How to Analyze a Stock

Investing in individual stocks starts with disciplined analysis and grounding your decisions in a set process. While there are many ways to do so, here’s how I would go about it. There are two main things that I like to look at when determining whether or not I should invest in a stock: Fundamentals and Valuation.

Fundamental Analysis

I’ve mentioned this before in other posts, but it’s essential to pick good companies when investing for the long term. That’s where fundamental analysis can help you out. Usually, you want to start at the top and go down through everything relevant about the business. This means looking at the C-level executives for the company, mainly the CEO and CFO. You’re looking for stable leadership and those guiding the company in the right direction, both in terms of innovation and avoiding controversy.

Next, you want to look at revenue drivers. A company’s products can tell you about its business model, which can help you decide whether the company will be more or less relevant than it is today, 5-10 years later. Financial statements and recent performance are also good indicators of a company’s financial health and the direction in which it’s trending.

**If you don’t know how to analyze financial statements, look out for a blog post covering that in the future!**

This leads us into looking at competitors and whether the company is losing/gaining market share. Don’t get me wrong; this doesn’t mean that blue-chip companies and companies with large market shares are the only “good” ones. It’s a way of judging where the company is and what its ceiling could be. For instance, you can find great emerging companies, but they’re typically in spaces that either lacked innovation before or had no clear top dog in the market. That’s why in the phone market, it would be difficult for an emerging company to take over Apple/Samsung, but in the AI/chip market, Nvidia was able to emerge and dominate.

Valuation

A company’s valuation can provide a window into how the market expects a company to perform. There are multiple types of valuations that all mean different things, but the one I like to use the most is Discounted Cash Flow (DCF). It estimates a company’s present value by projecting its future free cash flow. Unlike other methods, DCF focuses on what the company is actually worth, not based on market sentiment or other factors. It also accounts for future performance and not just historical data.

Not everyone has the time or interest to do their own valuations. So, if that sounds like you, do a quick Google search for a company’s DCF valuation and you’ll get multiple results with different outlooks. You can choose which one you want to use based on how bullish or bearish you feel about a company.

Using valuations is helpful because it tells you if the stock is currently over/undervalued, which can help you determine if it is a good time to buy the stock or if you should wait. You usually want a margin between the valuation and the actual stock price of about 10-30%. The higher the better.

How Do I Get New Ideas for Companies to Look Into?

This is a common question and one that I’ve wondered about myself. But really, it’s pretty simple. You get ideas for what companies to look into by being more aware of your surroundings. For example, what company made the computer/phone you’re looking at this post through right now? What companies made the chips, hardware, etc? What companies do you buy food from? What companies have services you use every day? These are just a few ways to get ideas for new potential investments. So, keep one eye open, and you’ll always have options in front of you.

One Last Thing

It’s important to understand that this is just one way of seeing things. There are so many other ways to look for individual stocks. At the end of the day, the best investment is the one you’re looking for.

Disclaimer:

This blog post is for educational and informational purposes only. It is not financial advice. I am not a licensed financial advisor, and nothing in this post should be interpreted as a recommendation to buy or sell any securities. Trading involves risk, and results are not guaranteed. Past performance is not indicative of future results. Always do your own research and consult with a licensed financial professional before making any investment decisions.