Earnings, Valuations & Business Analysis (II): Resources and Approaches
A constant them here is having to dig into the actual structural nature of an investment, particularly business. On that topic we've put up some posts on approaches, valuations, and Warren Buffett's thinking (btw - if you haven't follow that post to the YouTube videos we repeat it's well worth your time). The question we haven't addressed as yet is how. Which we propose to make a bit of a start on here. Below the line you'll find a listing of web resources that we've found useful. Now these aren't the resources of course that somebody in the business has access to - in fact we rather hope they have much better and deeper ones. Nonetheless there's more and more information sufficient for you get into investment and business analysis. Along with the links we'll also wrap a short explanation of the stepwise process.
As part of the approach let's repeat our fundamental mantra: Economy, Industry, Company. In other words understand how the overall Economy (& therefore Markets are headed), then understand how particular industries will play in this context. And finally how particular companies will play. Now Warren is found of saying he pays no attention to big picture, macro stuff which is all well and good, especially when you've got his resources and timeframe. But the mantra is not just top-down, as it might appear. One could as readily start on the other end by finding interesting companies, however you do it, and then understanding their bigger picture context. So the mantra works both topdown and bottom-up.
So below the line please find our suggested links, resources and (implicit) approach to business analysis. We hope you find it useful and productive.
Let's start with Warren's materials, though we've already pointed you at the videos. In our post on comparing his approach to ours we also pointed to an article by the AAII on their interpretation of his approach which resulted in their "Buffett Screen". That's a start of another sort as well, too. If you haven't already join the AAII unless you're already in the Finance industry and have access to alternative resources. Regular reading of their Journal will go a long way toward laying down a solid foundation.
Buffett
Buffett Screen: http://www.aaii.com/stockscreens/screendata/overview.cfm?screen=BuffHags
NotMakingThisUp: Pilgrimage, Part X: On The Cheap
BRK Web Site: http://www.berkshirehathaway.com/
The link to the screen is repeated above. One of favorite bloggers is Jeff Matthews and he's also a fan of Warren's and made a Pilgrimage to the last BRK annual meeting. His resulting multi-part trip report is very much worth your time. Finally, there's no better resource than Warren's annual stockholders letters - if for no other reason than they're fun to read as well as being informative, folksy and wise. Besides those resources we'd also recommend Graham's "Intelligent Investor" and either of Peter Lynch's books. A related resource is the annual meeting of the Value Investor's Congress which has a LOT of very good information on it.
AAII (American Assoc. of Individual Investors)
AAII: http://www.aaii.com/
StockScreens: http://www.aaii.com/stockscreens/
Clearly we think well of the AAII. Either bottom-up or topdown their site has a wealth of stock screens that are very good starting points for building up an initial list of candidate stock invesmtments. Now if you choose not to go the level of the individual company but instead focus on broader economic and industry trends, as well as key themes, then you might not have to dig this deep but in the long -run it 'll still pay to understand key players to understand an industry, e.g. IBM's investor presentations will serve as a fine educational tool on the structure and dynamics of part of the tech industry.
Finance Web Sites
Two other very good web resources that provide a broade wealth of tools and information on stocks, various assets, e.g. ETFs or Mutual Funds are Yahoo Finance and MSN Money Central. Both of which we've found to be very useful.
Yahoo Finance: http://finance.yahoo.com/
Industry Browser: http://biz.yahoo.com/p/s_conameu.html
Stock Screener: http://screener.finance.yahoo.com/newscreener.html
When you're beginning your explorations at the Industry level Yahoo is a great place to start. It also has a decent Java based stock screener. You might consider converting the AAII stock screen criteria, as far as possible, into their tool.
MSN Money: http://moneycentral.msn.com/investor/home.asp
Research Wizard: http://moneycentral.msn.com/investor/research/wizards/SRW.asp
StockScouter: http://moneycentral.msn.com/investor/StockRating/srsmain.asp
StockScreener: http://moneycentral.msn.com/investor/finder/customstocksdl.asp
Jim Jubak: http://articles.moneycentral.msn.com/Commentary/Experts/Jubak/Jim_Jubak.aspx
The MSN site is rich with resources and we're only touching the surface here. News coverage, explanatory articles, guides and columnists are all particularly good. The tools listed above are about as good as it gets for investment research (and can be used whether you're an investor, employee, customer or supplier. In fact these days whomever you work for it's becoming more and more obvious that understanding how well your company is or isn't doing is definitely in your own best interests !). MSN's StockScouter is a particularly interesting tool and uses a muti-factor scale to rate and evaluate companies. Highly recommended.
The stable of MSN columnists is also very good but we'll especially call out Jim Jubak. His columns cover the reach and range of the economy, markets, industry trends and particularly companies and he's as close to our approach as anything out there. He also nicely balances technical with fundamental analysis - which in these markets is a necessary technique. We are especially fond of and impressed with his ability to id macr-trends and themes and then translate that into investment strategies and company evaluations. In fact his columns are actually a better starting point for selecting targets than any standard screen might be and should be part of your regular reading.
Other Resources
Hoover’s Research: http://hoovers.com/free/.
Hoover's provides a fair amount of research on individual companies for free but reserves the more in-depth stuff for fee. You'll have to decide whether it's worthwhile though with regard to what it provides it's relatively inexpensive - though the free sites may take you far enough.
FusionIQ: http://fusioniqrank.com/
Another for fee site is the one put up by Barry Ritholz's new company FusionIQ which brings a rich set of proprietary tools to the table, though for a fee. That fee however is very affordable and the tools seem to cover both technical and fundamentals analysis very well indeed.
Schwab: Schwab has completely transformed itself and become perhaps the goto resources for the mid-size investor. Of course you'll need to be a client to access their tool kits but having been a customer for many years we've always been reasonably happy and in recent years the asset classes and instruments available as well as tools for analyzing them have gotten very good. For example their ETF screening tools are as good as anything we've seen and they've introduced a stock analyzer with a proprietary multi-factor rating and screening tool that is very good. In addition their commentary on the Economy, Markets, outlooks and companies is as close to ours as anybody out there. In the classic test of the intelligent person when they agree with you AFTER in-depth analysis then you've got something.
CAVEATS and Additions
A couple of things we didn't mention but are readily accessible thru the sites mentioned above and where the rubber really begins to meet the road.
1. SEC Filings - all the investment sites provide access in their company profiles to SEC filings. You should, if you believe anything of what we're telling you, make it a constant habit to read the 10-K and 10-Q filings on every major company you're interested in (the now famous 30+ Buffett "Circle of Competence")
2. Company Investor Presentations - many of the larger companies put their presentations to investors up on their web sites, which can also be reache thru the sites listed above. You should be reading these regularly as well. And, as we mentioned, if you're beginning to be pursuaded about the notion of business analysis these presentations are must reads. And again - not just for the individual companies but also for the insights into their industries and general conditions. For example the IBM pitches from last Spring on Emerging Markets focus of course on IBM but tell you a lot about those situations. For another example the GE presentation by Jeff Immelt on the strategic framework for GE's future is an exemplar of how it should be done. A comparison and contrast between GE and Citigroup is highly informative. One is clear, consise and well-structured. The other is a technician's dream and tells you how disorganized their thinking is.
3. Financials - all of the web sites have some company financial reports and you should always look at these. And learn how to read and interpret them if you don't know already. However there's not enough data to get an appropriate baseline. For that you may want to look into something like the AAII's "Stock Investory Pro" which provides multiple years of market and fundamentl information.
4. Operating Information - unfortunately none of these sights carries much in the way of business specific discussion or analysis. That is information on how a company really works though some of the available research reports, e.g. on Schwab, will get you started. For that you need to follow the business and financial press, e.g. Bloomberg, Financial Times, CNN/Money/Fortune, Marketwatch or WSJ etc.
If you've been following along on this blog you'll notice that we periodically collect and comment on this sort of reporting. Over time as you build up a comptency with an industry and company and accumulate your backlog of stories you'll find youself accumulating something even more valuable. An appreciating asset of business domain knowledge. Here again we'll go with Peter Lynch-like advice. Start with the things you know and build up your knowledge. We'll have more to say on that topic - in fact it's central to our whole argument.
And hopefully the point is clear that as we walk thru these sources and resources we're also outling what we think is the stepwise approach to business analysis. At least we hope it's clear and that you find it a useful and valuable approach to understanding business analysis and performance evaluation.