One of the most common questions I receive from readers is regarding the source of my stock ideas. I seem to always have a heap of potential value stocks on my to-do list, so perhaps I take it for granted that I come across so many ideas worthy of further study. So on the advice of some readers, this post is dedicated to describing and discussing my stock idea sources.
There are three main categories from which I derive my stock ideas. The most obvious category is that of the stock screener. Using one of these, the investor can cherry-pick stocks with characteristics that are conducive to his style. Value investors would likely filter for things like low P/E, low P/B and net current assets, either separately or even all at once! The stock screener at Google Finance is intuitive and flexible, but my favourite screener is at robotdough.com (warning: I don't think you can use it without signing up), where one can select for a whole slew of very specific financial statement data. I am also a user of Joel Greenblatt's screener at magicformulainvesting.com (again, I believe you have to register to use it), which employs a method of screening that is the topic of his book which is summarized here.
The second category of sources I use to identify potential value stocks is related to the investor sentiment towards a stock. When investors are downright pessimistic on a stock, it will often show up on one or more contrarian indicators. Examples of such indicators which I scan for potential stock ideas include 52-week low lists, analyst downgrade news, and lists showing the stocks with biggest percentage drops for the day/week/month etc.
Screeners and contrarian indicators are useful ways to identify potential value plays worthy of further study, but by far the largest source of my potential stock ideas is the third and most important category: other value investors. There are a number of different channels from which one can glean ideas from like-minded investors.
For example, one can follow the purchases and sales of value investors who have their own funds. In this post, we discussed how an investor can track the investments of one rather famous value investor.
There are also a number of value bloggers (much like myself) posting a number of value ideas online. If you're looking to find other value bloggers, this is a good place to start. Furthermore, many value investors post and discuss value stock ideas on twitter. By following these individuals, you will get a great many ideas. (If you're new to twitter, you can start by signing up, following me, and then seeing everyone I follow and subsequently following those that you wish to follow).
In addition, some of the best stock ideas I've received have come from you, the reader. I receive e-mails and comments with stock ideas all the time. (To see these comments when I do, you can subscribe to the comments on this site by clicking here and the articles by clicking here.)
Sometimes, a stock will show up in more than one of the above categories at the same time. In cases like that, I may move them to the front of my to-do list! (For example, the most recent member of the Stock Ideas page, Aeropostale, had already been listed on the Magic Formula site when it suffered one of the largest percentage declines on the market after it released its latest results.)
Did I miss an area which you feel is a great source for ideas? Feel free to add to this list in the comments section. I will refer to this page when I am asked this question again.