How To Research Stocks

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No matter if you’re a DIY investor or just someone who wants to know more about your investments, you don’t need to work on Wall Street to understand how to research stocks.

While researching stocks may sound complicated—and let’s be honest, there’s a lot of jargon—it’s a process that can be mastered with patience and some help from the following stock research guide.

A Few Things to Know about Researching Stocks

If you’re looking for a silver bullet, that one piece of information about a company that will tell you whether a stock is a winner or not, you’re going to be disappointed. That’s not the way this works.

Researching stocks requires gathering and analyzing multiple data points in order to find the equity investment that meets your needs. But you’re doing so to build a case for or against a stock, rather than a specific right answer to whether you should buy or sell.

“Equity research is an art, not a science,” said Asher Rogovy, a registered investment adviser (RIA) and chief investment officer of advisory firm Magnifina.

Every public company operates differently, and every stock investor has their own unique financial goals and interests. For Rogovy, that means researching stocks is as much about your particular investing strategy as it is about the market data you’re looking at.

To put that another way, stock research helps you build a story about a public company’s finances and business practices, and how those things might make the stock a good fit for you.

Start by Gathering Research Data on Stocks

The first step in building the story is to gather data. Here are easy-to-access resources that you can use to get started.

Equity Analyst Reports

Equity analysts are highly trained professionals who research stocks for a living. You should definitely be using their reports to your advantage.

If you have an online brokerage account, you can find analyst reports for most stocks on your brokerage platform. Navigate to an individual stock’s ticker page on the site, and see what sort of reports are available.

Equity analyst reports typically rate stocks as buy, sell or hold, based on their independent research. These terms are pretty straightforward, as the analyst is just telling you that a stock is worth buying (if you don’t already own it) or selling (if you already own it). Hold generally means the company should continue to perform in line with the market.

Some of the major analyst reports to follow are issued by Thomson Reuters, MarketEdge and Argus. You can also find consensus reports by companies like TipRanks, which gathers research from multiple analysts and gives a broader view of how the industry views a stock.

One of the best parts about a consensus report is that you can see opinions of multiple individual analysts, get a view of their overall ratings as analysts—yep, analysts are rated, too—and their track record for accuracy.

Take analyst ratings with a grain of salt, though, since they have a documented conflict of interest and research shows they can be too optimistic.

Dig into the Fundamentals

When researching stocks, the term “fundamentals” refers to data on a company’s financial performance. This includes things like revenue, profitability, assets and liabilities, and growth potential. Fundamental analysis helps you understand the financial health of a stock.

All publicly traded companies are required to file information about their finances with the U.S. Securities and Exchange Commission (SEC). You can find these annual (10-K) and quarterly earnings reports (10-Q) on every company’s investor relations page or by searching for a company’s records at the SEC’s EDGAR database online.

If you have an online brokerage account, you can also use the platform to find similar data. Log in and search by ticker to review company fundamentals like dividends and earnings per share (EPS), along with a stock’s historical and year-to-date performance. Some online brokerages also link to current news about the stock as well on the ticker page, making it easy to see news about a stock.

Online Stock Research Websites

There are plenty of online stock research websites that can get you plenty of information on the stock of your choice:

While many of the sites listed above have paid subscription services, you can generally find the basics that you need to know about a company from the free side of the service.

Understand the Numbers

Once you’ve gathered the research on your stock, you can dig into the stock’s financials. A company’s financial health has everything to do with how analysts rate its stock and should play a role in any decisions you need to make about adding the stock to your portfolio.

Here are the key financial criteria you’re going to be looking for:

  • P/E Ratio (price-to-earnings ratio). Also known as a stock’s earnings multiple or price multiple or, the P/E ratio is a number that measures a company’s current stock price (P) against its earnings per share (E). A P/E ratio is either forward-looking (uses estimated earnings) or backwards-looking (earnings that already occured).
  • PEG Ratio (price-to-earnings-growth ratio). While it sounds like a mouthful, a company’s PEG ratio expresses a company’s P/E ratio divided by its annual earnings per share growth.
  • P/B Ratio (price-to-book ratio). This ratio shows the relationship of a stock’s current price to the book value of the company. The book value is what a company could expect to get if it shut down tomorrow (yikes) and sold off all its assets.
  • Return on Assets (ROA) and Return on Equity (ROE). ROA is how efficiently a company uses its assets to create revenue. ROE is all about how much profit a company creates for every dollar that shareholders invest.

These figures help you make comparisons between different companies, or between a company and a basket of similar companies. They give you a sense of how expensive a particular stock is trading compared to its peers, and how much it might grow.

Learn About The Company

After getting the numbers down, continue to research a stock by learning about the leaders who run the company. Even if you’re a fan of the folks who make your laptop or your favorite sneakers, there’s more about a company that impacts whether a stock should be an addition to your portfolio.

  • Leadership. Who is leading the company? What’s their management philosophy? Where did they work prior to running this company and how did they help their previous company succeed?
  • Culture. How does the company rank on best places to work lists and additional lists that speak to equity, diversity and inclusion like the Corporate Equality Index.
  • ESG. How does the company prioritize environmental, sustainability and governance (ESG) initiatives in how it operates and generates revenue? Use MSCI’s tool for an ESG deep dive into thousands of companies.
  • Trends. Does the company have a strategy to remain competitive? Does it have business in multiple verticals and profit centers? And speaking to recent events, if the world shuts down because of a global pandemic, does the company still have ways to serve its customers and generate revenue? Much of this information can be found in the analysts notes you’ve compiled.

While some investors would consider these to be “feel good” criteria, there’s no downside to companies with solid, proven leadership. Also, a 2019 study from McKinsey found that companies with executive teams that ranked in the top quartile for gender diversity were “25 percent more likely to have above-average profitability than companies in the fourth quartile—up from 21 percent in 2017 and 15 percent in 2014.”

Put It All In Context

With this sizable amount of information about a stock, you can start to assess whether it’s a fit for your investing goals. Here are a few scenarios that can help spark ideas to decide what sort of investing goals you want to pursue.

  • Income investing. If a particular stock has buy ratings across the board, solid financials and sound leadership but cut its dividends to zero during the pandemic, you might consider a different well-rated stock in the same asset class with a long history of consistent dividends.
  • Growth investing. If your favorite sneaker company consistently puts out new products but doesn’t show signs of long-term financial growth, you could consider this stock for a different part of your portfolio or skip it since it’s not going to meet the growth you need to meet your financial goals.
  • Value investing. Value investors look for underpriced stocks. They believe the stock market overreacts to events that impact individual companies, and that short-term developments drive moves in stock prices that don’t always reflect a company’s long-term fundamentals.
  • Socially responsible investing. If your research into an agricultural company demonstrates that they’re not proactive with watershed protection and don’t have plans to build out an overall EGS strategy, a well-rated stock with an excellent returns history might not make the cut.

You also don’t want to fall in love with a company just because they seem like an innovative force, said Robert R. Johnson, CFA and professor of finance at Heider College of Business at Creighton University. He cites the example of automakers and how they would go on to change transportation.

“In the early part of the last century, there were 2,000 auto companies,” he said. But as of the late 1990s, only three of those companies survived. “While auto had a tremendous impact on society, investors weren’t duly rewarded.”

The Bottom Line On How To Research Stocks

Researching stocks gives you a better feeling for a company’s financial health and whether it’s an attractive choice for your financial goals. Be sure to leverage the research that’s already out there because you don’t have to go it alone. Analysts are paid to research stocks for a living and their work shouldn’t be ignored, even if you don’t buy every word.

The biggest decision you’ll have to make after researching stocks is whether you want to continue to do all the heavy lifting, or instead, explore other strategies like exchange-traded funds (ETFs), mutual funds or robo-advisors that do the hard work of deciding what belongs in your portfolio at any given time. It truly comes down to a matter of preference, time and enthusiasm for the research process.