How should you pick stocks?
Stock picking is an art as much as it’s a science.
You need to have a method to the madness. First decide if you want to take a more top-down approach or a bottoms-up approach. There are many software programs that can do this. I use Bloomberg to generate an analysis on a wider level before I narrow things down. It helps as a tool for idea generation.
There are a few functions that can give you broad based strokes. GRR is a group ranked returns function that gives you contribution of returns to SPX. This allows you to understand what has made the markets move. For example, semiconductors contributed the highest at 38%. No surprises here.
Naturally, from this point onwards you may want to know the individual stocks that comprised those returns. Click and you can see the top 15 movers. Both positive and negative. Nvidia moved 77% followed by advanced micro devices at 30%.
This should start giving you some ideas as you explore the screens one by one. The thing about Bloomberg is that it can be overwhelming. You can explore everything from idea generation to discovery to relative valuation. If you’re doing a top down approach you will want to pick broad screens such as GRR. This helps you focus on a sector and then start drilling down on individual winners/losers.
Clicking into the companies above for example gives you company descriptions. From here, you can start looking through comparables or supply chain analysis to see suppliers of the winners. Investing in a supplier that has a particular comparative advantage for example, or picking a comparable that has a lower p/e ratio or a higher FCF multiple or that seems undervalued. The possibilities are endless. At this point, you can perform an intrinsic value analysis using any type of metric whether cash flows, dividends, or earnings. You can also do relative valuation against other companies in the same sector etc.
If you don’t have Bloomberg, get some trial memberships at yahoo finance, or free stock screeners such as FINVIZ.COM. These are great for idea generation to see what stocks are out there.
Long story short, have a process and most importantly write it down. Have a template for how you evaluate a stock. Keep refining this process as you incorporate more information until you feel comfortable enough to do back of the hand analysis on multiples and intrinsic value of a stock.
