Top 11 Sources of Insight for Great Stock Calls
When planning dinner and a movie with someone special, you could select the restaurant that runs the most advertisements and the movie that has been the most promoted by its studio, but I suspect most analytic-types (like research analysts) don’t use either of these approaches. The odds of a bad meal or movie are relatively high because these methods don’t seek objective insights (such as would be found with Yelp, Rotten Tomatoes and TripAdvisor).
And yet, I find so many analysts aren’t looking for similarly-objective sources of insight for their stock calls.
I periodically get asked, “Where can I get good stock ideas?” First, start by identifying the 1-4 critical factors per stock in your universe, then find sources of information that can provide unique insights about these factors.
I’m not advocating seeking material that is non-public information because it’s illegal in most markets, and unethical in all. But rather, use these sources to build the mosaic.
The next question I get is: “Where do I find these insights?” to which I provide the sources below (for simplicity, I wish I could make it a “Top 10” list, but to steal a line from This is Spinal Tap, “it goes up to 11”). The list isn’t in any particular order other than the first 3 don’t require conversations with others, which may be a preference for introvert analysts.
- Subscribe to industry trade journal/website/blogs:
This is a no-brainer. If you don’t know where to start, ask the IR professionals of the stocks you cover. To save time, skim rather than read.
- Forecasting services:
If you have access to data from forecasting services, analyze in a manner not done by consensus: Paying $30,000 to IDC for PC sales might seem like a sound strategy for “unique” research, but not if 30 other firms are doing the same. If you’re fortunate enough to have a budget to purchase this data, find a unique way to analyze it in order to derive a unique insight (e.g. look for upstream or downstream data that will help you analyze your company and isn’t closely followed by analysts covering your sector).
- Conduct a survey:
This can be as simple as sending an email to 8 industry contacts once a month or as complex as hiring a research firm that specializes in surveys. As implausible as it may sound, as I was writing this post, I received an unsolicited call from a firm conducting research for an investment firm pertaining to vacation rental websites (presumably with interest in publicly-traded HomeAway), which is further evidence that the best analysts develop unique sources of insight.
- Contact industry trade journalist/blogger:
These individuals are unusually on the cutting edge of industry developments and love to talk. Just make sure you provide them insights as currency for their help.
- Speak with company’s publicly-traded competitors…:
You won’t get an objective perspective but it will provide a unique and informed insight that likely differs from management of the company you’re researching
- (…and also) company’s privately-held competitors:
This can be a gold mine because there are no regulatory limitations to what they can say. When covering the trucking sector, I would speak with the management of Schneider National, the largest company in the industry at the time, which was also privately-held. They could tell me the strength of the entire quarter two weeks before my companies released results.
- Connect with the company’s suppliers (privately held suppliers are better than publicly-traded):
This works well when the company has just a few suppliers for the majority of its products
- Seek out the company’s customers:
One of my best stock calls was given to me by a large FedEx shipper who told me he was being mandated to pay the company’s 4% fuel surcharge, something the company let slide until that point. It led to me seeking the opinions of more shippers, who confirmed the company was essentially passing through a rate hike (with no related costs, thus adding $100-$200 million to earnings).
- Speak with government officials or staffers:
You’re not seeking inside information such as if a drug is going to receive government approval, but rather building the mosaic such as “is there a climate for regulatory reform this year?” or “what are the greatest concerns of staffers in terms of drafting new legislation.”
- Spend time with industry association executives:
They’ll usually be biased in favor of the industry, but they can know about the investment controversies before they get to the mainstream press. For some industries there are associations that help investigate risks, such as a shipper organization that would gladly tell me about the problems freight transportation companies I covered were experiencing.
- Seek out an industry expert consultant or knowledgeable retiree:
It can be from someone in a firm as large as McKinsey or as small as a one-person shop. Consultants want to be in the information flow and are usually willing to provide their perspective if they’ll get another one in return.
Did you notice the list doesn’t include company management of the company being researched? I found the more I spoke to my companies the more stupid I became.
Just in case you’re wondering, I’m not advocating seeking material that is non-public information because it’s illegal in most markets, and unethical in all. But rather, use these sources to build the mosaic. Just like you don’t expect Yelp to tell you what to order for dinner or Rotten Tomatoes to give away the ending of the movie, there are excellent insightful sources of information that can fill in some details while leaving the final decision to you.
This Best Practices Bulletin™ covers the following elements of our GAMMA PI™ framework:
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©AnalystSolutions LLP All rights reserved. James J. Valentine, CFA is author of Best Practices for Equity Research Analysts, founder of AnalystSolutions and was a top-ranked equity research analyst for ten consecutive years