. So let’s look at their market cap in relation to their peers.
It looks like their market cap is right in line with their top competitors. In fact, they are only second to one other company. If you’ll notice, Morningstar gives our test company a better rating and I think we’re about to find out why.
Going back to the investor relations page, I see that the dividends have steadily increased each year. According to the cash flow statement, the operating cash flow has steadily increased each year with just a smaller net income in 2009 and 2010. With increasing cash flow and increasing dividends, it seems that they have good cash management. So I then look at the debt to see if that is the reason they have so much cash through the recession. And it’s true, the debt has increased steadily since 2006. But they have also decreased their debt to equity ratio which tells me that they are taking on debt responsibly.
One of the last things I do after checking on some of their ratios and financial statements is to check Yahoo Finance for recent news on the company. A quick glance at the headlines will tell me what is important to keep up with for this stock. It will also tell me if I should do some more research. For example, I don’t regularly invest in the energy sector so I have no idea what sort of events could impact the stock price. So if I see headlines that confuse me, I know I need to read more about this sector and learn more. Biz.Yahoo.com is a great place to do that. You can click Industries on the right and learn almost everything you need to know.
Whew! I’m tired. Think about how labor intensive this can be if I want to invest in more than one stock.
How do you research your investments?
This post was written by Latisha.