How to Research Stocks

For guys who do soccer or prediction, they sure know what it means and how important making proper research holds before prediction. Similarly, no one has to ask you to become your ambition. Hence, in the same vein, why should you wait for validity to learn how to research stocks and become your stock analyst? Yes, the reasons people want to learn how to research stocks can be relative, but it’s often for a common goal. Some may have encountered lots of losses and wants to stay aware while others just want to become guru analyst. Either way, we’ve carefully given a careful guide to follow to become a good stock researcher and analyst.

Meanwhile, learning how to research stock can help you learn how to evaluate a company and decide whether it qualifies for you to add it to your portfolio. Hence, learning how to research stocks entails considering a range of factors. Factors like the company’s financials, leadership team, and competition.

how-to-research-stocks

So, are you an investor who prefers to rely on your research? Then you have to consider becoming your stock analyst. Read on to discover how you can think and evaluate like an analyst, even while sitting at home.

How to Research Stocks

#1. Understand The Two Types Of Stock Analysis

Before considering researching a stock, you first have to know the approach to use. There generally exist two ways you can do this. They include fundamental analysis and technical analysis.

A. Fundamental Analysis

Fundamental analysis involves the assumption that a stock price doesn’t necessarily express the intrinsic value of the underlying business but rather external factors. Investors use this central tool value to try to discover the best investment alternatives. Fundamental analysts employ valuation metrics and other information to determine how valuable a stock is. Investors usually looking for an excellent long-term return applies fundamental analysis

B. Technical Analysis

Generally, technical analysis speculates that a stock’s price reflects all information available and that prices typically move according to trends. Hence, have you ever seen someone trying to identify patterns in stock charts or discussing moving averages? They are actually exercising a form of technical analysis. Meanwhile, technical analysis typically concentrates on short-term price fluctuations positions.

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#2. Learn Some Important Investing Metrics

To become a good stock analyst, you have to learn some important investing metrics. Hence, we’ve elaborated on four of the most significant metrics every investor should include in their analytical toolkit to know a good company’s financial statements:

A. Price-to-earnings (P/E) ratio: 

You have to properly know how to look at a companies price to earnings ratio. As they report their profits to shareholders as earnings per share (EPS). The P/E ratio is the most common evaluation metric in fundamental analysis. It serves a very useful purpose for comparing companies in the same industry with similar growth prospects.

Thus, the price-to-earnings ratio (P/E ratio) includes a company’s share price divided by its annual per-share earnings.

Hence, an example includes when a stock trades for $40 and the company’s earnings were $4 per share over the past year, we’d say it traded for a P/E ratio of 10, or “10 times earnings.”

B. Price-to-earnings-growth (PEG) ratio: 

Companies grow at different rates and strategies. The PEG ratio divides a stock’s P/E ratio by the expected annualized earnings growth rate over the next few years to level the playing field. The idea includes that a fast-growing company can become “cheaper” than a slower-growing one.

Furthermore, for example, a stock with a P/E ratio of 30 and 10% predicted earnings growth over the next five years would have a PEG ratio of 3.

C. Price-to-book (P/B) ratio: 

A company’s book value includes the net value of all of its assets. In a simple illustration, see book value as the total amount of money a company would theoretically have if it closed its business and sold everything it owned. The price-to-book (P/B) ratio involves a comparison of a company’s book value and its stock price

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D. Debt-to-EBITDA ratio: 

One good method to measure financial health includes looking at a company’s debt. There exist various debt metrics, but beginners can start by learning the debt-to-EBITDA ratio. EBITDA stands for the company’s “earnings before interest, taxes, depreciation, and amortization”.

An increased debt-to-EBITDA ratio could serve as a sign of a higher-risk investment, especially during recessions and hard times. You can find a company’s cumulative debts on its balance sheet. While you’ll find their EBITDA on its income statement. Then divide the two numbers.

#3. Look Beyond The Numbers To Analyze Stocks

This phase in learning how to research stocks holds the most significant step in the analytical process. While everyone loves a reasonable bargain, you’d discover more to stock research and analysis than just looking at valuation metrics.

Hence, you also have to watch out for these three other essential components of stock analysis;

  • Durable competitive advantages: As a long-term investor, you want to know that a company will sustain and hopefully increase its market share over time.
  • Great management: You have to check out the management team behind the stock. Because if the wrong people are making key decisions in the industry it will likely fall quickly.
  • Industry trends: You have to focus on industries seeming to have favorable long-term growth prospects. 

A Basic Example Of Stock Analysis

Let’s consider a hypothetical scenario. Let me say that I want to add a home-improvement stock to my portfolio. Hence, I’m trying to choose between Lowe’s (NYSE:LOW) and Home Depot (NYSE:HD).

Firstly, I’d have to look at some numbers. Below includes how the two companies listed some of the metrics we’ve discussed:

METRICHOME DEPOTLOWE’S
P/E ratio (past 12 months)25.020.9
Projected earnings growth rate14.4%16.7%
PEG ratio1.741.25
Debt-to-EBITDA ratio (TTM)1.461.73

Data sources: CNBC, YCharts, Yahoo! Finance. Figures as of Nov. 5, 2020.

Thus, from the table figures, I deduced some key takeaways. Here Lowe’s seems to stand as the cheaper buy on both a P/E and a PEG basis. Nonetheless, Lowe’s has a higher debt-to-EBITDA multiple, so this shows that Lowe’s may be the riskier of the two.

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Frequently Asked Questions About How to Research Stocks

What Do Stock Analysts Do?

People who analyze stock look deeply at a company’s financial reports and statements to carry out a fundamental analysis. They have to do this to come up with a presumed fair price or value target and then issue a recommendation to investors accordingly. This includes whether to buy or hold recommendations.

What Should I Do If a Stock Rises Above Its Target Price?

If you have confidence in your analysis, then you should sell the security for a profit once it reaches or exceeds its price target. However, you may still prefer to first check if anything fundamental has changed that might raise the current price target. Apart from that, use the revenue from your trade to fund a new investment opportunity.

What Are Some Bottom-Up Tools for Stock Analysis?

The bottom-up analysis starts with a company’s financial statements like the income statement and balance sheet. From there, you can compute various ratios that reveal a firm’s current and targeted financial position. These ratios include the debt-to-equity (D/E) ratio, inventory turnover, quick ratio, various price multiples, etc.

Conclusion

Ultimately the goal of every investor remains to make a profit. However, not every investor or analyst is profitable. If the financial market, before accepting whatever a stock analyst or anyone says always endeavor to do your research (DYOR). Yes, everybody cant become an investing expert, but you can always grow your analytical skills when it comes to stocks. So, ensure to learn how to research stocks yourself so you can determine good investments.

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