On Analysts and Research--Your OWN

Russell notes the importance of footnotes to financial filings. I have no use for analysts. None. They downgrade when a stock has already plummeted to earth like a meteor and they upgrade when it has already rocketed out of the stratosphere. Not terribly helpful.

Reading the 10-K's is key. No, it isn't fun, but you'll learn a lot. When you are researching a company, there are lots of things that folks look at and comment upon and are important in making an investment decision. But you have to exercise some global filtering to determine whether or not you WANT to look at all the stuff that will make your eyes glaze over. For my part, I like to make sure that I understand four things (admittedly this is simplistic):

Thing 1: Ensure that you have a company that is in a sector that will benefit from the current economic cycle or in long term trends (infrastructure, water). (I say this with a head scratching nod that there's lots of debate as to where one even is in the economic cycle!). Investing in a sector at the top--even when these are terrific companies--is a guaranteed way to see your money evaporate. It's not unusual to see 30% declines. I'm a firm believer that being in the right sector goes along way toward increasing one's probabilities of success. Money rotates in and out of sectors throughout the economic cycle. And it can do so with great alacrity.What are the success factors the industry that the company operates in, how are they measured and how is the company doing against those? IF you don't understand that, you're throwing darts or worse, gambling with your hard earned money. (Though, admittedly, any of this is a bit of a gamble of sorts!).

Here's a graphic of sector performance from John Murphy. I'm sure that I'm violating something, but I offer this as (1) an infrequent post and (2) a recommendation for you to consider this valuable service.



Thing 2: Assuming that you are looking at a company in a favorable sector, ensure that you understand FOR THE SECTOR the success and risk areas and the metrics/information that calibrate their performance. Look at the Fastenal data that I provided on this post. That metric is same store sales and overall growth. Does this trend look promising? Banks have different metrics as does ________ (fill in the blank). Make sure you know what they are. Those are the things that you are going to be looking for as you fight to stay awake in reading the 10-K's. Also of interest is the segment breakdowns (segments within the company's sales as well as geography) and margin analysis for those segments. Very key. Very key.

Thing 3: How does this company compare to other company's in the sector? IBD does a nice job of this, but you can do it too! Get a printout of a report that shows all of the companies in the sector (I use Fidelity's reports) and pull a Yahoo summary ON EVERY COMPANY. Yes, do this. It is worth your time. If you do a lot of research, get a fast printer with duplex (front/back) capabilities. Nothing beats sitting down with coffee, wine or water as well as a favorite pen/highlighter and circling positives and negatives. Throw the marginal companies away (low float, outrageous valuations etc) and focus on the strong ones. Those are the ones that you want to read 10-K's for.


Thing 4: I like to look at the technical chart analysis. I really do not want to buy a strong company whose technicals are already extended. It's a good way to lose money in good companies. Bill Cara has done a mighty fine job of educating people on this. I know that some of you pooh-pooh chart analysis. BUT....there really is no real vodoo in determining whether or not a stock's price has risen beyond continued volume sustainability. In the end, as Bill is fond of saying, we are ultimately trading prices. If you are a "never pay retail person", then I urge you to consider equipping yourself in having a fundamental knowledge of chart technicals.