How To Analyze A Stock In Two Hours Flat

How To Analyze A Stock In Two Hours Flat
Stéphane Renevier, CFA

about 2 years ago6 mins

  • First, understand the stock’s price action in the past using a site like Koyfin.

  • Then, investigate the industry and look at its three most important drivers: growth, quality and valuation. Use StockRover to crunch the numbers, and the company’s annual statements to make sense of them.

  • Last, make sure you check the company’s technicals and assess what macro factors influence its price. Sites like portfoliovisualizer.com and Finiviz will make this a piece of cake.

First, understand the stock’s price action in the past using a site like Koyfin.

Then, investigate the industry and look at its three most important drivers: growth, quality and valuation. Use StockRover to crunch the numbers, and the company’s annual statements to make sense of them.

Last, make sure you check the company’s technicals and assess what macro factors influence its price. Sites like portfoliovisualizer.com and Finiviz will make this a piece of cake.

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Some investors devote hours and hours to finding and analyzing their next investment, poring over balance sheets and crunching numbers to try to avoid picking stock market duds. But you don’t need hours and hours to sort the potential winners from the losers. Just two will do.

Review the stock’s price action: 30 minutes

So you’ve sat down with a stock in mind. First, ask yourself these three questions:

How has the stock moved over the past five years?

How has it performed versus the overall market?

Has it outperformed its main competitors?

See, the historical price action of a stock reveals how the market is feeling about it. You should also pay particular attention to large price gaps, which could reveal significant events – and interesting opportunities – in the lifecycle of the company.

Take Meta, whose stock has underperformed both the market and the tech sector since last summer after outperforming them for years. You need to understand why before you form a view on whether it’s relatively cheap or not.

So log in to your favorite charting tool (I personally like Koyfin), enter the ticker of your stock, and take notes whenever you see jumps or collapses in its share price. Then, spend a few minutes on Google to work out what was going on around that time.

Investigate the industry: 30 minutes

A significant portion of your stock’s returns will be influenced by the performance of its industry, which means it’s essential to understand the dynamics and drivers of that sector. So next up, you’ll want to examine if, say, the industry is exposed to an economic downturn, or if it’s on the decline or growing rapidly.

To understand an industry’s dynamics, answer the following questions:

How competitive is the industry as a whole?

What’s the current dynamic between supply and demand?

How concentrated is the industry? That is, is it controlled by a few firms, or is it more fragmented than that?

Are barriers to entry high or low? That is, how easy is it for newcomers to enter the industry?

Try not only to understand where the industry’s been and where it’s going, but also the role of the company you’re analyzing within this overall narrative.

Here’s a good tip: check your company’s latest annual report and read what it says about its industry’s key strengths and weaknesses. Make sure you also understand the company’s strategy, as well as how its management plans to capitalize on opportunities and fix any weaknesses.

Assess your company’s fundamentals: 30 minutes

Three fundamental factors are particularly important when assessing a company: quality, growth, and valuation.

To assess your company’s quality, you should examine how its margins have evolved over time, as well as how they compare to those of its rivals. If your stock’s profitability is above average and stable (or improving), you might be onto a high-quality company.

To assess your company’s growth, you should look at both its revenues and profit. Ideally, you’d want both of them to grow consistently (or at least stay level) over a few years. Again, to better understand its competitive position, make sure you compare your stock’s growth to that of its peers.

To assess your company’s valuation, you should pick a few relevant key metrics like price-to-earnings, price to free cash flow, or enterprise value-to-sales, and compare them to the market, to its industry, and to direct competitors. The lower those ratios, the cheaper the stock. Comparing your stock’s current valuation to its historical one can also yield useful insights into whether the stock’s always traded at a premium to its peers, as well as how cheap the stock is relative to its own history.

Assessing these three factors is useful in a couple of ways. First, it’ll stop you from buying a bad business at an attractive price – or a great business at a bad price. Second, it could help prove your thesis: if your stock is showing strong growth and profitability but trading at an average valuation, you might be onto something.

Plenty of websites (I like Stock Rover) allow you to quickly run the numbers for your stock, so spend a few minutes studying them and understanding the fundamental position of the company you’re analyzing.

Check the company’s technicals: 15 minutes

Here’s what to check:

  • Whether the stock’s liquidity and market capitalization fit your minimum requirements
  • Whether analysts are bullish or bearish on the stock, and how that’s changed over time
  • The amount of stock company insiders are buying or selling
  • The “beta” (a beta above one means the stock is riskier than the market).
  • The proportion of shares held by institutional investors

If you’re confident with technical analysis, you should also identify whether the stock is close to a “buying point” or not (a common entrypoint for growth investors is the cup-and-handle price formation, for example). By making sure price technicals align with the fundamentals, you’ll significantly improve the risk/reward of your investment.

A website like Finviz.com helps you visualize all these all at once. If you’re new to technical analysis, compare your stock’s numbers with those of other companies to put things into perspective.

Understand the macroeconomic drivers: 15 minutes

Stock prices are never just driven by their fundamental factors. Macro factors – including interest rates, inflation rates, and the health of the economy – also significantly impact their price. It’s your job to understand how your stock is exposed to those factors, and which ones represent the biggest risks or opportunities.

Bank stocks, for example, tend to benefit from rising interest rates, while tech stocks tend to suffer from them. Consumer staples stocks are less dependent on economic growth than consumer discretionary stocks. Energy stocks tend to outperform when inflation heats up, but they’re exposed to any downside in commodity prices.

Tools like portfoliovisualizer allow you to calculate your stock’s correlation to other assets, and you can use relevant exchange-traded funds that correlate with specific macro factors as a proxy. You might, for example, see how exposed your stock is to higher interest rates by correlating it with iShares 7-10 Year Treasury Bond ETF (ticker: IEF), to economic growth using SPDR S&P 500 ETF Trust (ticker: SPY), to commodity risk using Invesco DB Commodity Index Tracking Fund (ticker: DBC), and to inflation risk with iShares TIPS Bond ETF (ticker: TIP). It’ll also tell you whether that correlation is positive or negative, showing you if it’ll prove an advantage or disadvantage. Then just make sure those numbers tally with your understanding of the business so far.

And that’s it. Now, are those two hours enough to give you an edge and help you beat the thousands of analysts analyzing the stock? Probably not: the more time you can spend a stock, the better on that front.

But I see the benefits of this technique differently: assess your stock in just a couple of hours, and you’ll rapidly assess whether it’s worth pursuing further. By getting 80% of the thesis in 20% of time, you’ll be able to cover more ideas and discard the non-starters before you sink too much time – and money – into them.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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