Stock Research Tools

I will introduce the tools that I use in researching stocks. Nothing I can do will guarantee success, but my hope is to avoid the largest, most obvious risks. I gather as much information as is practical, and then make my decision of whether or not a stock is worth buying and, if so, what price I would like to sell it at.

I start at I am able to find the share price, book value per share, market cap, dividend, current yield, P/E, debt/equity ratio and payout ratio (or dividend coverage). I look for companies that have a small to medium cap size (under $1 billion), positive earnings and pay some income with a reasonable (under 90%) payout ratio. I also require a low debt-equity ratio, under 1.00 except for REITs (under 2.00).

If a company looks attractive, I will then continue on to Google Finance, where I look at the stock price history. I look for the high point, the low point and the recent trend. I also look up the company on to find out what professional investors have said about the company in public. This is a good way to find out if there is respect for current management, or worry about upcoming difficulties or changes that may not be reflected in past financial documents.

In further research, I look at the prior three annual reports and the most recent quarterly (or annual) report. I look for trends in dividend coverage, debt and operating earnings. I try to understand how much ongoing investment (cap-ex spending) is required to keep the business running. I look for the dependability of management in performing on their past promises. I also look for management’s ownership in the company, either in equity incentives or required ownership or a control block.

I look for insider activity at SEDI. If there is little or no activity, it is meaningless, but if there is large regular buying or selling, it is a hint on the confidence of management, the people who understand the company the best. I keep in mind that this may on reflect opportunities to exercise options or an unrelated need for cash.

Finally, I choose a price below which I am comfortable buying and a price above which I feel it would be prudent to sell. I lay out the risks that I see, which should help me sell when conditions deteriorate, as opposed to reaching a successful sale price.