Buying Stocks: Due Diligence You Should Never Skip
It always surprises us how many people don’t do their homework before plunking down their hard-earned cash on individual stocks. From our perspective, there are some questions you should be able to answer prior to making an investment into a company:
1. What does the company do?
It’s a simple question, but that doesn't mean it's easy. To answer the question, there are a plenty of places to look, including the company's web site. Also, check out the 10-K report to better understand the business fundamentals and Finstead News to learn about the company’s recent developments.
2. Is the company profitable?
One way to do figure this out is to read the quarterly and annual earnings reports (such as 10-K) and check out how much net income the company reported. To save you some time in your research, we’re providing insights on the profit margin (trailing twelve months) and year-over-year profit margin change on Finstead Insights.
3. What is the company's earnings history and outlook?
A quick scan of the company's past quarterly statements helps answer this question. You can also check out the history of revenue growth (i.e.,quarterly revenue growth) and year-on-year profit margin growth on Finstead Insights, and figure out how they compare to those of the industry and sector growth rates--see below. Just remember that not all trees go to heaven; if a company is young, in the hyper-growth stage, expect the quarterly revenue growth to be significantly higher than the industry and sector averages.
4. How richly is the company's stock valued?
It's great if revenue and profit margin are growing exponentially, but the other side of the equation is what the market pays for that growth and the prospect of future growth. There are several methods of determining a company's valuation, including price-to-earnings and PEG ratios (the latter accounts for projected earnings growth). The higher the number, the greater the likelihood the stock is overvalued. These multiples aren't the perfect gauge, but investors do need to consider how much they are paying for a stock. See below what the PEG multiple looks like for Facebook.
5. Who are the company's competitors?
Companies don't operate in a vacuum. For every Facebook (FB), there's a Google (GOOG) -- and a host of other competitors as well. Companies are constantly competing for business--and investors should know how their competitors stack up. For that reason, we’re providing you with industry comparisons on Finstead Insights. Every time you look at a metric for a stock you’re interested in, you should also understand how its industry peers compare.
Hope those are some helpful tips as you continue to do your company research on Finstead. Happy stock search in 2017!