Researching the best stock picks is challenging. There are a host of numbers out there and always a ton of news even for smaller companies … so where do you start in your stock research? How do you process it all?
The reality is, you can’t. So rather than believe there is a perfect system out there that will always properly identify good stocks, all investors need to simply embrace the chaos and understand there’s no way to know everything.
That doesn’t mean that you have to fly blind, of course. Reading financial news is an important part of playing the market, as is researching the numbers behind the headlines. Even if you can never know for sure if a stock is good or bad, this kind of due diligence will prevent the most costly errors and increase your likelihood of success.
There are a few simple steps that even rookie investors can take to both protect themselves and to uncover profitable investing ideas. And the best news is that thanks to the internet resources out there, it has never been easier to do your homework.
But where do you get started in your stock research?
I’ve put together a list of some must-haves for any trade, and an explanation of how to find the relevant info:
Watch the News
- Seek a Trusted Primary Source: The internet allows lots of people to publish “news,” but don’t trust any reports or rumors that don’t come from a top-tier organization. My favorites include Reuters, Bloomberg and The Wall Street Journal.
- Be Wary of Press Releases: Companies frequently will talk up their own strategy in press releases, but it’s not an objective view of the world. Always look for outside perspectives on the news instead of replying on the canned corporate statement.
- See Commentary for What It Is — Imperfect: Of course, a biased view can sometimes be refreshing and useful as an analysis of what the news means. As long as you can trust the source and understand the logic behind what you read, an optimistic analysis of a company could help highlight a great investment opportunity and a pessimistic analysis could steer you clear of trouble. Just remember opinionated articles like these, including those on InvestorPlace.com, may ultimately be on the wrong side of a trade, so do your own research as well.
- Set Alerts: Many financial sites allow you to set “alerts” for your favorite stocks, and Google Alerts allow you to search the entire web for new headlines. Consider these to have new developments sent to you, rather than searching frantically for new news each day.
Watch the Numbers in Your Stock Research
At the end of the day, all companies are valued based on real numbers. Sometimes revenue is more important for a small company in growth mode. Other times, margins and profit can be more important. But regardless of what metrics Wall Street is prioritizing, you need to know the facts behind your investments. Without due diligence and stock research, you’re just guessing at whether a company is good or bad.
- Follow Quarterly Reports: Every public company needs to report sales, profits and other metrics on a quarterly basis under U.S. securities law. Simply do a web search for a “[company] investor relations” and you’ll find an archive of financial data at your fingertips. Read up on current numbers, but also compare those to past results to get a sense of where things are headed.
- Find Your Favorite Filter: If reading SEC filings makes your eyes glaze over, there’s nothing wrong with using financial sites like Yahoo! Finance or Google Finance as your filter if you prefer the format. There won’t be as much info or as deep a history, but it’s a good way to stay apprised of the numbers at a glance.
- Don’t Ignore Third-Party Data: Of course, revenue and profits can’t tell us everything. For instance, if you own a homebuilder like Lennar Corporation (NYSE:LEN), wouldn’t you want to know how about housing permit trends as an indicator of future sales? Or if you own an oil stock like Exxon Mobil Corporation (NYSE:XOM), shouldn’t you watch crude oil prices? Digging into your specific stocks is important, but it’s also important to look elsewhere. Think of what outside numbers matter as you read the news and make note of those reports.
- Always Check Your Dates: Having the latest info is crucial. Always make sure your figures are up to date when doing your stock research.
Watch Investor Sentiment
“Sentiment” is a word for how optimistic or pessimistic investors are. Frequently, we talk about sentiment when a stock moves big on a day with little substantive news because we are seeing an emotional reaction more than anything else.
While sentiment can be squishy and hard to pin down when you’re trying to make the best stock picks possible, there are important tools out there that help tell the story of what investors are feeling.
- Watch the 52-Week Range: It’s a truism on Wall Street that a stock making new highs will continue to make new highs, and a stock making new lows will continue to make new lows; very rarely do we see sharp move followed by a quick reversal. Thus, look at the 52-week trading range of a security for a sense of where it is in the sentiment cycle. Generally, trading closer to new highs is better than being closer to new lows. You can find these ranges easily on any quote page for your favorite stock.
- Check Out Charts: Charts can be sophisticated, with many complex patterns to learn, or they can be deceptively simple. As with 52-week highs and lows, a line showing the “moving average” of a stock can tell you the direction it is … well, moving. A trend line moving higher often signals improving sentiment for a stock. An easy way to experience this when doing stock research is to visit StockCharts.com and type in a ticker. In the default view, the blue line is the 50-day moving average and the red line is the 200-day moving average.
- Social Signals Matter: From Twitter to StockTwits to online comments, there are plenty of outlets to see what other investors think. Take comments with a grain of salt, but don’t ignore everything.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.