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New Investors Should Do These 5 Things When Researching Stocks

Great news neighbors, last year, I hit my goal of reaching $100,000 in my net worth. That means I calculated all my assets and subtracted my liabilities, which totaled over $100,000 of assets. To say I was excited is an understatement. In addition to accomplishing my goal, I also purchased a brand-new house for $270,000. Last year was a busy one and I am grateful for the blessings it brought me. Now, you may be wondering how I accomplished these two financial goals. Let me start by sharing that I am not a high income earner. In fact, my average annual salary is roughly $55,000. If you do the math, someone making $55K a year shouldn’t be able to afford a $270,000 house and still have a $100K net worth. In order for this to become possible, I knew that I had to boost my income by working on my business value, housing a roommate, and investing in stocks. 

In 2016, I purchased my first stock (Signet Jewelers), thinking the main hoarder of diamonds would grow and the stock would grow. I was wrong. The stock didn’t grow. It tanked. I didn’t let this deter me from making future investments. I kept learning and practicing investing, which came into handy in 2020. By learning and practicing, I grew as an independent, intelligent investor over time. I had the knowledge and resources to take advantage of the opportunities that came my way. With my own extra money and roommate rent, I invested aggressively in 2019, and the money helped tremendously with the house down payment. Without investing the money, there is no doubt that I would not have hit $100K in net worth. That is why I’m a big advocate of DIY investing, even if it’s just a small percentage of your total investing portfolio. I believe it’s important to spread money around investments because you are losing money over time if you are saving the money. Thanks a lot, inflation.

During 2019, all stocks were down, but we eventually saw a big bounce back. Reviewing SPDR S&P 500 ETF Trust (SPY), an ETF that tracks the top 500 publicly traded companies, they had  positive returns of 31.29% in 2019 and 18.25% in 2020. While that is an easy way to invest in the market, you should also have some exposure to individual stocks, such as Google, Disney, Apple or Dillard’s. The hard part for beginners is picking the right stock to invest in. Selecting the right stock is similar to selecting the right car to buy. A buyer will consider what is important to them, such as the vehicle brand, how it drives, how they will feel driving the car, and safety features. When researching stocks, one should take the same approach. An investor should analyze every stock they invest in and not buy a stock just because a financial influencer such as myself says, “Stock ABC looks good.” At the end of the day, if you plan to invest your money in a stock, you should do some research! 

Here are five research tips to help you become a more strategic investor.

What’s your goal and is it feasible?

When you get inside your car and crank it up, you have a destination in mind. Imagine getting in the car hungry and driving around aimlessly, hoping to find somewhere to cure the hunger pains. The drive could take forever before you find something you want to eat. But if you knew where you were going then your problem wouldn’t exist. When you research stocks, it’s better to have a feasible goal and not just choose at random. Always write down your goal and make sure the goal is not to just make more money. There are over three thousand stocks trade in the country.  

When you have a SMART goal, you can cross out hundreds to find the best investment for yourself. An investor who wants to earn passive income through dividends should stay away from Tesla because that stock doesn’t pay dividends and no near future dividends are planned. Or perhaps the investment goal is to find an index fund that focuses on electric vehicle investments, and with research, you can take three thousand stocks down to only five index funds to choose from. To go through every stock available would be a waste of time, so allow your goals to help you make the decision process more manageable.

Is the industry thriving or dying?

An intelligent investor is looking at a company’s future, not necessarily where it is currently or has been in the past. However, a company’s history does provide excellent indications of where they are headed. A company’s future helps to inform whether an investment will provide a reasonable profit return or a loss. In addition, an industry’s outlook is also important because if company ABC is renting movies in-person, anyone can see the business won’t make it. Intelligent investors need to research an industry to decide if the industry is dying or thriving.

An easy example is the mall industry and Simons Property Group (ticker SPG). An investor who wants to have high growth within a short period should stay away from the mall industry. It’s stable but not growing. Before Amazon took over, the mall industry could produce high growth, but competition from online retailers has impacted the industry.

We can look at Beyond Meat (ticker BYND) as a real-life example. The plant-based meat industry is new and exciting with tremendous growth potential. The stock is down more than half for the past year at a current price (dated 12/14/2021) of $63.42 compared to its all-time high of $234.90. Beyond Meat’s recent earnings report noted that net revenue declined by 13.9% year over year to $67.5 million due to lower overall demand and supply chain issues.  Their past earning reports continued to cite declining revenue as demand continues to lessen. That is a sign of a dying market, especially when compared to a growing electric vehicle industry. Not only are there significantly more electric vehicle manufacturers, the U.S. government is pushing for reduced auto emissions, which are pushing sales higher.

Is there a brand or network effect?

Mark Zuckerberg is a genius in the sense he created a network that everyone is connected to now. Consider these points:

A business without a Facebook fan page is rather odd. So odd that customers don’t trust a company without a Facebook presence.
The majority of people have Facebook profiles that they don’t use but won’t delete because everyone else is on Facebook. That is the network effect working at its best.

For companies with a network effect, it makes it harder for customers/users to move away, and from the business side, they have a good source of reliable income. Apple is well known for its network effect alongside avid Apple fans. Customers who own an iPhone are likely to buy an Apple computer, watch, headphones, and much more. Finding a solid network effect can be challenging but well worth the research. Just look at how well Apple and Facebook stocks have done in past years!

Are there work culture issues?

Work culture exists and affects a  company internally, which affects overall company profits. I’m an employee of a large insurance company and can honestly say that the company would be nowhere without good workers. I’m sure many would concur. Imagine Amazon without warehouse workers. Imagine Kroger without cashiers. The whole business can fall apart overnight! With the realization of a company’s fragility, one should always look at how a company treats its employees. Luckily, it’s rather easy to find the real reviews from former and current employees via sites like Glassdoor or Indoor, which provide  an inside look of how employees view a company. Company ratings will address any common issues inside the company such as bad management, toxicity, and/or too much turnover. Companies with toxic environments do not hold onto good talent, which hurts the company in the short and long term. 

Are there any red flags!

The stock market has bull and bear cycles over time. A bull market means most investors are optimistic towards the market, and a bear market means most investors are pessimistic towards the stock market. A bullish investor may have difficulty seeing the downside or any red flags of a stock. A newly public fintech stock, Upstart, is currently up over 228% from their December 2020 IPO. As of December 14, 2021, the stock price is $144.95, with an all-time high of $390.00. Even with the amount of growth for this stock, there is an obvious red flag, and that is most of their revenue comes from two clients. Yes, you read that correctly, neighbors. This is a huge red flag because if one client decides to leave Upstart,  the stock will likely tumble.

Finding red flags can be done by reading a company’s earnings report, which is useful for understanding future risks. Investors can visit www.sec.gov for a full report on any publicly traded company, and each company must share their red flags. As we have seen, a stock with red flags can still grow; however, an intelligent investor is aware of all major risks. Other red flags for a company can include:

Accounting irregularities
Government laws and changes
Growing competition
Industry disruptions
Antitrust concerns

To make this research more effortless, you can use the Motley Fool stock advisor research tool as they have an analyst who reviews companies, especially when it comes to red flags.

Investing is not easy. It requires knowledge, resources, and, most of all, practice. One way to master the art of investing is to simply do your research. The more information you’re equipped with the smarter your investment choice will be. You will be closer to achieving your own financial goals. Remember to take your time and watch the return on your investments grow.

Andre Albritton, a graduate of Florida A&M University, has become a nationally recognized investing nerd who trains people on building wealth through the stock market and REITs. He is the founder of The Millennials Next Door, a community dedicated to millennials building wealth to create financial freedom. In addition, Andre created the Flavor Podcast, a venture focused on the many different flavors of investing within stocks, real estate and entrepreneurship. Andre is now a household name for ambitious millennials who are ready to reach and redefine wealth. 

New Investors Should Do These 5 Things When Researching Stocks appeared on Wealth Noir.