BITS > JANUARY 2004

"How can I find interesting stocks to study?"

Editor's note: Brian Lewis' splendid contribution in this month's issue is a reminder of the valuable contribution to stock study and investment education being made by so many of NAIC's national and regional directors. On behalf of individual investors everywhere, our thanks go out to them for their help, their guidance, their generous sharing of their knowledge and experiences. That has always been one of NAIC's greatest assets, and as we begin another year of learning and investing we salute them for helping others become better investors.

Are all "stock study" lists equally good?

There's more than one reason that a person might be seeking stocks to study. A very common one is "my club needs something interesting to look at this month." But there can be more focused reasons, often arising out of good portfolio management. For example, if you find that you have little money invested in a major sector (such as health care or financial stocks), you might want to direct your search just within that sector. All lists are not alike, and many lists of "great stock ideas" won't appeal to NAIC investors at all -- a list aimed at market timers might turn up a set of stocks that an NAIC investor wouldn't want in his or her portfolio at any price.

Of course any list is just a starting point. You knew that, right? Always do a stock study (complete a Stock Selection Guide) before purchasing shares!

So without further ado, here is my list of ideas, of sources for stocks to study. I've included some comments with each; a more terse version of the list is available as a separate pdf file (above, right under "Related Files"), suitable for printing.

19 Ideas for Finding Stocks to Study

1. Industry study list: The idea is to keep track of the stocks you have already studied, so that you spot "holes" -- juicy looking industries that for some reason or other you have either never studied, or haven't studied in a good long time. This is a particularly useful technique for a club -- it helps keep things fresh and ensures variety in your stock studies. It can also push your club to study "special" industries such as banks, insurance companies, growth-cyclicals, REITs, etc.
   


2. Lists in Value Line: look towards the back of the "Summary & Index" insert which is updated weekly. Consider the list of "Highest Growth Stocks"; scan down the Current P/E Ratio and the Estimated 3-5 Year Price Appreciation columns, and perhaps skip any with numbers that are too poor or that seem too good to be true.
   
   In addition, look for Value Line's "Selection & Opinion" piece in a separate notebook. This presents selected screens (lists) each week, in addition to highlighting a couple of stocks near the beginning of each issue.
   
   A problem with Value Line stock lists is selecting which ones to use and which ones to leave alone. For example, some clubs and individuals factor in Value Line's "timeliness" ranking for individual stocks and for industry ranking; others (myself included) ignore this factor, since it's a relatively short-term prediction based on a momentum timing system. If you use Value Line as your data source, I encourage you to spend a little time getting to know the various screens that Value Line offers and decide for yourself which ones you will find the most useful.
   


3. Internet screening software: examples include MSN, Quicken, Yahoo, Reuters Investor, Wall Street City, Stockpoint.com, Morningstar. I wrote a walk-through example of the MSN screening tool for the March 2002 issue of BITS, and Bonnie Biafore and Brian Goodhart have also written BI or BITS articles about stock screening. Stock screening is a great technique to use when you have a more specific goal in mind -- such as the portfolio management example I mentioned earlier. It isn't difficult to learn, though it's one of those skills that you can improve with practice.
   


4. NAIC Stock Prospector is another stock screening tool, but this one is aimed directly at NAIC members; it even screens off of NAIC's Online Premium Services (OPS) data. I wrote a review of the latest version in the February 2003 issue of BITS. Prospector has some key advantages for NAIC members, and it's one of my primary ways of finding stocks to study.
   


5. NAIC's BITS magazine: This is a BITS article (that you're reading now), so hopefully you're already aware of how useful BITS can be in finding stock to study! In case you're not, here are examples from the December 2003 issue:
   • Researching a Small-Cap Stock -- Cytec Corp.
   • Top 10 SSG downloads
   • NAIC Online Discussions
   • NAIC Growth Screen. This is provided in every issue.
   
   
6. NAIC Top 100 list. Ken Janke wrote about how he uses this list in the April 2003 issue of BI Magazine, in an article titled A Treasure-Trove of Ideas. The above (Top 100) link is from April 2003. A new list will be added each year, but it's not hard to find. It's printed in Better Investing magazine's April issue, and you can search on NAIC's Web Site for it. By the way, if you've never used the "search" feature of the NAIC Web Site, then I think you're overlooking an excellent tool to further your investing education.
   
   So how do you search? Just type "top 100" (without the quotes) in the search box near the top of NAIC's home page -- or on any NAIC site Web Page -- and then click the little "go" button just to the right. On the resulting page, you might want to change the "sort by" choice from "Score" to "Date," and then click the Search button; that ensures you're looking at the more recent articles first. Since the Top 100 list is only published annually, you might have to look through a few items to find what you're looking for. But the things you "have to look through" might turn out to give you some interesting stock study ideas as well. For example, Mark Robertson has been doing a number of short "Company Chronicle" Web Feature pages, some of which you might find interesting.
   
   So -- Top 100 stocks, eh? Since a whole lot of NAIC clubs own a given stock on the list, it must be a good idea, right? The top few must be guaranteed money makers?
   Please -- do your own analysis!
   


7. NAIC "Most Active" list: found in Better Investing magazine. Here's a link to the current Most Active list. Mark Robertson talks about the logic behind this list in his June 1999 article, Places Where Ideas are Born.
   
   As with the Top 100 list, I suggest that you don't assume anything about the Most Active list, other than that it might give you some interesting ideas. But if a lot of NAIC members say they're buying a particular stock and you've never heard of it -- why not look it over? Just recognize that even if it passes your personal growth and quality tests, at the current stock price it might no longer be a bargain.
   


8. ICLUBcentral's Investor Advisory Service (IAS).
   
   I tried to limit this list to free information sources -- I'm a huge fan of "free"! I made exceptions only for Prospector (referenced above), and the IAS (now also owned by ICLUBcentral).
   
   The IAS tracks a portfolio of something like 80 stocks that are of interest to NAIC investors, providing paragraph updates on a large number of these each month. It also gives three completed Stock Selection Guides (SSG) each month, profiling these stocks in depth with professional judgment and accompanying analysis text.
   
   I'm going out on a limb a little to suggest IAS as a source for stocks to study, but those who subscribe to this service will find both the "portfolio" list and the three-per-month completed SSG's to provide excellent ideas for stocks to study, along with judgment to compare to their own.
   


9. Other online "Best Company" lists: examples from Forbes include the Forbes Platinum 400 (the "Best 400 Big Companies in America"), and the Forbes Best 200 Small Companies in America. Also consider Jubak's 50 best stocks list.
   
   Of course there are other such lists; the above are just some of my personal favorites. For an example of "other" ideas, you could go to http://www.investor.reuters.com, click on the "investment ideas" link on the blue bar near the top of the page, and look over the results.
   
   As you wander the Internet in search of investment ideas, however, I would encourage you to keep a firm mental grip on your NAIC investing principles. Just because something is written up on a nice looking Web site, doesn't make it a great investment idea for you!
   


10. Investment magazines: either home delivered, at a local library, or via the World Wide Web (including a lot of free content). Examples might include Fortune, BusinessWeek, Forbes, Smart Money, and somewhat more specialized magazines such as Business 2.0 or even Wired magazine.
    
    If you have a bias towards technology stocks, Business 2.0 seems to do a pretty good job of covering that arena; Wired Magazine takes that even further, though with less of an investing (and more of a gee whiz technology) focus.
    
    In addition to the above ideas, there are magazines like Money and Kiplinger's which cover a broader array of investing topics, and aim at relative beginners. If this describes you, one of these might just be your cup of tea.
    
    I suggest that before you subscribe to any of these or other investing magazines, have a look to see what's at your local library -- give them a "test run" for a month or two if you can. Note that you can often read a lot of this content online (for free), either to see if you like what they provide, or maybe just instead of subscribing!
    


11. Newsletters: I mention these just in case you're conveniently located near a library that carries one or more of these.
    
    I suggest that, particularly for inexperienced investors, you don't just look at one of these (and definitely don't surrender your judgment to them). If you go to a fairly large library that subscribes to a number of newsletters, you might note with amusement how much these guys can conflict with each other -- they can't all be right. And in my opinion, pretty much none of them can be consistently right! (if they were, why would they bother writing a newsletter?)
    
    If you want to dig into the whole newsletter scene, the best place to start is, ironically, with a guy that writes his own newsletter: Mark Hulbert. Mark writes a newsletter about newsletters, tracking their performance. If this interests you, you might start with this piece on newsletters by fundadvice.com (note that I know nothing about fundadvice.com -- I just liked this particular article). If your library carries newsletters but doesn't carry the Hulbert Financial Digest, you might ask the librarian if they would consider adding it (perhaps replacing one of the others).
    
    I think that inexperienced investors would do better to just steer clear of newsletters -- there are 18 other ideas in this list!
    


12. Better Investing magazine: always covers a couple of stocks in depth, and other articles will sometimes provide ideas.
    
    Note that the "Stock to Study" is just that -- it's not an investment recommendation. Better Investing's Editorial Advisory & Securities Review Committee have offered a suggestion for a stock to look at, and done some initial research for you.
    
    That said, some clubs rely on this as their main source of ideas for stocks to study. I know of a pretty well-known NAIC investor who limits his portfolio strictly to companies that have been featured as stocks to study. The stock selection committee has some pretty heavy-weight NAIC gurus, and their monthly selections are certainly worth looking at.
    
    So how about the "undervalued feature"? In my opinion, not every undervalued feature company will be suitable for every NAIC investor. As an example, take The Stanley Works, the undervalued feature in the July 2003 issue. Its five-year historic sales and EPS growth figures are uninspiring at best. Just because a stock is mentioned somewhere in BI magazine doesn't mean it's guaranteed to pass all the tests that a typical NAIC investor might apply. My personal opinion is that the undervalued feature article is something best left to more experienced investors and clubs. If you do decide to investigate one of these, always check that the historic growth rates and quality factors meet your standards.
    


13. Published news stories: in the newspaper or on the Internet.
    
    Here I'm just talking about how easy it is to find stock "stories" in the business news or even just in your daily life. On a typical day I'll see stocks I recognize in the headlines of several stories in the business section of my local newspaper, and sometimes showing up in other sections of the paper. Stock stories are easy to find (in fact, sometimes even hard to avoid) on a variety of Internet sites as well, perhaps even on your "home page".
    
    I figure it's a lot like a tip from my brother-in-law -- if it sounds interesting enough, I'll look into it, but start out with no assumptions either way.
    
    Finding stocks to study in your daily life is something you can develop a sort of "radar" for. In fact, I find that today I can't go into a grocery store or a bank or any sort of business without thinking about what I see and what it suggests about profit margins, sales volume and growth, customer loyalty, etc.
    


14. TV shows: Nightly Business Report, Wall Street Week, CNBC, CNNFN, etc. Note that many in the NAIC community shy away from the "up-to-the-minute" approach of some of the features on CNBC and CNNFN, reckoning that these are aimed more at traders or market timers than at long-term investors.
    
    I think it's just fine if a person uses the television as a source of investment ideas. I think it's not-so-fine if that's their only source.
    


15. Other NAIC members: you can get insights from chatting about why people like certain companies (or industries) by talking to your acquaintances in other clubs, or to your immediate neighbors at regional or national NAIC events.
    
    In fact, I think this is one of the hidden (but valuable) benefits of going to either of NAIC's national events: CompuFest (this year in St. Louis, June 18 - 20 2004), or the BI National Convention (Phoenix, November 5 - 7 2004). But wherever you rub elbows with other NAIC investors -- at club meetings, regional events, classes, etc -- make an effort to socialize. Ask what stocks other people are looking at. And at least as important, ask them why they're looking at those stocks!
    


16. NAIC's I-Club-List: available as individual e-mails, in digest form, or through the Web interface. Serving a similar purpose is NAIC's Compuserve Forum. These are another way to connect with other NAIC members, and have some added benefits: you can do it from the comfort of your own home, and you're connecting with NAIC members from all over the country, often connecting with well known and/or very experienced investors. As an aside, sometimes articles that you read in BITS or BI Magazine spring from the cauldron of discussions in one of these two electronic communities.
    
    I've heard some people say that they shy away from the I-Club-List because "it's too much e-mail". That doesn't have to be true -- you don't have to receive messages as individual e-mails. A great way to get help with questions or problems is to enter either the I-Club-List or the Compuserve Forum via their respective Web interfaces, post a message asking your question, then check back in a couple of days to see if you got any answers.
    


17. Other club Web Sites.
    
    I belong to two investment clubs -- one local, and one online. My local club "locks away" a lot of information for members only, but nevertheless provides a sort of unique feature: reasonably up-to-date SSGs on a number of stocks, those that our webmaster Tim Paterson personally follows: http://invest.patersontech.com/
    
    My online club, by contrast, was designed with on-lookers in mind: http://mywebpages.comcast.net/ctcolic/index.html.
    
    There are many club Web sites; some provide some great ideas -- and not just limited to finding stocks to study. I've often heard Lynn Ostrem's Crow River Club site held up as an example of a site to look at (and learn from). Hmm, maybe this would be a good I-Club-List discussion to have sometime ("what are your favorite club Web sites?").
    


18. Your own broker: Log in to your broker's Web site, and look to see if there's a "research" or similarly labeled link. You might be surprised at how much research you can do there, to include finding investment ideas.
    
    My wife and I have separate brokerage accounts; we figure this makes for a happier marriage, but more to the point, I have two different brokers that I can directly compare.
    
    At both sites, we can get stock screening tools, industry data from Standard & Poor's, and other "idea generators." The two brokers offer some similar or identical research tools, but each has some unique items as well. You're already paying for whatever research is offered by your broker, so check out what's available there.
    
    Not to be repetitive, however, but as with some of the other idea generators above -- hold on to your NAIC principles as you look at some of this stuff.
    


19. Mutual fund holdings: for funds whose management you admire.
    
    Let's say that you've done your due diligence and (I would suggest) used NAIC's mutual fund check list to select only excellent, well-managed mutual funds for any actively managed funds that you might own (as opposed to index funds). So if you think well of the fund management team, why not have a look at what they're invested in?
    
    You have to recognize that you're looking at somewhat old data, and you don't know what price they paid for their shares -- so again, we're not talking about a "guaranteed list of great stocks to buy now" or anything like that. But if you have a fund that uses an approach of buying excellent growth companies and thinking like owners of companies (rather than market timers), then some of their picks might be stocks that you'll find interesting too.
    
    How do you get the list of recent holdings? At both of the broker research sites I listed earlier, I can get the top 10 holdings for funds that I own. Or you can go to Morningstar.com to get this information (for free), in this case for the top 25 holdings.
    
    Subscribers can get the top 10 holdings -- and more -- at NAIC's new Mutual Fund Resource Center; it offers top 10 fund holdings in a short list, as well as the complete list of most recently available holdings. Also helpful is the ability of OPS subscribers to click on any stock name in the list and jump to the OPS company report on any of the listed stocks. Finally, funds list their holdings in reports they make to their shareholders. Even if you don't own shares, you can access reports like this, often on the Internet, or ask the company to send you their most recent report.

For a one-page version of this list, right-click on the link at the upper right column on this page (under "Related Files"), then save the PDF file on your hard disk. Or just left-click to open directly and print.

A member since 1994, Brian Lewis is the President of the Puget Sound Chapter. He's a founding member of BetterInvesting's Online Investor's School and has presented a number of classes online. Brian has taught a variety of classes in the Seattle area since 1999 as well as at the BetterInvesting National Convention, and has published several articles in BITS and BetterInvesting Magazine. He can be contacted at brianle@nwlink.com.