Just as business owners must constantly search for new leads that turn into clients, investors also must be on the lookout for leads that can turn into profitable investment opportunities. On numerous occasions, I have been asked about my sources for investment ideas.
There really isn’t one source that I use because leads can come from many different avenues. For example, one of my best ideas in the second half of 2009 actually came from the editor of my book, Why Are We So Clueless about the Stock Market? After the editing work, he asked me if I could look through about 20 companies and advise him on whether any of them were good. Even though I discarded 19 of his ideas, one company really caught my eye. It was Arctic Cat (ACAT), which manufactures snowmobiles and all-terrain vehicles (ATVs).
While searching on the Internet, it became obvious that almost no one was aware of this investment opportunity even though this company is the Harley Davidson (HOG) of snowmobiles. Joel Greenblatt, the author of The Little Book That Beats the Market, was close because he invested in Polaris (PII), Arctic Cat’s competitor, but I doubt that he ever considered Arctic Cat.
Because of the weak economy, the stock of this company was totally hammered. I could not believe that it was so cheap considering that it had no debt, an unbelievably strong brand name, high returns on equity, and was selling for about half of the value of its inventory. I still hold this stock even though I already doubled my money because I believe it has much more to go. If you wish to read my analysis of Arctic Cat, click here.
The point of the Arctic Cat story is to make investors realize that investment leads can come from everywhere including your grandmother. However, there are a few sources that investors can use to increase the chances of finding good deals.
Sources that I would recommend include Magic Formula, Guru Focus, Value Line, Value Investors Club, and various blogs. Notice that I didn’t include the media, and that includes Jim Cramer of Mad Money. I used to watch his show, but over time, I was really disappointed in the poor quality of his picks, which are more suitable for traders instead of intelligent investors. Many investors rely on the media for investment advice, but fail to realize that television stations, radio stations, and newspapers are in the business of advertising, not in the business of providing investment advice. They deliver whatever content is necessary to increase the size of their audiences because advertisers are willing to pay more for greater exposure.
Magic Formula is a website founded by Joel Greenblatt, the author that I previously mentioned. At first, the name might sound like a scam, but his website is a pretty good hunting place for investment ideas. It is a screen that attempts to generate a list of good quality companies trading at low prices. The list of companies is generated by searching thousands of companies and ranking them based on two quantitative factors: return on capital and earnings yield. Last year, the screen generated Thor Industries (THO), a company that I invested in that generated pretty good returns.
It takes quite a bit of work to go through the list of companies before deciding which ones are worth further investigation. However, I ran across Magic Diligence, whose author takes ideas from Magic Formula and writes investment reports about them. While the Magic Formula is free, Magic Diligence costs $89 per year. I signed up for it, and I believe it is worth the price because it can save you a lot of time weeding though Magic Formula ideas before deciding which ones to research more. I interviewed the author of Magic Diligence on this blog.
Guru Focus is a website that tracks the investment activity of the top value investors in North America. It offers free and paid subscription options. The free version allows users to access information with a quarterly delay where $200 per year allows them to view the most recent activity of top value money managers. In addition, the website also has forums, articles, investment screens, and other useful services. I am a contributing author on this website.
Value Line tracks approximately 1,700 stocks in over 90 industries, publishes reports four times a year, and publishes weekly full-page reports on approximately 130 stocks. While an annual subscription is available to individual investors, you may be able to access the online version through your local library. The Value Line Ratings and Reports (R&R) sheets contain a wealth of information, including records such as the earnings per share for several years, depending on the company. Value Line is a well-respected research firm providing services that are wonderful sources of good investment ideas.
Value Investors Club
Value Investors Club is another website run by Joel Greenblatt. It is a club whose members share their investment ideas with each other. It is open to the public, however, only about 250 people are allowed to submit investment write-ups. Those who are not accepted as contributing members are still allowed to view these write-ups but with a 45-day delay. In value investing, it usually takes longer than 45 days for the market to adjust its mispricing, so this delay does not disadvantage noncontributing members too much.
My favorite method for finding investment ideas to research is reading other people’s blogs. There are thousands of blogs dedicated to investing. Most of these authors love to share their ideas with other investors, and they do it for free. While other sources such as Value Investors Club limit who can publish investment research, anyone can start a blog. Of course, this can be both good and bad. Because Greenblatt limits who can be a contributing author on Value Investors Club, this ensures high quality write-ups, but on the other hand, it keeps good ideas from being revealed by other investors. For example, I applied to be a contributor for Value Investor Club and was rejected due to the high volume of applicants. But those who only rely on Value Investors Club would have missed all of the ideas such as Arctic Cat that I posted on my blog. The negative aspect of reading blogs is also its strength – anyone can have a blog. As an investor, you have to decide on your own which blogs are worth your time. For a list of blogs that I read, visit my resources tab.
Whether the investment lead comes from a particular blog, Guru Focus, or Value Investors Clubs, it is only the beginning of the research process. I would never advise anyone to make an investment decision based solely on a report provided by one of these sources. If you really want to be a good investor, you will perform your own due diligence to make sure that the investment idea fits into your investment strategy.