Learning Center

How to Research Stocks: Guide for Beginners

Today, we wanted to answer a common question we get at Briefing.com: What is the best way to research stocks? We think the best way to tackle this question is in two parts: Finding the right stock and then, once you have settled on a name, how to research that stock.

I. Finding the Right Stock

There are many ways to uncover attractive stocks in which to invest. Different methods will work better for different investors. The key is to find a strategy with which you are comfortable. Let’s look at some of the various methods of finding the right stocks:

Briefing.com: Not to toot our own horn, but Briefing.com offers a wealth of options to begin your search, including our weekly Emerging Growth (GROWX), Value Leaders (VALUE) and Yield Leaders (YIELD) reports. We also provide in-depth analysis on IPOs (IPOXX), notable insider buying/selling (INSID) and we publish several story stocks daily. You can set up email alerts to get notified whenever we publish a new report.

Scans are a great way to look for investment ideas. We like to perform scans because they tend to take investors beyond the scope of companies they are already familiar with. We recommend using parameters showing good top-line growth, profitability (or at least positive EBITDA), strong margins, a history of returning cash to shareholders via buybacks/dividends, strong balance sheets (high amounts of cash and low debt), good relative strength, valuation metrics (very important) etc.

It is good to experiment with different parameters and different levels within parameters. We also recommend using minimum cutoffs, perhaps a $500 mln market cap or at least 100K average daily trading volume. We would also avoid bulletin board stocks as they are too risky and are too thinly traded.

Rely on the Professionals: Portfolio managers are also great idea generators. They have access to more sophisticated screens, and they know you as an investor given the style of the fund they manage. This option is good for people who maybe do not have the time to track stocks on a daily basis.

Analyst Recommendations: Sometimes analysts can get a bad reputation like when they downgrade a stock after the company reports a bad quarter. It is a fair criticism. However, the author of this report worked on a highly-ranked team on the sell side at Citigroup in the Steel industry, so we have a good sense for how they operate.

Despite a bad reputation for some, analysts really know their stuff and they have good connections in the industry and with the companies they cover. Our recommendation here is to focus on the substance within their notes, which often is top notch and very valuable. We recommend paying less attention to the headline Buy / Sell rating and Target Price etc. That is more about marketing.

The one exception when you should pay attention to the headline ratings is when a company, for example, has virtually all Buy ratings and then that first analyst goes to Hold or Sell. Another time might be when that first analyst lowers their sales or EPS estimates below consensus ahead of an earnings report. That is when you want to react as an investor. That should make your ears perk up.

Stock Buybacks: We are big fans of gravitating toward companies that have been aggressively buying back shares. A lot of companies can sound positive on their earnings calls, but those that put their money where their mouth is really stand out to us.

Briefing.com’s YIELD Leaders report is a great resource here. We publish the report every Friday afternoon on our Stock Ideas page under the Investing & Trading tab. The report provides information on companies that are being aggressive in terms of share buybacks and dividends. This report is a good resource because it does not put weight on Relative Strength like some of our other reports. So, you can find some beaten down names that make for good turnaround candidates. And if companies are willing to pony up to buy their own shares, they clearly see some value there and they would know the company best.

Be sure to set an alert for YIELD in order to get email notifications for the report. In addition to the Friday report, where we profile a name that jumps out at us, we also publish reports intermittently, so the email alert means you will not miss anything.

IPOs: We are also a big fan of IPOs. We like that they are fresh investment ideas, and you know people have not been sitting in them for years, which may alter their selling decisions.

What we really like among IPOs are the ones that maybe timed their deal poorly, meaning the market sells off soon after IPO debut. You can find some really good names that are beaten down and, because they are recent IPOs, they may have gotten overlooked when they came public, and people forgot about them. You may be able to scoop up quality names on the cheap.

Another reason we like IPOs is because the S-1 filings with the SEC are super helpful. IPOs tend to go into a lot of detail and the language of S-1’s tends to be more everyday language and less legalese.

The best pattern: A quality name, the overall market then sells off near its debut, stock gets knocked down perhaps below the offering price and is forgotten about. We prefer to see some consolidation (trading sideways) and stabilization, then hopefully they turn around as the market improves and investors start to notice them.

An example of this is salad restaurant chain SweetGreen (SG). It made its IPO debut in November, right before Omicron and the market sell-off in 2022. But we love that set up. We profiled SG as a beaten down name a few weeks ago. It’s a good read, you should check it out.

Briefing.com also has a great IPO list under our Calendar heading. If you then click on Lock-Ups, you can see a list of recent deals. Then start punching those tickers into a charting software, or even BigCharts.com and look for good patterns.

Just be careful around lock-up expirations. That is when management is allowed to sell their shares. These sales can weigh on the stock price, although it is less of a problem for beaten down names. You can find lock up expiration information on our IPO calendar.

Finally, you can also set a ticker alert for IPOXX, then you will get email notifications of any IPO reports we publish.

Insider Buys: We think flipping through insider buys is another great way to uncover good investment ideas.

You can go through the SEC filings for insider trading activity. However, we think the best way to generate ideas or track a name you’re invested in is to use Briefing.com’s INSID ticker search. Just type INSID into the ticker search on InPlay and you will get a bunch of recent data points. Also, we recommend setting up an INSID ticker alert, so you get email notifications whenever comments get posted.

Go With What You Know: It seems simple, but it is often good to rely on your own life experience. Most people are not biotech experts or maybe do not have the time to spend researching which semiconductor company has an edge over others. However, we do all create impressions about brands as we live our daily lives, or maybe you are a doctor and you love a telemedicine service that works great.

Two big industries we all deal with are retailers and restaurants. That may seem simple, and they may not be as exciting as tech stocks, but you know the brands firsthand or you see how busy a restaurant chain tends to be. Rest assured that retail and restaurant stocks can be big movers as well. Not every stock you own needs to be tech related.

lululemon (LULU) is a great example. It is a great brand and the market got excited with its MIRROR purchase, then the stock headed lower as MIRROR estimates were lowered when people returned to gyms. The point here is that we all have opinions on companies and brands and that’s very helpful. Other examples we have been bullish on recently include Columbia Sportswear (COLM), Tapestry (TPR) and Sonos (SONO). We all know these brands and can make judgments about them.

Look for a good story: This could be industry or company specific. For example, the infrastructure bill may benefit them, or a new CEO aims to turn a company around or maybe an airline that’s a good way to play the travel reopening in 2022 or find a play on the boom in electric vehicles set to hit the road over the next 5-10 years. Just make sure the stocks you pick have a good story behind them.

ETFs: Your decision does not even need to be a single stock. ETFs are also a great option. They are similar to mutual funds in that ETFs own a basket of stocks. They are different in that they trade throughout the day like a stock whereas a mutual fund provides a once-daily price at the end of the day. But either security makes sense. The idea is that ETFs allow investors to get exposure to an industry they like, but without the risk of one company.

II. How to Research Stocks

Dig Into It: Once you have chosen a stock, it’s important to take the time and do a detailed research on it. You may think you know everything, but you don’t. Neither do we, and that’s why you need to do the legwork.

If you can gain or lose thousands of dollars, you can take a few hours researching the stock and company. If you divide your gain or loss by the number of hours spent on stock research, that hourly amount is likely much higher than the current salary, so take the time. And Briefing.com will help you.

The rule of thumb here is that you should be able to explain to someone else in everyday language what a company does and why you like the stock. If you cannot comfortably talk about the company with confidence or answer questions, you need to do more research on that stock. And even if you are comfortable, do more research.

Resources: If you have access to the expensive data providers, that is great. However, there is a lot of information available for free online. You can really learn a lot while researching different stocks.

Briefing.com Archive: We think a great starting point in researching stocks is typing a ticker into the InPlay archive, which will pull up all sorts of tidbits about a company. People may not realize it, but our archive is one of the most used pages on our service. The archive will provide a plethora of recent events, maybe some of our stock analysis. It will pick up key events, notable insider buys, upgrades/downgrades (although go to up/downgrade calendar also for a complete list), earnings, etc.

Call Transcripts: We think listening to the quarterly conference calls is extremely helpful. You get a lot of great information for your stock research. Some companies can be overly positive but do your best to filter out what is really important. We think the Q&A sections are very valuable because there is no pre-written script, so you can get some candid answers to questions. Everyone can listen into the calls when they happen. Be sure to get the information from Briefing.com’s Earnings calendar for time/date and the link to the webcast. If not able to listen live, paid services offer transcripts which are the easiest to use, but many companies at least provide an audio recording of the call. And some companies provide transcripts but not too many.

Company Websites: You can get a lot of information from a company’s website. They tend to provide good overviews, but they certainly may provide an overly rosy view of the company. But it is still helpful for your stock research. They also tend to provide histories of press releases in their investor relations sections.

SEC filings: The filings are great for gathering background on a company. In particular, the 10-K’s go into a lot more detail than the 10-Q’s. The 10-K is also great for discovering competitors and suppliers, etc.

Valuation: It is critical to do some leg work on a company’s valuation metrics. There are plenty of websites detailing various valuation metrics.

We like to use P/E (current and forward year), which is calculated by simply dividing the share price by the annual EPS estimate. You can get the quarterly EPS estimate in our Earnings archive page, but there are plenty of other websites, like Yahoo Finance, FinViz.com etc., where such information can be found. Ideally, you should also take the time to compare to other competitors to see where your company comes out.

Other metrics we like to use include price/sales (especially good when a company is not yet profitable), EV/EBITDA, etc.

Briefing.com runs a VALUE Leaders report every Wednesday that generates some ideas with good valuations. Again, a ticker alert (VALUE) will help notify you when a new report is published.

Keep an Eye on Competitors: It is also really important to research who their competitors are. You can usually find a competition section in 10-K filings where competitors are listed. It’s extremely helpful to monitor competitors and read their earnings reports/transcripts. Your company is likely facing similar conditions. Also, the 10-K typically lists key suppliers. That’s another way to gauge the health of your company. If sales are booming for its suppliers, that’s a good sign for your company.

Technicals: The author of this report is more of a fundamental investor, a buy-and-hold type. So, technical analysis is not my expertise. However, Briefing.com also provides technical analysis. As a fundamental investor, we like to see a slow and steady climb that avoids wild swings. We also like to see multi-month consolidation, then a stock trading above that range.

Avoid Speculation: We also recommend that investors avoid more speculative ideas when researching stocks, including sub-$100 mln market caps, bulletin board stocks, thinly traded names and be careful with Chinese stocks as many can be sketchy. Also, be careful with biotechs, which can be very binary (FDA approval, non-approval), that makes them hard to assess unless you really understand the science.

Stock Loss Limit: Once you have researched and chosen a stock, we think it is wise to set 15-20% stop loss limits to limit your downside risk. It is important to give a stock enough room to trade around, but sometimes it is better to take a loss before it gets too big.

Summary

What we really want investors to take away from this report is that it is important to do the leg work, find the right idea, find a good story like trends in EVs or the expected recovery in automotive production in 2022 and avoid big losses by using stock loss limits. Also, set up ticker alerts for GROWX, YIELD, VALUE, IPOXX, INSID, FUNDX. And do not be ashamed to stick to what you know and is easy to understand, maybe a retailer or restaurant chain. Those stocks move quite a bit. We hope this report on researching stocks was helpful.