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how to perform research on stocks

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research on stocksAs a typical investor in equity markets, every day you are bombarded with information. Be it 24/7 business news channels, news papers, publications, friends etc. We tend to react to more transient news than focusing on stock fundamentals. This ensures two things – One, we end up choosing wrong stocks and two; we make our broker happy by doing frequent buying and selling.

Do not rely on the so called brokerage reports as well. Just use them for information because these entities who write such reports tend to be heavily biased on the upside for a lot of stocks. They may even have other relationships with the company (investment banking) which may influence their outlook. Finally, a lot of the so called “sell side” research firms follow the herd. If it is bad days for a stock, very rarely will you see a broker coming out with a bold contrarian report on the same. This is to avoid career risk for the analyst, as, if you go wrong in a crowd it is ok but if you perform badly alone, you are castigated.

Dwelling back to our main point – so what does the investor do? Well, start to go to the most primary source of information about a listed company. The one which all analysts, fund managers, news channels go to – the

Annual Report

! This is a gold mine of information for an investor to know a lot about the company. What one needs to do of course is have patience and some time allocated over weekends to read 2-3 such Annual Reports.

Annual Reports give information about the said year’s financial performance of the company and lists out the management commentary and outlook. Good companies have very detailed disclosure in their Annual Reports. This is an indirect way of judging Corporate Governance standards also! For starters, just immerse yourself with management commentary and understand the company’s sector and business environment. Then, move on to their segmental break ups to understand which segment gives them primary revenue and how it has been performing. Lastly you can move on to consolidated or standalone financial statements to get a feel of financial performance.

The Annual Report is a base from which further research can be done. You can always eke out various ratios from the Report by putting it down in an Excel sheet or manually calculating it. You can take a judgment call on its future performance. You can find out how cash has been put to use by the company. Whether it is being ploughed back into new projects, given back as dividends or just kept idle! You can also read about off balance sheet items. You can get to know more about the company management and board of directors.

Supplementing can be further done by reading on quarterly press releases and financial statements. This would make it easier to follow the company. Good companies host conference calls after every quarter and give detailed press release on their quarterly performance, following this would make you more updated about the company.

Think about it like this. If you would have invested in a house, you would be up to date on the happenings in the surrounding area like new developments, civic amenities etc. You are updating yourself periodically for that. Similarly, as equity stocks are also your long term investments and your company (since you are part owner, however small!), it is necessary to form your own opinion on the investments!

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