How to Find New Stocks to Invest In

Finding the right investment opportunities can be one of the most challenging aspects of investing, but it is fun (at least I think it is 😉).

Allow me to share a few options that might help improve your treasure hunting:

Stock Screening

My preferred method is to use a stock screener, which allows me to rank companies based on predefined criteria such as valuation, quality, and growth metrics. You also get to define your stock universe; perhaps you are looking for companies listed only in the US or of a specific size—the screening options are numerous.

There are several excellent stock screeners available online, including:

• Finviz

• Yahoo Finance

• TradingView

The disadvantage is that good companies don’t always appear on the screener, so you need other tools in your arsenal when looking for your next investment. We’ll cover those options below.

Fund Letters

Professional firms often publish letters to their clients discussing their performance and recent investment decisions. These letters provide insights into potential new investments and the rationale behind them. Seeking Alpha is an excellent source for fund letters.

It is critical to be aware that reading someone else’s investment thesis on a specific stock, especially the opinion of a professional money manager, will sway your thinking, and when it comes to investing, it is critical to have your own convictions.

13F Filings

Institutional investment managers with over $100 million of assets under managers and significant US holdings must file quarterly reports disclosing their US equity holdings. These 13F filings can be valuable sources for finding new investments.

Platforms like WhaleWisdom provide detailed analyses of these reports, summarising when managers buy and sell positions for their portfolios.

Investing Forums

Engaging with investment forums allows individuals to exchange ideas, present investment theses, and receive constructive feedback regarding their research.

Value Investors Club is a fantastic forum for value investors; however, access to the latest research is for members only, and you must submit a piece of research to qualify for membership. The demand for the club is very high, and your research needs to be exceptional. The advantage of being a member is that the quality of members is guaranteed to be of the highest standard.   

Seeking Alpha is another fantastic forum with a community aspect, allowing you to follow investors you like. The difficulty with this platform is that not all research is created equal, and you need to be able to sieve through the good and the bad to find the gems.

Insider Buying

No one knows more about a business than the people who run it, so we should sit up and notice when we see directors or management buying shares in their own company. As the saying goes, management has many reasons to sell, but there is only one reason to buy: they believe the company is undervalued.

Managers, directors and large shareholders must disclose when they buy or sell shares by filing a Form 4 with the SEC. Platforms like Finviz’s Insider Trading offer great summaries in this regard.

Word of Caution

While the resources mentioned above are great tools for finding potential ideas, remember they are for idea generation only. They are just the starting point of the investment process.

You are still responsible for doing the homework and detailed research to determine whether it is a good investment. Remember, investing without a well-defined thesis can lead to uncertainty when faced with adverse outcomes.

Happy hunting!

The Investing Chronicle above explores techniques for discovering new investment opportunities. Among these methods, my favourite is the screening process, and due to my love for mathematics, I prefer to conduct my own screenings.

One particularly powerful screening technique is Joel Greenblatt’s Magic Formula. In his book, “The Little Book That Beats the Market,” Greenblatt argues that amateur investors can outperform the market by investing in a portfolio of stocks selected using his “Magic Formula”, which ranks companies based on quality and value metrics.

Let’s delve into the process:

Warning: Some maths is involved, but it’s nothing you can’t handle

The Magic Formula

1. Define Your Universe of Stocks

Begin by defining the universe of stocks from which you’ll construct your portfolio. Currently, my universe comprises all US-listed companies, but you can define your own. You may choose to invest only in companies with a minimum market cap or stocks that trade a minimum daily volume, or perhaps you prefer UK-listed companies. The choice is yours.

Below I walk you through a simple example of how how the Magic Formula ranking process works using all the consituents of the S&P 500. For each company I have populated the necessary metrics and rank them showing you the top 5 for each step below.

2. Rank According to Quality

Next, rank each business in your universe based on quality. Greenblatt’s formula uses a metric called Return on Capital (ROC), which measures the amount a company earns per dollar it invests. A higher ROC indicates a stronger incentive for the company to reinvest back into the business.

ROC is calculated as follows:

ROC = EBIT / (Fixed Assets + Net Working Capital)

Once you have each company’s ROC, rank them from highest to lowest as per the example below:

The table above represents the 5 companies in the S&P 500 with the highest ROC. It is for illustrative purposes only, and data should not be relied upon

3. Measure for Value

Greenblatt advocates using the Earnings Yield as a measure of value. This metric reflects a company’s earnings from an operating perspective and is less prone to manipulation than net income. Think of earnings yield as similar to an interest rate, and is calculated as follows:

Earnings Yield = EBIT / Enterprise Value

Once you have each company’s yield, rank the companies from highest to lowest based on this metric.

The table above represents the 5 companies in the S&P 500 with the highest Earnings Yield. It is for illustrative purposes only, and data should not be relied upon

4. Building the Portfolio

Once you have completed the initial rankings, it’s time to construct your portfolio. Combine the ROC and Earnings Yield rankings to create a Total Ranking. Order the Total Ranking from lowest to highest

The next step is to purchase the 20 - 30 companies with the LOWEST  Total Ranking and hold them for exactly one year in equal proportions. Based on our example, the portfolio has the following 5 companies:

The table above represents the 5 companies in the S&P 500 with the highest Total Ranking. It is for illustrative purposes only, and data should not be relied upon

At the end of the year, you repeat the process above and adjust your portfolio accordingly. It’s that simple.

Of course, there will be years of underperformance, but consistency is key. If followed diligently, Greenblatt’s evidence suggests you will outperform the relevant benchmark, e.g. if you are investing in US stocks, you will outperform the S&P 500 over the long term.

Word of Warning

Data quality is crucial. The better the quality of the data used to calculate your metrics, the better the outcome of your performance. I prefer using the company’s financial statements directly, but some service providers summarise the data for you. Greenblatt’s Magic Formula Investing website does all the work for you, making the process even easier.

NB! READ The Book Before Starting

If you’re interested in screening for new investments, I recommend Joel Greenblatt’s Magic Formula. If you choose to follow this method, I strongly suggest reading his book, which provides a comprehensive overview of the abovementioned technique.