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Ask HN: What information do you consider before investing in a stock?
51 points by yoseph on Oct 18, 2010 | hide | past | favorite | 25 comments
My startup is in the finance space and we're wondering what information is important to individual investors.

We have identified the first three aspects our tool will analyze: the quality of a stock's balance sheet, its history of generating cash and the amount of cash it generates compared to the amount it invests. We use proven value investing standards to grade each aspect.

What other information do you consider before investing in a stock?




I do work as an analyst with a value approach.

Besides what you have listed above, I like to do a lot of comparisons to peers in the rest of their industry. So when I see an insurance company trading at 1/2 their shareholders' equity and the industry average is 1x, that is interesting.

I also like to see figures such as returns on invested capital (EBIT/NWC+PP&E), ROE, ROA, and things such as gross margins vs operating margins.

I like when I can get both EBIT and EBITDA relatively quickly as well.

I really really like to see how the numbers have developed and changed over time. If you go onto Morningstar you can get data on key figures over a 10 year period. You can find some really useful trends by looking at that data.

I do a lot of quick math when looking at a stock too. Such as calculating FCF and seeing what it versus the stock price (so P/FCF or FCF/P for yield).


Jakarta, thanks for the feedback!

Our tool also calculates how much your stock is worth, so to be able to combine that with a relative value approach would be pretty powerful. We're adding it to the list!

We calculate Cash ROIC, not ROIC, because we believe cash is king. We'll take a look at ROE & ROA, but we also calculate FCF yield. When comparing gross to operating, what insight are you seeking to gain?

Yeah, Morningstar has solid data like that. We're planning to analyze how shareholders' equity & free cash flow have grown (or shrank) over the past 10 years.

Shoot me an email. It's in my profile. Or tweet @vurudotco . Your feedback would be great as we move forward!


Giving away all my secrets here, but anyway:

- rate of stockholder's equity growth, over 10 years

- a graph that projects that growth over the next 10 years, assuming I buy 1 share at today's price; plotted with a projection of the same dollar investment in an index fund (projected from its long-term return).

BONUS: do the same for earnings (I don't actually do this, but I should - because shareholder's equity is artificially influenced by things like 'goodwill' from acquisitions; and employees exercising bonus options. Earnings is closer to what a business actually does; I just really like stockholder's equity for its apparent simplicity).


Your secret is to pretend the next 10 years will be the same as the last 10 years?


You've probably put this on your list already, but the beta value always works for me when just looking at price alone.

But for value investing, I try to do as much analysis of the business model, recent initiatives and the top execs as possible. Businesses don't make decisions, key people within businesses make decisions. This is a little wishy-washy, if you will, though -- it is Warren Buffet 101 on the other hand. Maybe you could develop some sort of quantification of top talent via some checklist or tiers of achievement.


Thanks for the feedback!

We're actually looking at ways of measuring management performance. If we can do it, it'll be great for Buffett fans everywhere, myself included!

Sign up on our website (http://www.vuru.co) or follow us on twitter @vurudotco to stay up to date as we move forward!


I like to see improvement in the company's fundamentals. For example, a decrease in net debt or an increase in economic value added.

Additional information is comparison to other stocks, such as within a related index (use GICS or similar codes). So how does the balance sheet compare to competitors?

As for other investment metrics, take a look at the Piotroski score:

http://www.grahaminvestor.com/articles/quantitative-tools/th...


I find most of my investments through 2 methods: general news as an indicator of future growth prospects, and through industry stalking. I am primarily interested in high capital growth and mostly invest in an industry peripherally related to my own work which I can keep tabs on through industry contacts (i.e. who's hot, who's not).

In both cases those methods yield potential investments which I then look at financials as a basic check - does this company's balance sheet and P&L indicate anything obviously dodgy? More importantly, do their accounts offer any insight as to how their business is actually going; in many cases I find this is not the case as through sufficient accounting manipulation little reflection of reality is left in the reported figures.

In terms of your service what I would like to see is some sort of graph of executive management & directors and their histories. I have a personal blacklist of individuals based on their ability to ruin companies, and I also have a few folks that I basically would invest in anything they do. This is largely industry specific though not always the case as there are folks from finance & legal backgrounds who end up being chairmen or directors across a wide variety of industries; this can be good for finding investments in new industries.

Another thing is the company's history, particularly (but not limited to) the balance sheet. In some cases future prospects look great but the company has burnt existing investors through heavily dilutive raisings (as an example). These holders will suppress any rise in price so for me that is a reason to stay clear despite everything else.

You asked about "before" but on-going is also important. For the small (speculative) companies that I invest in I try to stalk most of their staff; in particular I want to know if key members of staff leave (not necessarily executives); or if there is unusually high turnover. Tools like LinkedIn and Twitter have made this a lot easier but it would be great if it could be automated.


I buy on the growth story in an industry I understand.


I am very much a value investor too. I find a lot of the value investing techniques attempts to predict the probable price evolution of a stock and make a projection on its business performance. All these projections are based on the historical data and the assumption that it will continue to make money. But often the past did not equal the future, and most companies cannot continue to make the same 20% growth year on year.

Plus it also can't evaluate its management and internal business decisions such as M/A. And with the large cap these hedge funds are holding these days, they are quite capable of manipulating the stock prices for their gain.

What's also important is to understand the risk appetite of each individuals and have an investing plan? i.e. a value investor with a large risk appetite might be looking at citibank, make some assessment on its valuation and take a 5 yr plan on it with definite exit and cut loss prices.


Indexes of technical analysis indicators for bullishness/bearishness. This should be done over multiple time periods, to evaluate whether the trend of a few hours or days is just a temporary pullback in a longer weeks-to-months progression. Technical analysis gives important information for timing position entries and exits - and if you screen on both the fundamentals and technicals, you have more tools to narrow things to a few top picks.

An example set of signals I might use to find a bullish stock: Upward-trending SMA-20 and SMA-50, 14-period RSI > 50, MACD 12-26-9 signal line under value line. If trading actively, enter when all signals are ready, exit as soon as one breaks. (haven't actually tried that particular system, but I know for a fact that similar systems work.)


-Projected growth relative to peers

-Relevant industry multiple relative to peers

-Insider trades (Executive or board of director trades)

-Value catalysts such as M&A, restructuring, spin-offs, etc.

Other stuff really depends on specific industry, feel free to ask any follow-up questions


Thanks for the feedback!

We're planning to provide a projected growth rate, but to be able to compare that to pgr of peers is a pretty cool idea.

Hmm, how would you measure value catalysts?

Shoot me an email. It's in my profile. Or tweet @vurudotco . Your feedback would be great as we move forward!


I consider how predictable the dividend is.


I really like this idea.

What in particular would you like to know? If its steady or if its been growing over a number of years?


OK, a bit late to the party but here's what I look at:

1) Calculate cash flow (EBITD) 2) Calculate total market value of the company (equity + debt - net cash) 3) Calculate price/cash flow. 4) Look at consensus growth rates for earnings/cash flow for the next 5-10 years. 5) Multiply by 100 6) Calculate Price/cashflow divided by 5 above. 7) My buy targets are values of 6) above of 0.7 or less. Sell target is above 1.0.


I don't know if this fits with your startup, but something I'd really like to see is: given this set of transactions (basically, stock, date & time, buy/sell, price), here is a graph of the value of the portfolio over time. Ideally, you'd even include things like dividend pay outs, margin fees, etc.

This would make trying out different investment strategies and portfolio allocations much easier.


We have a portfolio tracker that allows you to do exactly what you said. We don't (yet!) include dividend payouts and the like. We hope to add this in the future. The only hitch is that users aren't able to have several different portfolios (yet!), so you could try out one approach and then delete it and try another. I know it's tedious.. but we're bootstrapped!

Thanks for your feedback! And follow us on twitter @vurudotco



I use an enhancement on the PE ratio where I take the average earnings over the past X years (between 5 and 7 usually) instead of just the most recent. That can accommodate short term fluctuations in an otherwise stable business.

Also the rate at which the dividend changes is important.


Going by Value investing

- Understand the competitive advantage of the business

- See if it has a "moat" built around it

- See its PE ratio and EPS. A company with a high EPS and a low P/E is always worth looking into.

- How much cash the company has on its balance sheet, its a good idea to go for cash rich companies


And, just in case you're interested, sign up to be notified when we launch into private beta (http://www.vuru.co).


Do you love the product or service? Google, Apple, ING..

Not all of them will be growth, but very stable investments. Starbucks, Costco, Southwest, ..


I ask myself if the symbol is AAPL.


There have been several studies/tests reported online where a parrot or a blind choice and then letting that investment sit outperformed "professional" traders so I guess all kinds of obscure analyzing methods can only get you so far.

At the end of the day you are always looking at historic data and from there you are trying to predict the future...




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