Knuckling Down with the Numbers 🤓
We’re at the business end of the best investing course out there! Today, we’re digging up great stock leads step-by-step, covering both some basic accounting and the various strategies of stock idea generation. Those include screening, reading 13Fs, themes, and specialisations. We’ll enlist the help of Gurufocus and Finviz to get underneath the most revealing metrics and measures for promising franchise value stocks, and the entire lesson is laced with little caveats of golden nuggets of advice to make all the difference. It’s an actionable banger of a lesson, so time to get stuck in!
Imagine filtering through a humungous database full of stocks for the winners. That’s what a screener lets you do. You’re narrowing down over 70,000 stocks to just a few well-scouted leads, the power of which is unrivalled.
However, done wrong, screeners are shortcuts for the lazy and false confidence for the spineless. To get the most of out a screener, compare its output to the source documents, i.e. check the business is as financially healthy as the screener suggests by looking at its financial statements. It’s not enough anymore to punch in parameters and take what’s given. You need to scrutinise what the screener spits out in light of the real context. The 10K documents with financial statements for a company can be found here. I recommend Gurufocus as your first choice all-in-one screener, with all countries selected. This is because Gurufocus’s scanning of markets outside America are great hunting grounds for poorly valued stocks. However, it costs. A more economical option might be Finviz Elite, where you can backtest experimental screeners. Both are very easy to use in terms of their interface!
The Mother of All Screens 🙌
In a nutshell, this set of screening criteria will target stocks with franchise characteristics that may be selling at unduly low prices. It’s focused more on the quality of companies over their prices, which is the right way to do it in my opinion.
Let’s Learn About Free Cash Flow 💰
When a business sells a product, revenue comes in. That’s recorded on the top line of the income statement and can go by the name ‘sales’ or ‘net sales.’
Then, costs of making that sold product are shaved off to leave gross profit.
Then, costs of running the business are shaved off to leave operating profit.
Then, the interest owed on debt is paid, plus taxes, to leave net income.
Most people consider net income to be the end of things. It’s not! There are other costs that need taking into account, and when they’re shaved off too, you arrive at free cash flow. Free cash flow is the money we’re getting at the end of the day as investors.
After subtracting maintenance capital expenditures and the change in net working capital (be it positive or negative), you get free cash flow!
Bear in mind, the change in NWC could be a negative figure, so you’re subtracting a minus figure.
Form 13F 📜
A 13F form is filed by fund managers, disclosing what they’re buying and selling. A fund manager is an investor who has been given others’ money to invest because of his or her talent (or snake oil salesmanship 😂).
There’s a few months of lag time with what the 13F form shows, but copying the best in the business has to be a smart strategy for finding promising stock leads. It’s a no-brainer! You can check out fund 13Fs here, but first some words of advice;
Scrutinise the track record to ensure it’s consistently been picking winners for 10+ years
Choose funds managing less than a billion dollars
Prefer fund managers who concentrate money into their best ideas
Theme Investing 🌎
Some world trends are misguided. In the business world, negative sentiment is always hovering somewhere and if that sentiment is wrong, you can capitalise as an investor.
For example, retail is considered dead or dying by most in the market. Few market watchers are willing to pay a high price for retail stocks and so they’re very cheap, offering good yields. This may be justified if the true value in retail matches those prices, but if you have reason to think retail has a better future than most believe, focus on retail and analyse it in more detail to see if you’re right.
A common approach to theme investing is to wait until a large company befalls a major PR disaster. Scandals are your best friend. The investing public sells its shares all at once in a viral commotion, causing the stock price to plummet. In many cases, that’s an unjustified emotional reaction and there’s a window of opportunity for you to buy low. Think Facebook in 2018, United Airlines in 2017, or drug-maker Mylan in 2016. Every year, you’ve got opportunities.
Avoid political themes that bring on speculation
Remember negative sentiment is only wrong if profits go be unaffected by the scandal
Be humble, admit what you don’t know
Don’t fall in love with your big picture ideas or world view
Saving the best until last, specialising in a small niche of the market has fast become one of the best ways to outperform it. You can hone in on an industry you like, or one that you already have connections and work experience in. The goal is to become the number one investor of that space with the best insights and understanding, so learn, learn, learn! Opportunities will flash up on your radar whereas they won’t for others who spread themselves thin over the entire market.
You can specialise in industries, countries (certain stock exchanges), special situations, or even better still, something nobody has thought of yet! Roam this website to get started. I’ve packed it chock-full of industry insights worth paying for, but I’ve kept it free. Just peruse my content until you find a niche that sparks an itch. My industry primers would be the best place to start!