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Picture this: You go to YouTube, look up your favorite YouTuber, and he gives you one or two stock picks to feel excited about. Before you close the app, YouTube recommends another video titled "Best Stock Picks This Year," you watch it, adding a few more stock picks to your list. You promise yourself you come back and research them next weekend. But before you go to bed, a quick scroll through Twitter adds a few more ideas to your list, and just about the time you think you can't handle any more stock ideas, a breaking news article on CNBC adds a new ticker to the top. At best, you research a few haphazardly and skip the rest, and at worst, you forget about the list and repeat the same process the next day.
This stock-picking dance happens to all of us more often than we care to admit it. It is quite damaging to our success as long-term investors. In today's blog post, I'll share a process that can help you take control of your stock-picking process. It's simple and effective; anyone can use it, and it puts you in control and it is based on how Warren Buffett recommends you pick stocks.
Let's talk about that!
I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of our educational series to help you hone your fundamental investing skills. Catch up with the other post on How to Invest Like Buffett ?.
Remember, this content is for education and sharing ideas and not advice to buy or sell any securities.
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The starting point of this template is how Warren Buffett recommends you pick stocks. After we understand how he does it, I'd share a more practical and useful template you can use to find stock picks according to his methodology but in the modern day and age.
Warren Buffett's Approach: On several occasions, investors have asked what he would do if he had a small amount of money and wanted to make lots of money in the stock market. His answer has two parts:
To pick stocks following Buffett's suggestion, I have devised a framework I call a three-legged stool with a flower vase.
Market Cap Filter
This typically refers to a company with a market cap of at least $50 Million or above but lower than $10B. Chris Myer, the author of the 100-bagger book, explains this best. Chris has looked through companies created more than 100 times in return between 1962 and 2014 and found the most common characteristics of such companies. The idea is that smaller companies can grow ten or 20 times, still be small, and have room to grow over the year. In contrast, Apple today has a roughly $1Trillion market cap. We can safely assume it won’t go up 10 or 20 times and certainly not a hundredfold. So for us long-term investors buying companies to hold for 3, 5, or 10 years and, in return, expect to get rewarded significantly, we have to focus on smaller companies.
How to find them?
It's one of the easiest criteria to screen for. You go to Stock Card's stock screener tool, and choose the market cap filter, and remove companies with less than $50M and more than $10B in market cap. Please notice this would exclude very good investments such as Airbnb or Nvidia. But, notice, here we are focusing on finding companies that don't trend, and also, we are looking for companies that truly deserve to be held for a decade. Nvidia is a great company, but we all have exposure to Nvidia, either through holding broad market indexes such as SPY or some other ETFs.
Revenue Growth Filter
We've often heard that fundamental investing is picking businesses, not stocks. This means we must have a few criteria to differentiate a good company from a crappy one. If there is only one filter we should pay attention to, we should focus on revenue growth or a company's ability to grow revenue. Without revenue growth, it is very hard to attract talent and capital, and the company starts to shrink and decline, especially if the plan is to hold the stock for 3, 5, or 10 years, this criteria becomes super important.
How to find them?
One simple way to look at it is to just look at companies who grow their revenue in the last 12 months. But businesses are like humans, they have good years and bad. You can't just judge them based on one year's performance. You want a company that has been able to grow most of the time, with some flexibility for slower growth in a quarter or two. I prefer looking at the company's annualized revenue growth in a 3-year. On Stock Card's screener, if you choose the "Solid Revenue Growth" filter, it is based on the company's revenue growth in the last quarter over quarter, year over year, and 3-year period. Looking at all three periods, Stock Card allows for flexibility in revenue growth interruptions if a company has a bad quarter.
Cash Generation Filter
What's the most important reason businesses exist? I wait a few seconds for you to think about this. If you said making money, you are spot on. Yes, businesses exist to make the world a better place, innovate to solve problems, bring a dream to reality, and so on, but at the end of the day, the ultimate goal of any business is to make money.
How to find them?
We can use net income or profit that companies report at the end of the profit and loss statement. However, net profit results from accounting rules that don't always show the company's cash generation power. Instead, free cash flow is a better indicator of a company's ability to generate cash because it excludes non-cash expenses such as stock-based compensation and includes cash expenditure on capital expenditures. It shows the true power of a company in making money.
On Stock Card's screener, if you choose the "Cash Availability" filter, it is based on the company's free cash flow and its growth in the last quarter over quarter, year over year, and 3-year period. Looking at all three periods, Stock Card allows you to filter out companies that aren't truly cash-generating.
Those three filters are foundational to your long-term stock screening. However, they are not the only screeners you have to use, but it take the universe of more than 21K stocks listed in the U.S. down to around twelve hundred stocks on the day of recording this session for you.
Now, for the next part of our discussion, let's focus on how you can further narrow down the list from 12 hundred stocks to a few. If it were young Warren Buffett, he would have started researching the full list. But let's accept that with the help of technology, we can be much more efficient than Buffett.
Two Additional Filters To Screen Stocks Like Buffett
First off, there are super easy ways to cut things out.
Now, we have a screener that gives us about 100 stocks or so that are worth researching and spending time on. It is very easy to take this screener and make it more personal to your investment strategies. For example, if you want a company to be profitable or rather invest in undervalued stocks, those are additional criteria you can add.
This is the link to the screener I created in this blog post: Click Here. You can save it to your Stock Card account and adjust it to your liking, if you are on the mission to invest like Buffett!
I'll see you next time!
I have been reading on SVB to figure out what happened and why?
It's important to me for two reasons:
1) I'm an investor (not in SIVB). Always be learning!
2) I'm a customer (of SVB), which directly impacts us (not critical).
Let's dive in!
Interest Rates (Part I)
SVB had a bunch of bonds. Those bonds' values declined as the interest rate went up. That's just what bonds do. SVB could have held the bonds and gotten paid the coupon value at maturity.
But instead, SVB sold tons of bonds at a loss! WHY?
Interest Rates (Part II)
You need to know that lots of the banks' customers started moving their cash to interest-bearing accounts, which means higher costs for SVB. According to SVB, each % point decrease in non-interest-bearing deposits would reduce its net interest income by $3M.
Didn't SVB have cash on the balance sheet?
Interest Rates (Part III)
Context: banks hold their securities in two buckets: Available to Sales (AFS) and Hold to Maturity (HTM).
With HTM, if the value of your securities goes down, you don't take any loss on the balance sheet. It's held to maturity.
With AFS, you take the loss on the balance sheet if the value goes down.
As the interest rate increased, the value of those lovely "secure" assets SVB held dropped rapidly.
Technically, any bank can be insolvent, but the balance sheet doesn't show.
Now, we hit the real story!
My educated guess: SVB realized that with the deposits not coming as fast, VCs not investing, everyone wanting interest & their assets losing value by the minute, they may be insolvent.
What to do:
Market Phycology & Mechanics
The madness began, and market mechanics took over:
Some Observations (3/10/2023)
That's what I have learned so far. Thanks for reading! Things may change, and new information may impact my conclusions. Here are some observations and lessons:
Hope you found this helpful!
Fortune favors the intelligent!
Hoda, Founder and CEO of StockCrd.io
Hey folks, it's Karen, Head of Data Science at Stock Card. This week I used the COVID-19 Testing Kit and meshed it with one fundamental indicator and two technical indicators using the new Filter function on the Discover page, used to result to come up with stock on my Watchlist. Let me share with you how I went about this screening.
Steps to follow
Visit Stock Card's Discover page, and follow these steps:
If you are a Stock Card user (on our free Starter plan or premium plans), you can see the final results by clicking on this link. It is noteworthy that the results may vary day to day due to price changes in the stocks included in the collection. As of the closing on Friday, September 11, 10 stocks are included in the screening results. Click to view the results, or continue reading.
Using filter results
The overall market has been quite volatile since the indices (e.g., Nasdaq-100, S&P 500) peaked on September 2. In particular, the rally of tech stocks fueled by Softbank has receded, and cautious investors may be inclined to refrain from “buying the dip” in the FAANG and tech stocks resulting in drastic declines in some of Stock Card most popular stocks. What other stocks can investors consider to diversify their portfolios away from the technology sector? Investing in the stocks in the COVID-19 Testing Kit collection could be an excellent way to get exposure to the biotech and healthcare sectors and diversify one’s portfolio.
Let’s take Thermo Fisher Scientific Inc (NYSE: TMO), one of the ten stocks in the filtering results, as an example.
Add to watchlist
The chart below shows that TMO has outperformed the S&P 500 index throughout the year and is very close to the Nasdaq-100 (NDX) Year-to-Date returns daily based on returns. In the most recent pullback since Sept 3, as both S&P 500 and Nasdaq have been laggard, TMO has shown increasing strength, which is reflected in the daily returns. This may qualify TMO as a good addition to your watchlist.
The outbreak of Coronavirus has changed the way we live and work dramatically. The impact is not limited to people having masks on, and sitting 6 feet apart. The more prominent but less visible change is the transition of work from offices and commercial physical spaces to our homes. Working from home is not just limited to having a desk set-up, although that's certainly a necessity. The more critical enabler of the working-from-home era is digital infrastructure, such as a smoother log-in and access to the tools employees need to do their job. The more digital works become, the more significant is the need for easier online communications, document management, payment, and cybersecurity. Such a simultaneous and rapid shift to a new way of working has boosted companies' growth prospects associated with "work-from-home" products. At Stock Card, we live by the belief that our investment is a financial image of our lives, and it was only a matter of time before we completed our research to introduce a new list of companies that enable the work-from-home era.
Launching Stock Card's "Work-From-Home" collection
Last week, we introduced a collection called "Companies Shaping the Future." Many users told us that it helped them discover new growing companies to add to their portfolios. We hope the new "work-from-home" collection does the same. To build this list, we picked themes and markets associated with making "work-from-home" possible, less expensive, and more reliable. We have included companies from 40 different markets to create this new list. Some of these markets are:
You can click on the above links to see the individual market collections.
The above screening gave us a list of 450 companies as a starting point for your research. The best way to use this new collection is to look it up in the search bar, use the "advanced filters" to add your criteria and get a list of stocks that fit your investment goal. The video below shows you how, or click here to get the full list...
If you don't have a brokerage account to invest in Work-From-Home stocks, here is one of the best. We like the M1 Finance app that has an easy-to-use interface. Give it a try if you are in the market for a new brokerage account:
Risk-taking is an art! Not every risky stock is worth investing in. It's prevalent among stock market investors to justify a wrong decision as a risky one. However, a well-researched and informed risky decision can generate an outsized return, while being protected from total ruin. In this blog post, we explain a simple set of criteria we use to discover stocks worthy of your attention if you are a risk-taker. The list of Stocks for Risk-Takers can be a starting point for those who understand only some risks are worth taking.
Launching Stock Card's "Stocks For Risk-Takers" collection
We started the process by looking for smaller companies using the market capitalization of less than $10 billion. Doubling a $100 billion company is much harder than doubling a $2 billion company. Therefore, when it comes to risk-taking, small is more beautiful than big.
By just only one filter, the universe of publicly-traded stocks in the U.S. stock exchanges shrinks to a list of slightly a few more companies than 4,000.
Not every small-cap stock is worth your attention!
Finding noteworthy risky stocks is not just about searching for smaller companies. It would help if you also weed out those companies that cannot grow their revenue. Notice that we didn't talk about profitability. When companies are small and profitable, the chances are the stock market algorithms have already found them, and prices are adjusted to reflect the positive earnings. Therefore, stocks with growing revenue in the last 12 months to 3 years can narrow the list to a more manageable list.
If not profitable, then what?
While being profitable is good, being able to generate free cash flow is better. Earnings and profit are metrics heavily influenced by accounting principals. Highly profitable operations can become unprofitable if the management decides to reinvest the money it makes back into the company. However, a reliable, rapidly-growing company are typically cash flow positive before they are profitable.
The last criterion to consider is the company's ability to survive a period of economic hardship (such as the economic slowdown induced by the COVID-19 pandemic in 2020) or possible fluctuations and cyclicality in demand (such as demand cycles for chip technology). A reliable, risky company has enough cash to fund its operating expenses easily without the need to raise additional money or borrow.
The result of the above screening is a list of 189 reliable but risky stocks worthy of the attention of a risk-taker investor. We added them to Stock Card's collections, and you can access them for free by typing "Stocks for Risk Takers" in the search box on our website. Log in and check the list!