- The Washington Times - Friday, September 11, 2009

OPINION/ANALYSIS:

For more than a few personal investors, the recent run in the market has them thinking that the train has left the station. While my concern over current stock market valuations amid a canvas painted with cautious consumer and corporate behavior remains, the herd mentality can trigger feelings of being left out of the market move.

I suspect that is at least part of the reason why I have gotten some e-mails asking me where to look for information and other data as well as metrics to help make an informed investment decision. To say there are a number of potential sources is an understatement. I say that because a quick Google search of “stock ideas” returned 83 million results in 0.13 seconds.

So how do we navigate through this sea of information? People have different ideas on where to begin, and in my experience the most important part is simply taking the first step. I say this because doing your homework on a stock idea is not all that different from falling dominoes - once the first few fall, the others tend to line up.

The basics. Identifying the product offered by a company is not all that hard most of the time. In some cases it simply involves following consumers around the mall or stores to see what they are buying, or talking to purchasing managers or others. Knowing some of the products is one thing, but understanding a company’s offering is another, as is understanding where a company generates its operating profit.

With that in mind, I would suggest a few baby steps such as looking a company up on Yahoo Finance or Google Finance to make sure you have a preliminary idea of what the company you are researching really does. An alternative is to look at the company’s Web site and poke around to see the products it offers and the markets it serves. While at the company Web site, I would pay particular attention to the Investor Relations section, as it is a wealth of information. From press releases to management presentations to requesting an investor kit, this section offers a number of things that can quickly bring you up to speed on the company. I would also suggest reading any analyst reports, which can be obtained from brokerage houses as well as reading as many articles as you can about the company.

That aforementioned investor kit tends to include recent press releases, a quarterly filing with the Securities and Exchange Commission (Form 10-Q) and an annual filing with the SEC (Form 10-K). In breaking down a company and truly grasping what the business is, its products and the competitive landscape, there is little better than the 10-K. That filing also has detailed financial statements as well as footnotes to those statements that can be illuminating for those willing to slog through them.

For example, in its financial statement footnotes, Apple breaks down its revenue stream on both a product segment basis and a geographic one, which allows you to see where the company generates its revenue but also where it really gets the biggest bang for its buck - that is, generates the bulk of its operating profit. These filings can also be found at www.sec.gov, as well as at the service I mentioned a few weeks ago, SECWatch. Reading these filings will help balance those articles you were reading, as well as help you understand whether something has a lot of sizzle but is not very meaty when it comes to the business.

Once you have a firm grasp on the who, what and how of the company, there are several sources that help identify its competition or peer group. I say peer group because you should be using these companies to determine whether the company is overvalued, undervalued or fairly valued. Assembling the peer group can be tricky, but there are several sources that help identify the low-hanging fruit such as Google Finance, Hoover’s and others, as well as the competition section in those 10-Ks.

While there are several metrics to be used, one quick metric is a staple - the price to earnings ratio. A peer version of this is assembled by collecting each of the peer companies’ earnings forecast for the current year and the next few years, calculating the ratio for each company and taking the peer average.

Generally speaking, a company that is growing its earnings faster than the peer average and is trading below the peer average P/E ratio warrants a closer look. To be fair, we need to understand the company’s balance sheet, where its business is in the economic cycle, the historical trend for P/E ratios and other investment metrics, as well as other issues.

For these historical company earnings and stock prices as well as future earnings expectations, the better site in my opinion is Yahoo Finance - given its historical prices, analyst estimates and analyst opinion selections as well as its financial section that brings up historical financial statements. Another data point that Yahoo Finance offers that some find helpful is Insider Transactions, which allows you on a lag basis to see which, if any, company insiders have been buying or selling shares in.

That is but a quick “how to get started” sketch and the beginning of a much larger conversation. While it seems like it may be simple, it takes a fair amount of time and can lead to a company being less compelling than you may have originally thought. Like most things, it gets easier with practice, and that means investing more time for each stock idea you’re considering.

Lest I forget, the stock market and stocks in general are moving targets. It’s not enough to simply identify a good stock idea. You have to continually scrutinize it to see whether the story changes or if its revised metrics make it expensive on a historical/peer basis or whether it’s a better buy if the fundamentals remain intact.

Happy hunting, and let me know if you turn up any good ideas.

Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston. He can be reached at cversace@ washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.