Choosing a company to invest in can be incredibly overwhelming. There are thousands of publicly available companies listed for trading.
Fortunately, more companies mean more opportunities. In this post, I’ll walk you through my approach to shrinking my options from thousands to just a few.
Identifying your strategy
There are many different strategies investors use to profit off of the stock market. It’s very important to go in with a strategy. Otherwise, you’ll end up picking the wrong stocks for you.
I like to use a long-term value investing strategy. It makes the most sense to me and I plan on holding my investments for 5-10+ years.
The stocks I choose reflect my strategy. I usually go after stocks that I think are undervalued and will grow further into the future. So, if you’re someone who wants to see gains in a few years or less, this strategy might not be the best for you. That being said, as long as you know your strategy, you can still follow along but keep your end goal in mind.
Choosing an Industry
Before we get into screening for stocks, it’s extremely helpful to know what industry you want to invest in. Maybe you’re excited about AI or you need to diversify your holdings by choosing something outside of tech. Either way, selecting an industry can make your stock selection much easier and more purpose driven.
For example, I see a lot of potential in Electric Vehicles. Clean air vehicles are the future of transportation and are on the front lines of the war on climate change. California is even pushing to achieve 100% zero-emission vehicles by 2035. Even though some electric car companies are struggling now, I think some may have bright futures ahead of them.
This is just one particular example. There are tons of opportunities out there. You just have to be mindful about what’s happening in the world around you and make your own judgments.
Notice we’re selecting companies. Not stocks just quite yet. You can argue whether or not stocks and companies are the same thing but for our purposes, we’re investing in companies first and foremost.
So, even before head over to Yahoo Finance, I start with Google. I look up who are the leaders in EVs, what companies are just entering the market, and what industry cousins I could also invest in (self-driving, charging stations, batteries…you get the idea).
After I have my list (which can quickly get fairly long), I organize it into more specific niches. In this specific example, I kept car companies that also manufactured gas cars separate from electric-only manufacturers. I also made sections for companies focusing on public transportation, ride-sharing, and charging stations.
I do this not only because I want to narrow down my selections when screening, but most importantly, because I get more accurate comparisons when I focus on a specific area in the market.
As you’ll see, screening is all about comparison. We’re not comparing apples to oranges here. We’re comparing electric car manufacturers to electric car manufacturers.
Now it’s time to look at the numbers! To do that, we’re going to use a stock screener. If you’ve never heard of a stock screener, it’s a tool to help search for stocks that meet certain numerical criteria.
Because we’ve already narrowed down our choices in the previous step, we don’t have to worry about applying fancy filters. In my case, I’m using FinViz and searching for the companies (by ticker symbol) that are a part of my list. In this case, TSLA, RIVN, ADR, LCID, XPEV, FFIE, NKLA, ARVL, GOEV.
The first area I consider is valuation. Meaning, are any of these companies underpriced for the overall performance or value of the company?
FinViz makes this easy, providing us with a tab focused on ratios that help us determine the fairness of the market price:
There are many metrics to valuation. The most common include P/E (Price/Earnings) and P/B (Price to Book). Since most of the companies I selected are losing money, they don’t have a P/E value. So, I decided to focus on P/B because this ratio focuses on a company’s assets relative to its stock price.
A good rule of thumb for most valuation ratios is the lower the better. We want the price to be less than assets or earnings. But, this isn’t always the way to go. Remember we’re comparing. The company that is at a fairer price relative to its peers in the same industry is the better value buy.
Going off of that logic, Faraday Future (FFIE), Canoo (GOEV), and Rivian (RVN) stood out the most. Rivian may not be a value buy just by looking at its P/B (being over 1 is usually a red flag) but Tesla (TSLA) sure makes it look like a steal!
It’s also important to note that certain valuation ratios are better than others in certain situations. Hence, why I chose to ignore P/E in favor of P/B. I highly recommend understanding (at least the basics) of what each valuation ratio means. It’s important to use the right ratio(s) in the right situation (especially since we’re dealing with our money here).
Now it’s time to weed out the red flags. We certainly don’t want to make the mistake of investing in a company that can’t stay afloat. What we need is a company that can handle their debt in the short-term and the long-term.
For that, FinViz has a nifty Financials tab:
For short-term debt, we can focus on Current and Quick Ratios. These two ratios describe a company’s liquidity or items (like assets or cash) they can use to quickly pay off any debt that can spring on them right away.
Unlike valuation ratios, we want these numbers to be higher. Finviz does a handy job of showing us the good numbers in green and the bad in red. Right away, we can see that Canoo and Faraday Future might struggle in the face of looming debt.
However, most companies on the list seem to be in an okay position to handle debt in the long-term. We can tell by the numbers in the LTDebt/Eq and Debt/Eq columns. Many of them have higher debt to equity (the numbers are less than 1.0) but that is typical for the EV industry.
Out of these companies, Lucid and Rivian are standouts for their strong ability to handle short-term debt. They may be the smart move as many analysts claim that EV companies might have a rocky road ahead of them (pun intended).
But, the choice really depends on your level of risk tolerance. Canoo may still be a good company to invest in despite having the lowest Current/Quick ratios on the list. It is a smaller company after all, which makes it have all the more potential for growth.
Usually, I’d consider efficiency measures at this point. However, many of these companies aren’t turning up huge profits (as can be seen by all the red under ROA and ROE in the financials tab).
While these metrics are important, don’t let them scare you away from potential opportunities. Because they all have negative efficiency measures (save Tesla), it’s nothing too abnormal.
As I said, screening is all about comparing to peers within an industry. These numbers mean nothing to us without a reference point.
No, I’m not going to get sketchy here. We’re not talking about getting the details of a merger from a buddy before it happens.
What is legal and helpful for us to know is what percentage of the company is owned by people within the company. This is publicly available information that is conveniently listed in FinViz as well:
Under the Insider Own column, the biggest standouts are Lucid, Arrival, and Rivian. I’m not too surprised by Arrival, since it’s the smallest company on this list and seems to be just starting out.
I am, however, shocked by Lucid and Rivian. I mean, these are multi-billion dollar companies that aren’t relatively new. It could be a good sign that insiders are holding onto their stock. They may know something we don’t that makes them keen on keeping their stock.
Of course, don’t base your decisions solely on what company members are doing. Most of them are likely not financial experts (otherwise they would be working in finance). Use this knowledge to supplement your judgment.
Now that I’ve narrowed down my list of companies to a few, it’s time to start diving deep into them. The purpose of qualitative analysis is to answer the fundamental question: would I buy this business?
The reason I phrase the question this way is because when you buy a stock you are really buying a (most likely tiny) piece of that company. This may seem insignificant but if you frame your mind around this fundamental question, you will force yourself to make the right investment decisions. You have to realize that you are buying a business not a number.
There are tons of ways you can go about doing this. So in the end, do whatever allows you to make a sound decision. In the end, it all boils down to how much time and effort you are willing to set aside to make your decision.
To give you an idea of where to start, I like to focus on a few general areas.
The company behind the ticker
Before this, we used a screener to help narrow down our list of ticker symbols to only a few. Now, it’s time to put a face to the name. This can be as easy as googling a company to find its website. Most companies nowadays have a website. Their main site is a great place to start and you’d be surprised at the amount of information that is presented.
For example, with Rivian, I wanted to know what their goals are and how they are setting out to achieve them. Are they just looking to get into the electric car market early? Or are they trying to provide a solution the world’s environmental crisis?
Identifying a business’s mission statement is a great first step in determining if you align with what they are trying to achieve.
The “what” is no good without the “how.” A mission statement is worthless without a solid business plan to back it up. Luckily, most companies are pretty transparent about what their planning for the future.
In Rivian’s case, they like to blog about their goals on their main site. Just skimming a few short posts, I was able to learn that they are planning on building a new plant specializing in more affordable EVs, and are delivering their vehicles fully charged by renewable energy.
The people behind the ticker
Now that we know a little about the company’s goals and plans to meet those goals, we need to know the people driving the company to make all that happen. In other words, who is leading the company?
It’s pretty easy to identify who the leaders of the company are. Usually they’re the people with C(letter)O in their title. Rivian has a whole list of these people on their site, but a simple search for “<company name> management” usually leads you in the right direction.
From there, I typically focus on the CEO and piece together who they are. For example, I’ll look up their previous work history, recent news articles talking about them, and sometimes, even their social media.
This is an important step that should not be overlooked. You’re essentially putting your money in the hands of the company’s management team. You certainly don’t want to make the mistake of investing in someone like former CEO of FTX (and convicted felon) Sam Bankman-Fried.
Sizing up the competition
The world of business is all about survival of the fittest. The company you’re investing in is going to have to fight with other competitors to be successful. It’s up to you to identify what unique traits it has that push it ahead of the competition.
This is a comprehensive subject within itself but there are a couple of helpful, well-known strategies that are a good place to start.
SWOT analysis, which stands for strengths, weaknesses, opportunities, and threats helps to evaluate the success of a company internally and externally.
There’s also assessing a company’s economic moat which is almost exactly how it sounds. A moat is a collection of aspects of a company that helps protect it from competitors. Unlike a medieval moat, these aspects aren’t fast currents and crocodiles, but a strong brand name (think Apple) or the ability to provide lower costs (think Walmart).
Weighing other’s opinion
The internet has made investing easier than ever before. You have access to the opinions of thousands of experts and stock gurus from around the world. A quick search for “investing in <insert company name here>” will lead you down a rabbit hole of stock analysts.
This is a powerful technique as you will be leveraging the opinions of people who do this for a living and likely will have been investing successfully for a lot longer than you have.
Just don’t base your entire decision on a few experts. Make sure you cross-reference them and weigh the opinions of both sides. Also, make sure you’re taking advice from people who are actually successful in the market. You don’t want to take advice from some social media guru trying to sucker you into their paid online course that is sure to make you a millionaire.
While this can be helpful to you, also make sure you are considering your own analysis. It’s vital that you do your own research first before weighing the opinions of others. Often, if there is a lot of hype around the stock, it’s already too late to buy. Alternatively, “bad” news surrounding a stock can provide a unique opportunity for you to buy it at value.
Therefore, only use this technique as a tool to help shape your own judgment.
Hopefully, I gave you a great place to start on your investing journey. It can be intimidating to choose a stock, but doing your own research can help solidify your decision.
If there’s one thing I want you to take away from this is that you are buying a business. If you are not willing to own the entire company then why even bother buying any portion at all?
Also, if you’re having trouble choosing one out of 3-5 stocks because they’re all seemingly great (after you’ve done your due diligence of course), it’s not a bad idea to buy them all. If one or two go down and the rest succeed, you’ll be in a much better place have you accidentally chose one loser.
Don’t be intimidated by stocks! Use your knowledge to pick the right stocks for you and you will see success. Get out there and practice analyzing.
You also don’t have to find the next Apple or Microsoft. Any company that will grow even a little in the future is a success.
Best of luck to you and I know you will be successful!