Finding the best stocks among the 13,000 publicly traded companies in the US is a daunting task. One of the most popular methods is to screen for stocks based on fundamentals. But screening stocks based on say a low price-to-earnings (P/E) ratio could inadvertently filter out stocks that may have high P/Es but are trading at less than cash. You could be missing out on some of the best ideas.
Based on my limited experience, I've found the following to be the most effective ways to find new stock ideas.
Steal from The Gurus
Investing is the only game where an amateur can beat the master at its own game simply by copying the master. I consider myself fortunate to be an amateur. The nice thing about being an amateur is you get to copy the masters like Bruce Berkowitz, Seth Klarman and Joel Greenblatt. Sometimes, you get really lucky and you get the opportunity to buy below the entry prices of the masters. In this case, you might just beat the master. To help us steal ideas from the investing gurus, the US Securities and Exchange Commission (SEC) requires investors holding more than 5% of a company to file a Form 13D. And a 10% investor to file Form 13G. Once the ownership crosses the 10% mark, the investor is required to report all additional trades on forms 3, 4 and 5. That's a lot of forms to remember. Luckily for us lazy bums, GuruFocus keeps track of the gurus' trades by scouring the forms filed with the SEC. So stealing ideas from Tom Gayner is now just a mouse click away.
Even though stealing ideas from gurus is both enriching and noble, sometimes gurus have ideas that don't work out too. I fell into this trap once when I followed Mohnish Pabrai into Delta Financial. Despite losing quite a bit of money, Pabrai at least knew what he was doing. Me? I was clueless. But I was lucky to have invested with just play money. Lesson learned: Skipping homework was fun only when we were back in school.
Study Ideas From Value Investors Club
Another place to look for well researched stock ideas is the Value Investors Club (VIC), the brainchild of Joel Greenblatt of Gotham Capital. Greenblatt created the website to help him and peers discover high quality stock ideas. Message boards such as that on Yahoo! Finance contain more noise than facts. By creating an exclusive club of outstanding investors, Greenblatt and the members of the club get to cherry pick ideas from the smartest investors in the industry.
Since I can barely pass a Math exam, I was overjoyed to find VIC also offer guest accounts with a 45-day delay. So I don't get to see the latest ideas and some comments are only viewable by members. But I still get to read the full analysis of the ideas. Be very careful here. Some ideas may read like great ideas. They don't necessary turn out as promised. Make sure you read the annual reports and form your own opinion about the company before you invest. Even if you don't find ideas that you act upon, you can still learn a whole lot from reading the analysis on the stocks.
Scour Insider Trades at Form 4 Oracle
Both Peter Lynch and Seth Klarman have emphasized the importance of observing the signals from insider trading. There are many reasons insiders would sell a stock, but there is only one reason they would buy a stock - they believe it would go up. Form4Oracle allows you to search for companies with the biggest insider open market purchases. This is a strong signal of insiders' confidence in the company. But pay careful attention to the type of purchases. Open market purchases send the clearest signal because they require insiders to pay with cash out of their pockets. Exercising stock options, on the other hand, will only dilute existing shareholders.
Once you have found a company with high insider buying, dig deeper to understand the company and insider motives. Sometimes the best catalyst to narrow the price-value gap is to sell the company. But if the company is majority owned by insiders who have no intention of selling, you as a minority shareholder is left holding the bag.
Find Hidden Gems in 52-week Lows
Pabrai constantly scans the 52-week lows list to find stars that have faltered. You can find 52-week lows list on most financial websites such as Nasdaq. But finding a gem amongst stocks that have lost significant value is like navigating a minefield. Most companies trade at low prices for valid reasons. Only a handful may turn out to be deeply undervalued companies.
A good way to narrow down the list of stocks you need to scan through is to look for stocks trading at 52-week lows that are also owned by investing gurus. Again, GuruFocus offers a convenient way to track down these bargain stocks. The stocks you find here could be quite rewarding.
Listen to Randolph McDuff
This last method of finding stock ideas is a little unconventional. Randolph McDuff is the investment guru you've never heard of. His two model portfolios on Marketocracy earned annualized returns of 22% and 30% respectively since inception in 2001 compared to S & P 500 annualized return of -0.22% over the same period. You can invest in one of his Marketocracy mFolio portfolios for a fee.
Alternatively, you can follow Randy and his trades via his blog. Randy doesn't write very often. This is actually good because someone once said, "If you find every stock a good idea, you are in big trouble." Good stock ideas don't come by easily. Otherwise, they won't be good. I always wonder how publishers of investment newsletters come up with 10 new ideas every month. Randy discusses his reasoning behind picking the stocks for his model portfolio on his blog in gory detail. You can also ask him questions about his picks on his blog. An indisposable learning resource!
There you have it, my five best places to look for stock ideas. How do you find your stock ideas?
I'm Ye, a Principal of Qovax. Qovax is a small web development company that builds beautiful websites and thoughtful applications from sunny California. Read more articles like this on my blog.