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8 Steps to Research a Company to Invest in - Best Investment Series - YouTube
Channel: Learn to Invest - Investors Grow
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hey YouTube I'm Jimmy in this video I'm
gonna walk through how to research a
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company and ways we can learn to become
a better investor
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I plan on starting with the very basics
and I'll give ideas along the way for
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how we can take our investing game to
the next level so I've been investing
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for over 15 years and I started
investing shortly before I went into
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college then I got my bachelor's degree
I got my master's degree and I'm
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currently working towards my doctorate
of Business with a specialization in
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finance but my real love for investing
came from when I was young and my father
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worked on the floor of the New York
Stock Exchange and that was really my
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early introduction to investing that
being said I understand that investing
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can seem intimidating for people who
have never been around it who I've never
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done it for the first time or if you're
just starting out the process itself can
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seem cool you know quite overwhelming so
what I'm hoping to do here is I'm gonna
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break down the actual process I go
through whenever I analyze a new company
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and I believe that if we follow this
process we can all get really good at
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analyzing companies and ultimately
picking companies to invest in so if
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you're not a hundred percent confident
on how to read financial statements I
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think that this book is a fantastic
place to start
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it's called Warren Buffett and the
interpretation of financial statements
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and I got an Amazon link in the
description below but I like it because
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it's very simple I that's really the
reason I love this book and as you can
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see it's quite a small book and it's
super easy to read now i think that mary
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buffett she's one of the authors i think
that she used to be married to or she
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still is married to i'm not sure i
married to warren buffett son and and
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although this is called warren buffett
and the interpretation of financial
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statements I can safely say after
reading it that this is not a shortcut
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for thinking like Warren Buffett thinks
as far as investing goes but I'm not
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even saying that's why I would like the
book what I'm saying is that they do a
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fantastic job of making it very very
simple they walk through different key
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ratios different pieces of each of the
financial statements and I think it's an
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amazing place to start if you want to
learn how to read financial statements
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like Buffett does
then Ben Graham's book security analysis
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is the place to go but I read that book
and I love reading about this stuff and
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that is a really tough book to read that
book took me over a year to read this
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one took like you know a couple hours I
mean it's really quite simple okay so
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now let's pretend that you're
comfortable with the basics of financial
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statements and you could probably move
on to these next steps even if you have
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just the very basics they're just a very
basic understanding of financial
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statement analysis and I put the links I
put links to the videos that we created
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on each of the financial statements in
the description below and you could
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probably get away with just that for now
but I think the key to really becoming a
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good researcher and ultimately a good
investor is being able to analyze a
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company's business or understand the
business itself so now let's look at how
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we can learn about the business and if
you're wondering this is the these are
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the exact steps I go through for every
company that I research either for work
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or for when I'm making a video however I
do it these are the steps there's eight
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steps in general that we go through
okay so let's pull up any company how
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about we start the next company that I'm
gonna cover for the Dow 30 analysis
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Goldman Sachs so the first step is to
pull down the most recent annual report
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which is called the 10k now 10k's are
required to have a certain amount of
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information in them one of those
sections one of the requirements is that
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they have a business description in it
so whenever I start with a new company
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or even if it's been a while since I
last analyzed the company I always start
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with the business description this is
the business description for Goldman
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Sachs and here they break out the
segment's they break out what the
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company does and this one's about 20
some odd pages and they're all usually
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in that area call it 15 to 20 pages so
this isn't your typical they throw a
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description out there they do a really
good job at least Goldman did in this
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example of explaining what the business
does and how they make money now many
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times when I first start researching a
company this may be as far as I get if I
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get through this section and I don't
like the business itself or it's too
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complicated or I question how many
prospects they're gonna have over the
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next few
years then I could just stop here and I
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think that this is an important point
because you can bail out on a company at
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any time you don't need a thousand good
investments all you need is a handful of
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great ones and you can make a killing
with your investments so I think we all
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need to be very picky about the
companies that we elect to ultimately
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put our money in okay now we know what
the business does so now we're on to
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step two now we're going to read the
most recent management discussion and
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analysis section from their most recent
filing if it was their annual filing the
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same place they got the business
description great otherwise you have to
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pull down the quarterly filing which is
called a 10-q now the business section
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is usually only in the 10k but the MD&A
section is usually in every one of their
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quarterly and annual filings now
sticking with our Goldman example
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Goldman's annual report was filed on
February 26th of 2018 it's now November
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so it's a bit outdated but their last
quarterly report was filed just two
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weeks ago so we know the business
section is from back in February and the
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MD&A section is just from two weeks ago
so in the MD&A section we're gonna
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learn a lot about the business what
management what the management team is
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trying to do with the business what
their plan is they might talk about the
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industry or maybe what different trends
that are happening in the industry
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they're likely to break down the
financial performance for each of the
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segments and basically they're gonna talk
about how the business as a whole is
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performing now I bring up the dates
because I think it's important to
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remember if you're reading the business
section and it was from almost a year
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ago just keep that in the back of your
mind you know you might want to update
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those numbers in your head as you're
reading through the quarterly MD&A
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section okay and this kicks us right
over to step three which is on to the
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financial statements and I highly
recommend that we pull those financial
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statements directly from the latest
quarterly and annual reports because these
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financial statements come with the
footnotes and the footnotes can be key
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to understanding the financials often a
company does something unique with a
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particular line item and in the
footnotes they explore
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what they're doing and why they're doing
it so if they were ever going to let's
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say change an accounting rule or adopt a
different accounting rule well we should
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probably just Google what that
accounting rule change is and I think
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that this type of practice can get us
really good at exposing ourselves to
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different types of financial statement
analysis and I think that the more we
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look at the actual financial statements
not something off of let's say Yahoo
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Finance or whatever it might be go to
the actual source and if you have a
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question about a particular line item
look at the footnotes
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they'll probably explain it there now
step four is get the company
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presentations and recent earnings calls
now steps two three and four can really
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be pushed together or swapped around
because for me on a personal basis after
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I read the business section assuming I
still like the company well I go ahead
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and download everything from steps two
three and four all at once because each
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of these are often interdependent and
sometimes they say the same thing in
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each of them so I think it's a great a
bit faster just to download them all at
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once and start going through them
together now up until this point we've
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made no attempt to value the company all
we're doing at this point is getting to
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know the firm understanding what they do
how they make money where their margins
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what is their growth rate look like do
they have free cash flow how does free
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cash flow look what's management's plan
do we think that their plan is
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reasonable things like that during steps
two through four those are the questions
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your time you're trying to answer okay
now in step five now we need to find
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competitors so in their MD&A section
or maybe in the business section or
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maybe in the earnings call well
we would have come across hopefully
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something about the industry and now we
need to identify competitors ideally two
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or three of them if we could do that I'm
happy now at this point we know the
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company well and you know what they do
you know what they're planning to do you
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understand where they're going and now
once we find competitors what we want to
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do is we want to read a little bit about
each of the competitors and try to
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understand what their plan is what's
their growth rate like what's their
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margins like what business line are they
trying to go into and sometimes if let's
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say you see a big difference in
margins between one company and another
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you could look at well why is there such
a big difference sometimes this reveals
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a competitive advantage that one company
has over another so now once you
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understand the very basics of what the
competitors do you pick two or three and
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we move on to step 6 now we want to try
to value our company now assuming that
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we still like them of course now
sometimes you'll come across one of the
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competitors and you'll say I like this
one better maybe I'll switch over to
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that company to that competitor because
maybe they have a competitive advantage
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that we identified so what we do is we
start this exact same process over with
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them but this time imagine how much
easier it's going to be to understand
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that business read the management
discussion over there because now we're
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going to know that business so much
better we're going to know the industry
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we're gonna understand the language so
much better so the second the third the
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fourth time we do this for similar
companies the easier this is going to
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get but now let's imagine that we still
like our company so now what we want to
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do is we want to try different valuation
methods maybe we try discounted cash
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flow or p/e multiple or EV to EBITDA
there are lots of choices and the more
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experience we get with different types
of companies and different types of
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valuation methods the better
we'll get at choosing which one is
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appropriate for that particular
situation now this is also where you
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want to compare the company with their
competitors compare the ratios also
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compare the company with themselves from
prior years if management says that they
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have a particular plan in mind well how
long's that plan in place are they
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actually working it can we see it in the
numbers and for me I think you can learn
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a ton about a company with this type of
analysis digging into the differences
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from year to year or from company to
company can really point out a lot
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personally this is also where I like to
find industry associations often these
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types of groups can do a great job of
explaining the industry explaining the
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potential of the industry maybe the
projections or the future of the
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industry and I think that this is great
to identify what our company does what
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their competitors do where they fall
overall in the industry now if you have
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access to analysts research this is a
good place to pull it all down I like to
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see what valuation methods are
using what does consensus say about
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revenue about earnings and personally
what I like to do is I start with
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consensus for revenue let's say or even
for earnings per share and then I read
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their investment thesis and I say you
know what I'm either more bullish than
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their or I agree with them I'm right
line with what they're thinking or I'm a
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bit more bearish than they are and then
I can adjust their expectations in one
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direction or another if I think it
should be higher I can move it slightly
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higher slightly lower or much higher
maybe they're not accounting for
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something I also like to look at which
valuation method they're using are they
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using PE or EV to EBITDA and if I have
access to a few different analyst
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reports that could be useful to see how
each of them do it so I can look to see
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at least what's popular among analysts
from a valuation perspective don't
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forget they in theory specialize in
these types of companies so in theory
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they should know which type of valuation
method is best and this ties us into our
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next step step 7
see what the stock is doing now we also
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we've calculated our fair value we know
what we believe this stock should be
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worth where's the stock actually trading
so sticking with Goldman here's a recent
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chart from Goldman Sachs looks like
they're trading right around two hundred
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and seven dollars but here's the point
of this step this isn't necessarily to
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see where the stock is right now look at
this drop right here what happened how
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about this drop or what made it move
higher in this spot and in each of these
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we want to pull down the news from that
time period to see if we can identify
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what was happening either with that
company or with the industry to identify
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what moves the stock pretended with
Goldman Sachs that every time a big
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headline comes out about rising interest
rates are falling inflation or whatever
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it might be and when that news comes out
while the stock goes crazy in one way or
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another that's good information for us
because we want to know what is a driver
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what does Wall Street or what do
investors believe is a driver of this
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stock you can usually tell that by
looking at big movements and what put it
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there
usually its earnings but sometimes it
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could be more than that now it almost
doesn't matter what you're over there
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we now have an idea of what to look for
going forward plus if we
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similar headline come out one morning
let's say a month from now after we've
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done all of our research well we
probably have a good idea of how the
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company will react and this brings us to
our last step step 8
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look for a buying opportunity okay so
now I know what the company does we know
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what their plans are and we know what we
believe they should be trading at we've
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looked at some recent news and now we
need to determine what our personal
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margin of safety is so if we like the
company but maybe we think that there's
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a lot of risk well we want a large
margin of safety using the Goldman chart
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as an example so if we think that this
stock is really worth let's say 230
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based on our calculations well maybe
down here at 207 maybe that's good
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now that's plenty of margin of safety
for us but if we think the risks are
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larger maybe we don't want to get into
it unless it's at 190 or maybe below 175
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that's going to depend based depending a
lot of different things could be your
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portfolio could be your level of risk
tolerance could be your confidence in
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your projections whatever it might be so
now going back to the news for a second
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one thing that I really like to see if
there's a company like this that maybe I
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wanted to get below one ninety one thing
that I really like to see is let's
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pretend earnings come out and they miss
by a penny and the stock drops you know
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nine percent because of it well that
could be a pretty dramatic drop for
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something that over the long run doesn't
change a lot unless the fundamentals of
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where we think the business is going or
management changes their plans or
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something like that that could be an
enormous opportunity I look for
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something like that as a buying
opportunity to get this stock back
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within my margin of safety so if I want
to below 190 or below 175 whatever might
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be that looks like an ideal opportunity
to me don't let everybody selling off
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scare you away from your analysis do you
need to update the analysis but don't
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let them scare off if you're confident
with what you've done with the research
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that you've done so at the end of the
day if you like this company well we can
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go on buy it simple great that's easy
but maybe you want to wait for it to get
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below 190 or 175 or whatever fine what I
like to do is I have a bull pen of
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stocks where I just put it over there
and I wait for them to get there and
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then what I do almost immediately is
move on to the next company
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this is the key point to remember with
this whole process that the idea here is
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that the more you read about companies
the more you analyze different
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industries and how different companies
play different roles the more ideas
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you're going to come up with and the
better you're going to get at analyzing
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companies and ultimately coming up with
great investment opportunities so if you
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have any questions or if there's
anything that you would do when
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analyzing a company that I didn't
mention here please post them in the
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comments below and thank you for
sticking around all the way to the end
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of the video and if you haven't done so
already hit the subscribe button and I
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look forward to seeing in the next video
thanks
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