MUST KNOW!: ESSENTIAL TIPS on how to Research, Analyze & Perform Due Diligence on Stocks [What to look at]

[fryn]

Some people have asked about due diligence & research on stocks, so I decided to put this together. These are things to look at, when looking at a stock.

Some of you may know me from my Due Diligence posts at r/FluentInFinance, but below is my Guide on HOW TO ANALYZE & RESEARCH A STOCK, and what you should look at when evaluating a stock (This is my checklist just build from years of wins & losses, things I learned from Pace University and Goldman Sachs). If I am investing large amounts of cash, I want to research thoroughly, so if the stock drops I can stick to my convictions, and forget about emotion.

Before I use my time to research a stock, read up about it into detail, and dig into the financials, news, and 10-K, I check these two things first, to decide if I should use my time to dig further:

1. I quickly look at price upside. I look to see what the analysts covering it, have to say about the price targets. (Money is a tool, and you want it to work for you). MarketBeat.com can show you this: https://www.marketbeat.com/stocks/NASDAQ/AAPL/price-target/
2. I look quickly at the charts and the technicals. I try to read and interpret the charts to see what previous trading patterns can predict. What are the short-term, mid-term and long-term predictions? A site you can use to interpret the charts for you is BarChart.com and TradingView.com

https://www.barchart.com/stocks/quotes/AAPL/opinion

https://www.tradingview.com/symbols/NASDAQ-AAPL/technicals/

If it passes these two quick tests, then I start to dig deeper. Other things I look at:

1. Sentiment & News. I Google the company. I search the ticket on Twitter. What are people saying? How do they feel?
2. Earnings & revenue history. Is there growth? Is there potential? I look at the financials and the projections. Are the making money? Will they make money?
3. Growth. I look into the financials to look at past growth. I look into news, 10Q's, 10Ks, investor presentations, and statements to look for future growth. Is there potential?
4. Financial health. Are the financials strong? (Quick ratio, Profit margin, EPS, Income Statement Trend, Cashflow). Can this company survived? Is it managed well?
5. I dig deeper into technical analysis and the charts. I look at RSI, moving averages, MACD, Stochastic Oscillator, etc. What is the Long term trend? What is the short term trend?
6. Valuations. How is this valuated? (PEG ratio, P/E ratio). Is it over-valued? Is it undervalued?
7. Short selling. How much of this stock is sold short? Are people betting against it?
8. What is the put/call ratio? Are people betting against this stock to go down?
9. Peers & competition. How does this company stack up against its competitors and peers? How do the financials compare? How to the products compare? Is there a moat?
10. Institutional Sponsorship. Are big banks and wall street holding this? How much or this company's stock do they hold?
11. Insider Trading. Is the CEO buying or selling shares?
12. The amount of ETFs that hold this stock. Will they continue to buy it up and drive price over time?
13. Average volume traded. Is this stock liquid? Would I be able to get my money back? How easy can I trade it? (The higher the volume, the thinner the bid/ ask spreads)
14. Social sentiment. I check what people are saying on twitter, reddit, and google search trends. Is it trending?
15. News moves a stock. So I also use google to find out as much as a company as possible. Are there potential catalysts that may move the stock?
16. Management & CEO: I check Glassdoor and Indeed to learn about the management of the company, and google their CEO.
17. For more tips or strategies check: https://www.flowcode.com/page/fluentinfinance

There are many sites, tools, or resources you can use to dig into a stock such as (1) Yahoo Finance, (2) MarketBeat.com, (3) MacroTrends.com, (4) MarketWatch.com, (5) CNNMoney.com, (6) CNBC.com,

I use an excel spreadsheet to organize my research: https://www.flowcode.com/page/fluentinfinance

Check my prior/ past reddit posts for other analysis/ tips at r/FluentInFinance,

Disclaimer: do your own research, make your own decisions because nothing is guaranteed, and I am not a financial advisor

 

[marysson]

@fryn Nice post, it's a great idea to have a clear process.

Since we're in personal finance, I would add though that for the vast majority of individual investors, actively making investment decisions is a losing game. And even if you see a positive return (as one would in the current market), beating the long-run return of broad ETFs is almost impossible.

 

[dollfaceme23]

@marysson No it’s not

These guys said Apple was the gem in there collection of stocks

 

[resjudicata]

@marysson where can I see some research about this?

 

[peacefulmind]

@resjudicata There’s been research by the ESMA (regulator for finance industry at the European level) where they found that active equity funds underperform passive index funds: https://www.esma.europa.eu/press-ne...ts-performance-especially-active-equity-funds. Those active funds are managed by professionals whose job it is to analyse and make investment decisions. So the guy who spends a couple of hours a week researching companies doesn’t stand a chance. Especially in large cap equity markets (US and EU stocks) which most people retail investors trade in, the markets are so efficient that you’ll be just as successful by trading through flipping a coin as doing your research.

 

[marysson]

@resjudicata The Little Book of Common Sense Investing by John Bogle of Vanguard explains and documents this quite well.

It also makes intuitive sense: The market is going to return a specific return per year. If you beat the market, by definition, someone else underperformed. In practice, beating the market year after year is nearly impossible, even for professionals. As an individual investor, it would be even more surprising.

 

[kaytiedid]

@fryn great post - thanks for sharing.

 

[fryn]

@kaytiedid Thanks, glad to help!

 

[resjudicata]

@fryn TL;DR the thread creator is self advertising and spreading misinformation for his personal gain. please don't fall for it. stock picking is a bad idea, buying total market index funds is way better, because it has a higher expected return rate, less complexity, and takes less time away from your life

I would add the following points to your list:

1. stock picking has a lower expected return rate than total market index funds. it is gambling with bad odds (russel3000 index: 67% of stocks underperform index, 40% had negative returns)
2. stock picking exposes you to uncompensated risk (the risk of specific companies/stocks)
3. stock picking and "research" costs time (with no benefit to you, no matter how much you "research")
4. stock picking introduces unnecessary complexity to your portfolio
5. stock picking costs more fees
6. stock picking triggers taxes, because you can't hold them forever, like you can hold a total market index funds forever
7. stock picking is a zero sum game and you are competing against world elite educated professional traders and investors (a billion dollar industry). they have tools and data that is not accessible to the retail investor

In general, just think through it and realize just how bad stock picking really is and safe yourself time and have better expected return rate by buying low fee total market index funds.

 

[sayo]

@resjudicata Have to agree. These "tips lists" always leave a sour taste when there's self advertising involved.
And if you wanna beat ETFs you gotta do a hell of a lot more than read tips.

 

[kingcharleshead]

@fryn Thank you!

 

[fryn]

@kingcharleshead glad to help!

 

[ladyjaden]

@fryn Awesome post, well structured. Definitely good guide for dd
Nice, simple checklists before diving into a stock.

 

[triumphant8891]

@fryn Thank you. These advices seem quite simple to follow and yet very useful.
I am on a french subreddit about personal finances. I would like to share your text over there, do you allow me to? I would tag you and link you the post ofc.

 

[fryn]

@triumphant8891 Sure, no problem. I can post. What is the subreddit?

 

[skeptic25]

@fryn Very good list, a great start for many small retail investors. I find it too easy to be drawn into a momentum move only to look at longer term charts and see huge downside on small cap stocks I'm following. I'll use this to bolster my research points. Thanks for the contribution!

 

[fryn]

@skeptic25 Thanks for the words!