Now that we have all the tools we need to value stocks, we can finally develop a method for researching a potential new position within our portfolio. There are a few very important particulars to research about your company/stock of interest: how it makes money, how well it has done in the past at making money, what sector/industry it belongs to, and what factors can move the stock in either direction.
If you have an online brokerage, such as Fidelity, Scottrade, or E*Trade, you probably have research reports available to you at no cost. For a great majority of larger companies, Standard & Poor's publishes a report that outlines a lot of basics on your company, such as how it makes money, what factors have developed over history that have swayed the company's performance, what sector/industry it belongs to, what it's peer companies (competitors) are, and the S&P analyst's commentary on future performance. This is usually a good first stop to get a crash course on your prospective investment.
The 10-K SEC filing is a particularly cumbersome source that can have some very detailed information pertaining to how a company makes money. The 10-K is a yearly filing that describes any and all information that you are interested in or never wanted to know. I like to check the "risk factors" section to identify potential risks, obviously, and to develop a list of important metrics to keep track of. For instance, if a risk factor describes the heavy use of debt to fund operations until revenues grow substantially, I would keep track of the debt on the balance sheet and any news/analysis pertaining to such.
It is equally, or even more, important to understand the industry/sector of your prospective position and what factors influence that industry as it is to understand company-specific influences. Most of a stock's price change will be influenced by its industry. If you own an oil stock, and oil goes down, no matter what oil stock you own, it will go down as well. There's simply no way around it. The best you can hope for is that it will go down less than comparable oil stocks, and when oil turns favorable again, that it will go up more.
Once you have an understanding of how your company makes money, and what factors influence the stock price, you will then want to check on management's execution. The best resource for this, in my opinion at least, is to read the earnings conference calls. SeekingAlpha.com is my sole resource for these transcripts. You can gain access to insights from management as well as the short-term concerns that are on analysts minds during the call. You may even want to read the most recent two or three to see how management's dialogue has changed. News and research articles can be a good resource to help gauge how the investment community has received the earnings releases.
Now that you have a good gauge on your prospective company, you may want to compare it to its competitors. You can compare earnings histories, management's growth plans, valuations/growth, and any other relevant information. If you know you want to have a position in the oil sector and have a company in mind in which you'd like to invest, you may want to consider that a competing company in the oil field may be better run and have cheaper valuation metrics.
Once you learn how your company makes money, what factors have influenced it recently, and what factors will potentially influence it in the future, you are ready to make your first purchase! You may be eager to make this purchase, but you can do yourself a huge favor if you decide on a fair valuation to purchase the stock at and wait until it reaches that valuation.
Common Cents Take: While it is exciting to establish a position, it is very important to do your homework on the company prior to making your purchase. If you do not perform the research, you will not have conviction (at least justifiable conviction) in the stock. The market will easily bluff you out of your position with misdirection when you could be adding to your position at a great bargain. And remember, equally important as conviction is valuation. I really love Starburst, but I don't plan on buying a pack for $30. Alright, enough chatter-let's open that account and make that purchase!
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