Fundamental: The many ways to pick your stocks
Where to even start looking when you’re just starting out?
Before this, we have spoken a lot about the ways in which you can evaluate a company’s worthiness for your investment. We have introduced you to the concept of fundamental analysis itself, and along the way, we have explored how to look at a company through its qualitative traits, and we have also moved to the quantitative method in which we start reading companies’ financial statements. From the financial statements, we have also learned about financial ratio analysis. — which is how to extract the numbers from financial statements into metrics that you can use to gauge a company’s well-being.
Then you might be wondering, okay… now that you have all that, should you just venture into the wild and randomly vet companies for your portfolio? That would be exhausting, looking at how there are thousands of publicly listed companies (in the US alone). So here are a few ways that you can narrow down the scope and start picking stocks.
Heads up: It’s okay to miss out on massive rallies if you’re still making money.
Listen to the buzz
There’s no easier way to identify good companies, or even a good sector, other than by listening to the chatter of the crowd. The easiest way to do that is by going to financial news portals, look into the names that frequently pop up, look at these companies, and then take note of them.
For example, as you browse the news daily, you see Tesla’s name often leads the headlines, you then look into Tesla itself — is it good? Is the business model workable? Are they making any profit? How are the financial ratios? After doing that, you can start to look into the industry itself, what are other companies involved in EV? Are they doing better than Tesla?
Simply, look into the companies that lead the headline, and then put what you have learned into practice. Screen the heck outta the company!
Look into macroeconomic trends
Another way that you can shortlist your stocks is by looking into macroeconomic trends. For example, when the US decided to cut China away from its semiconductor supply chain due to security-military concerns, what can you learn from it?
What is China known for? Buying US semiconductors, as well as providing cheap labor costs for companies including US companies, to manufacture electronic components, right? So, what’s going to happen after that? The US is having trust issues when it comes to its precious semiconductors, right? What would they do? They’d try to do everything themselves, probably.
If the US decides to do the whole process in the US, what’s going to happen? Some companies are going to get government funds to handle the research and developments for the US to bring the whole process back to the US, the cost of manufacturing semiconductors may increase, purchase of semiconductors may decrease (because China is banned from buying some semiconductors), etc.
All of the above will help you to narrow down your search. Which company will get the government funding? Who can dominate semiconductor manufacturing if China is out of the picture? Will consumers buy more end products if the price is going to rise? Which company will make the most? Which company will suffer the most?
See how you now will be left with a smaller scope and you can start your analysis on semiconductor-related companies for you to put your money in?
Look into sector-specific trends
Another way is to look into sector-specific trends. For example, if you look into car manufacturing businesses. There are changes in trends nowadays for consumer demands, whereby more and more are going for EVs, either because they’re concerned about the environment, or due to government efforts such as incentivizing EV purchases, etc.
From there, you can look into which companies are dominating the EV market, and which big car manufacturers are more flexible to shift to EVs. Fun fact: some big car manufacturers are a bit constrained in terms of EV production because of their ongoing commitments with internal combustion engines — where some of them have already invested heavily in machines and equipment to produce internal combustion engines, so they can’t simply scrap it and decide to pivot to EVs.
All of these will help you to decide which companies are best suited to be in your portfolio.
Look into things you are good at
If you’re not really a finance person, which many of us aren’t, then where can you look to? Perhaps the best place to start is the one closest to home — things that you’re good at. Say, you’re an engineer at an oil and gas company, you might want to look into the oil and gas sector for your investments.
Why? Because let’s be honest, you’re working from morning to evening, do you have time for market research? Most likely not, and even if you do, it’s going to be very limited. If you invest in oil and gas, at least you have a mastery of what’s going on, even better than some of these finance bros — and perhaps you can even hear gossip on the trajectory of these companies. This will help you a lot.
Keep yourself updated on company developments
This is not a good way in the long run, but it’s good when you want to identify certain special events that screams “It’s time to put your money in!”. This is where you follow the development of some companies, read the news relating to them, and act on special events that may shape how the companies are making money.
For example, if you follow Disney’s development, you can see how it has recently struggled with getting the right CEO to lead the company, and up to a point where its ex-CEO, Bob Iger, had to be reappointed to the post. Now, if you follow the company, you’ll know Bob Iger is one of the most renowned media CEOs who have brought Disney to many triumphant peaks.
Upon hearing that Iger is to be reappointed, you may then think that it’s a good bet to start investing in Disney, and if you did, you might be looking at an increase in your portfolio for the upcoming few months (although the stock is currently in a downtrend, as of May 25th, 2023).
Use a stock screener
Well, this is actually the easiest way, which is why we put it last. How it works is quite like Tinder, where you put in all the criteria, and the stock screener software will list down the stocks that match the criteria — actually, even better than Tinder, they would give you recommendations that actually match the criteria (lol).
For example, you can put in the ratios, say look for companies with more than 50% return on asset, and some other criteria, the stock screener will do the job for you. There are many of these software which you can find online.
There are many ways in which you can start shortlisting stocks for your investments. The key is to be firm with your shortlisting process. Don’t try to take too much, because you’ll just end up overwhelmed. Try to have a focused set of companies, sectors, or trends that you look into — even if it means that you’ll have to neglect some big names. After all, you can’t win everything.
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None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.