How I “Screen” For Stocks – I Don’t
I get asked a lot how I screen for stocks. And the basic answer is that I don’t. I sometimes run screens, but I rarely find ideas off them.
I can rephrase the question though. When most people ask me how I screen for stocks, what they’re really asking is something more like: “How do you decide which 10-K to read next?”
In other words: “How do you come up with new names to research?”
Other Investors Tell Me What They’re Interested In
I meet about once a week with my Focused Compounding co-founder, Andrew Kuhn, to just talk stocks. We both read a specific 10-K and analyze that stock. We bring our notes, Excel sheets, etc. to a local restaurant. And then we have a cup of coffee together and take 2-3 hours to go over the idea. Recent ideas Andrew has wanted to talk about include: Hostess Brands (TWNK), Cars.com (CARS), Green Brick Partners (GRBK), and Howard Hughes (HHC). I wouldn’t have researched these stocks if Andrew hadn’t pick them as our next meeting topic.
I also talk via Skype’s text messaging system with investors around the world who I’ve never met in person.
I spend several hours a week doing all this.
But I guard my time pretty closely. If you’ve ever asked to chat with me this way – you’ve probably noticed two things: 1) I don’t talk on the phone (or do audio on Skype) with anyone no matter how nicely you ask and 2) I insist we agree on a specific stock to talk about. I’ll talk about whatever you want to talk about, but I’m not interested in any sort of general discussion.
These are anti-time wasting rules I’ve learned to adopt through experience.
I Mine My Favorite Blogs for All They’re Worth
I’ve mentioned before that my favorite blogs are:
I go through all their archives and make up lists of stocks they’ve written about. Some of them also have “portfolio” type pages (Value and Opportunity, Richard Beddard) that help generate a list of stocks they’ve covered.
Now, I’ll tell you a secret. Although I love these bloggers and the way they look at things – there’s one situation where I specifically don’t read what they’ve written. It’s when I’m interested in a stock they’re writing about.
So, let’s say I’m reading Clark Street Value’s write-up on the Hamilton Beach (HBB) spin-off from NACCO (NC) or one of Richard Beddard’s articles on Howden Joinery and something in that post makes my investing antennae twitch. I stop reading the post the second I hit that line. I just go off and research the stock myself. Then – and only then – I come back and read what one of my favorite bloggers has written.
This brings up a bigger point. Once you know an investor you think is a clear thinker owns a stock or considered owning that stock – that’s often more useful than knowing exactly why he bought the stock. The blogger, famous investor, etc. is giving you the “name” as an initial lead. After that, the work is all yours.
I will look at any stock that is being spun-off. I will look at the parent too. If I hear a spin-off is planned, I will add that stock to my research schedule right away. I’ve even researched stocks like Hawaiian Electric (HE) – it’s a utility that owns a bank – in anticipation of the possibility of a spin-off that never happened.
I’ve never bought an IPO. About the closest I ever came was a stock called OpenTable (it was later acquired by Priceline and then written off). And even then I never really came very close to buying it.
However, I do read what companies file when they go public. Companies put out a lot of information that may be useful to have a few years down the road. So, I read a surprising amount of IPO documents.
Anti-Competitive Practices (Blocked mergers, etc.)
I am interested in companies with “market power” which I define as:
Market power is the ability to make demands on customers and suppliers free from the fear that those customers and suppliers can credibly threaten to end their relationship with you.
As a result, any article that mentions anti-competitive concerns gets me interested in an industry / company / etc.
On Twitter, I recently linked to a Bloomberg article about the Luxottica / Essilor deal. This is the kind of article that – if I’d never head of Luxottica or Essilor – would immediately cause me to research the company, because it mentions concerns that regulators in the U.S. and E.U. have with the deal.
A while ago, I also linked to a Bloomberg article “Is the Chicken Industry Rigged?” about chicken producers sharing production data. That can reduce competition in such a short-cycle industry. Any time I see a hint that competition is low in an industry or is going to decline – I put companies in that industry near the top of my research list.
I did some research on Staples back when that company was public. What got me interested in Staples was the company’s strong position with U.S. business customers (its delivery business). I wasn’t interested in the Staples stores. When Staples tried to merge with Office Depot, the merger was blocked. That kind of news – a blocked merger – is typical of the kind of thing that would get me interested in a stock.
This is the biggest source of my “new names”. Whenever I research a stock, I try to come up with at least 5 peers. Whatever price ratios I calculate to determine the cheapness of the stock I’m actually interested in – I also calculate for the peers.
So, by researching Fossil (FOSL) I get interested in Movado (MOV). By researching Village (VLGEA) I get interested in Kroger (KR). By researching Nike (NKE) I get interested in Under Armour (UA).
This is my best “screen”. Why?
It’s extremely time consuming and risky to research the first stock in an industry you’re unfamiliar with. The research process becomes progressively faster and less risky as you work your way through a series of companies in the same industry.
It is much easier to research your seventh straight regional bank stock in the U.S. than it is to research your first. The same is true of supermarkets. Local businesses are an especially good source of “new names”, because every state needs to have a local bank, supermarket, etc. In most cases, you won’t have researched this company or any direct competitor before. And yet you will have researched companies with similar business models in other states.
A Steady Diet of Specific Stocks
This is kind of just my catch-all term for trying to fill your eyes, ears, etc. each day with specific stock names instead of general investing news. For example, while working at my computer, I try to only listen to old episodes of “The Value Guys” podcast. Some of the episodes are more than 10 years old. Odd as it sounds: I find 10 year-old mentions of specific stocks much more useful than today’s economic news.
I don’t have CNBC on mute. I don’t read newspapers like The Wall Street Journal, The Financial Times, etc. Whenever possible, I try to identify any time I spend exposed to general financial news and replace it instead with exposure to discussions of specific stocks.
Real Life: Finding Stocks “Out in the Wild”
People who know me in real life and don’t care about business / investing find this habit frustrating. I’m often saying things like “How many square feet do you think this store is?”, “How many employees have you seen in here so far?”, etc. I research public companies I come in contact with through my day-to-day life.
For example, I live in an apartment complex. When I first moved here, I searched to see if my landlord was publicly traded. It is. So, I read the 10-K. If I eat at a Zoe’s Kitchen (ZOES), I research Zoe’s Kitchen as a stock. If I got to an AMC movie theater, I research AMC as a stock. If I go to Dave & Buster’s (PLAY), I research Dave & Buster’s as a stock.
Historically, finding stocks “in the wild” has been an excellent source of ideas. But, the ratio of stocks researched from this group to stocks I actually buy is quite high. You’re going to read about 100 stocks and buy maybe 1 using a finding stocks in real-life approach.
Long ago, I found:
· Village Supermarket (VLGEA) because I worked in one of their stores as a cashier
· Coinstar (it later became Outerwall) because I saw people using Coinstar in the store I worked at
· Blue Rhino (it was later acquired by Ferrellgas) because I preferred using the company’s propane tank exchange over having to re-fill a propane tank
The bad thing with ideas you find “in the wild” is that it’s a needle in a haystack approach. You’re finding them for reasons that don’t have to do with the stock’s price, the business’s quality, etc. Basically, you’re going just off product quality.
The good thing with ideas you find “in the wild” is that you’ll have a firmer understanding of the business model, more confidence in the company, etc. if and when you do choose to invest. It can be difficult to imagine what a company really does just from the 10-K.
First-hand experience of the product combined with a close reading of the 10-K is usually the easiest way to truly understand a business.
Things That Might Work For You: Value Investors Club, Corner of Berkshire and Fairfax, “Superinvestor” Portfolios
I’ve spent days digging through Value Investors Club, Corner of Berkshire and Fairfax, and portfolio holdings of famous investors. I’ve never found these sources of ideas any better than just “going A to Z”.
And I have some experience just going A to Z through a stock list. That’s how I found the Japanese net-nets I invested in about 5 years ago. There was no screen. I just went through a list of Japanese stocks. It worker pretty well. But, I knew I was just looking for net-nets. So, I was able to manually “screen” out each stock in a manner of seconds.