Search strategy

To be successful in investing, one should have a good search strategy. Often I used to wonder where should I look for companies for doing further research and then investing in them. Here are some of the places I look at
1. 52 week low list: Many seasoned value investors will tell you that one of the best places to find stock ideas is the 52 week low list. Its an inherently contrarian strategy. A company will usually hit this list when something has gone wrong in the short term such as quarterly / annual results, some bad news or if the entire sector is unloved. In the recent weeks, a lot of large cap technology stocks have hit this list ( Sept 2010).

I have built my own S&P 500 by 52 week low

S&P List by low P/E

2. Low P/E, P/FCF, P/B list: Once again another favorite method used by many value investors is finding stocks that are trading cheaply on one or more valuation metrics such as Price/Earnings, Price/Free Cash Flow, Price/Book. You can use a screener to generate a list of companies that match your criteria. There are many screeners around. One of the good ones is FinViz (best of all it is free)

3. Magic Formula screener: I am a big fan of Joel Greenblatt’s method of finding ‘good’ companies trading at ‘cheap’ valuations. He has created a free screener that can be used to find stocks that match the criteria by different market cap ranges. In Europe, some folks have setup a paid version of this screener. Access it here. Magic formula investing recommends buying 20-30 companies from this list. However, if you think you can do better, use this list and do your own research.

4. Holdings of Guru Investors: Any investor that manages $100 million has to disclose his portfolio holdings each quarter to the SEC in the US. This is called a 13-F filing. Some websites make it easy for you to find the holdings instead of having to dig this on your own. Two of my favorites are dataroma.com and gurufocus.com
You can find what stocks a particular fund manager owns or you can find all the managers who own a particular stock you are interested in.

5. Magazines/Newspapers: I subscribe to the Barrons and WSJ. I prefer the Barrons for ideas and WSJ for overall business news. Other recommended publications are the Financial Times, Economist, Fortune, Forbes.

6. Create your own watch list: You already may know several companies that you like. Make a list of them and track them. I have created a few watch lists already using Google docs. Read my past article on how to use Google Docs for creating such watch lists.

Here is a sample watch list

7. Investor clubs: Two excellent websites that provide excellent quality write ups and ideas are Sumzero and ValueInvestorsClub

8. ValueLine: A lot of investors use ValueLine Investment survey to look at various companies and find ideas. I think Buffett and Walter Schloss have mentioned about their use of ValueLine as well. ValueLine provides a weekly overview of companies in an industry with historical data/performance/valuation. A shortcut could be to follow other investors who review ValueLine and are kind enough to share their findings with us. I will mention two of my current favorites:

thevalueguys.com is a weekly podcast that provides 3 ideas from each weeks edition (Check articles on them here)
Greg Speicher updates an online spreadsheet with data.

9) Ben Graham screens: Ben Graham gave two screens in his book “The Intelligent Investor”. One for ‘defensive’ investors and one for ‘enterprising’ investors. You can find the details in the book or on other websites.
Defensive nvestor screen

Enterprising investor screen

There could be hundreds of ways you find a stock. Remember that coming across an interesting company is only the first step in the investing process. The next important thing is to do your own research and see if you agree with what you had read elsewhere. You need to arrive at a valuation for the business and then see if the stock is both undervalued and trading at an attractive level compared to the intrinsic worth of the stock.