Sourcing Investment Ideas

Hey guys,

I'm going to be working on a stock pitch for a student value fund.

I'm looking for some small caps names and I was wondering how other people go about picking companies to look into, you obviously can't just go around reading a whole bunch of companies 10Ks until you find one you like. And I don't really think that using a stock screener is a very reliable way to find companies to dive deeper into.

I have a few ideas of specific areas I would like to look into but have no specific companies in mind. I tried to look on google finance for public companies related to the keyword but it yields a ton of results and most of them aren't even what I'm looking for.

So I was just wondering how you guys begin selecting companies to look deeper into.

Thanks

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Comments (85)

Aug 9, 2012 - 9:51am

Okay, what are your specific areas? Ideally, ones you know at least something about or are interested in learning about. Then get some industry reports and read those. Then start looking at what companies are in said industries. Then download a bunch of 10-k's for each company and read through them. Read earnings call transcripts, or listen to them if you prefer. Then generate a thesis as to why they are whatever they are, what's going to make it go and what the key drivers are of said company going forward.

I'm not an ER guy, so I'm sure someone with more experience can help you further but that's what I did to get started investing and it worked out pretty well. If you want, toss out the areas and maybe you'll get suggestions.

Aug 9, 2012 - 10:06am

As far as it goes in an IB a research analyst will cover a sector and a few companies in the sector. He will know these companies backwards and publish a monthly report on them and rate them as buy or sell. Many people who pick stocks in banks use this information. As far as you souring a stock its not that simple otherwise everyone would do it. Pick a sector you are interested in and go from there. Maybe pick a marco theme and a view to help you choose your sector. If you think the economy is going to worsen in the next year due to euroheadwinds, slowing global demand etc, then pick a defensive sector like healthcare. Study the companies in that sector in the S&P 500 read reports and get down and dirty. See how the company has performed compared to the sector average, compared to the S&P. Looking at P.E compared to other companies in the same sectors, look at EV/EBITDA. What is their balance sheet looking like. Check who the companies are closest correlated to in the last year and see how that has changed in the last 3 months. If you find 2 companies are strongly correlated and yet in the last month they are trading very differently and you see no weakenss in the weaker companies performance maybe it is undervalued. I'd look for a company with strong 10k , P/E, EV/EBITDA relative to other companies in its sectors is under performing. It's not a simple task good luck.

Aug 9, 2012 - 10:34am
Addinator:
Okay, what are your specific areas? Ideally, ones you know at least something about or are interested in learning about. Then get some industry reports and read those. Then start looking at what companies are in said industries. Then download a bunch of 10-k's for each company and read through them. Read earnings call transcripts, or listen to them if you prefer. Then generate a thesis as to why they are whatever they are, what's going to make it go and what the key drivers are of said company going forward.

I'm not an ER guy, so I'm sure someone with more experience can help you further but that's what I did to get started investing and it worked out pretty well. If you want, toss out the areas and maybe you'll get suggestions.

I was part of the research group that worked on FIG for the past two years but I'm looking more at industrial because I find it more interesting. Specially I'm interning in Corp Fin at a manufacturer that's having inventory problems and are spending quite a bit on supply chain optimization consultants and stuff, I'd like to look into this more but I don't really know where to start, typing Supply Chain consultants into Google finance gives me a lot of logistic companies that focus on trucking which isn't what I'm looking for. Yeah I have a handle on what to do once selecting the company I'm just having trouble getting started.

Aug 9, 2012 - 10:06am

As far as it goes in an IB a research analyst will cover a sector and a few companies in the sector. He will know these companies backwards and publish a monthly report on them and rate them as buy or sell. Many people who pick stocks in banks use this information. As far as you souring a stock its not that simple otherwise everyone would do it. Pick a sector you are interested in and go from there. Maybe pick a marco theme and a view to help you choose your sector. If you think the economy is going to worsen in the next year due to euroheadwinds, slowing global demand etc, then pick a defensive sector like healthcare. Study the companies in that sector in the S&P 500 read reports and get down and dirty. See how the company has performed compared to the sector average, compared to the S&P. Looking at P.E compared to other companies in the same sectors, look at EV/EBITDA. What is their balance sheet looking like. Check who the companies are closest correlated to in the last year and see how that has changed in the last 3 months. If you find 2 companies are strongly correlated and yet in the last month they are trading very differently and you see no weakenss in the weaker companies performance maybe it is undervalued. I'd look for a company with strong 10k , P/E, EV/EBITDA relative to other companies in its sectors is under performing. It's not a simple task good luck.

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Aug 13, 2012 - 3:27pm

Definitely pick something you are interested in. The best pitches aren't always the one that have the greatest return profile but are the most thought out. Very often people do not price in risk when evaluating returns. I'd rather trade some returns for a lower risk profile. IMO there is a lot of risk in the footnotes and thats not going to show up in any screener so pick something you are ready to learn everything about.

Aug 18, 2012 - 7:05pm

Sources for Investment Ideas (Originally Posted: 03/25/2012)

Hi guys,

I have an interview with a credit hedge fund and the headhunter confirmed that they will ask the typical buyside questions, i.e. macro hot topics and particularly investment ideas.

I want to prepare with five investments that I would currently do and need to back up those ideas with some macro reasoning.

Now I struggle to find the right sources for this and was wondering if you guys have any recommendations what best to read?

I thought about The Economist as a bottom up approach, but think a top down would be more efficient..

I would really much appreciate any advice

Cheers
PM

Aug 18, 2012 - 7:28pm

How do investment analysts source their investment ideas at hedge funds? Is there a process? (Originally Posted: 08/14/2014)

" "

"Respect others in their view, and demand that they respect yours. Love your life, perfect your life, beautify all things in your life."
Aug 18, 2012 - 7:29pm

Everyone is different. Some develop themes and then look for specific companies within that theme . Some run screens with specific parameters. Speaking with analysts and people in the investment community.

Best Response
Aug 18, 2012 - 7:30pm

As from the previous poster, the best ideas are always your own personal ideas.

If you feel your lacking of ideas and need a little guidance, here's some places to start with
Financial Times
Wall Street Journal
Fact Set Screener
Bloomberg Screener
Barron's (Publication)
Seeking Alpha
Bronte Capital Blog
Oddball Stocks Blog (http://www.oddballstocks.com/)
Value Investors Club
SumZero (Not as good as Value Investors Club)
Distressed Debt Investing Club (Not as good as Value Investors Club)

Few threads that help with your thought process on generating new ideas

http://www.wallstreetoasis.com/forums/idea-generation-and-why-wall-stre…
http://www.wallstreetoasis.com/group-post/sourcing-ideas-investing-and-…
http://www.wallstreetoasis.com/forums/sources-for-investment-ideas
http://www.wallstreetoasis.com/blog/interview-with-simple-ashedge-fund-…

  • 4
Aug 18, 2012 - 7:31pm

Two of my favorite sources for ideas are asking management (I understand most not in the industry people don't have access) who else in the industry they respect, who their stiffest competition is, etc. and understanding industry verticals and who benefits from larger players doing well/industry structural shifts. For example, if Boeing and Airbus win huge orders TransDigm will benefit since they manufacturer smaller parts on planes (e.g. seat belts, toilets).

Aug 18, 2012 - 7:40pm

Do you have an opinion on LMI Aerospace? Initial thoughts are that it may be a great de-leveraging story. Revenue build also looks promising given significant appreciation in revenue/part+volume. Demand is largely driven by Boeing, but LMI sells to BA's largest supplier, so bargaining power doesn't seem to be all that great...

Aug 18, 2012 - 7:32pm

I actively follow several subsectors and companies within those subsectors. I always have to be on top of what's going on for all those companies -- as you continue this process, add in new companies, over time the ideas just start coming naturally, and most usefully, they tend to be ideas that are not being followed by the rest of the hedge fund crowd.

Aug 18, 2012 - 7:33pm

Aspharagus is correct, I spend time reading ideas on the listed sites, but some have bs ideas like SA. I usually check my surroundings and see if there is something I like or catches my attention, I then try to research that industry for investments ideas.

Aug 18, 2012 - 7:34pm

From a top-down perspective when it comes to equities, reading a ton of news helps. You start seeing themes emerge and think about the best way to bet on/against these things. Screens also help as mentioned above. A stock or sector will break or rally hard and when looking into why a trade idea could start crystallizing.

Most analysis on SA is pretty terrible. Some articles might be worthwhile (I've published a few pieces there) but you'll realize that there are a lot of vested interests in any stock that is pitched if you read the comments sections (although some insights are pretty good there too). As an example I outlined the long case for a sector on SA last year but singled out one stock as the perfect short if things didn't pan out. The comment section was full of vehement statements in defense of that stock. It dropped 50% over the next 4 weeks.

I would only recommend SA as a way of seeing what others think is driving a stock you are interested in.

Aug 18, 2012 - 7:36pm

Both. But the PM probably has a larger influence on what themes are being looked at.

edit: The PM definitely has more influence on themes being looked at. Who am I kidding. But that doesn't mean I can't come up with an idea as an analyst that we end up seeing as part of a wider theme.

Aug 18, 2012 - 7:37pm

Thanks @"GoodBread" . Are you directly reporting to the PM or is their a "Senior Analyst" vetting your ideas? Are you able to answer any questions regarding when other investors enter into the same position as you? I guess 1. Are you able to know that who may have entered prior to a 13F? 2. If you are able to find out who else in a trade, do you reach out to get their take on the company? Would that be an analysts doing or would that conversation be between PM's? 3. If you find out an activist... Ackman, Loeb, Icahn enters into a company you already own does this spook you? I know there are some funds that stay away from activist owned companies.

If there is another thread this kind of stuff is already answered on let me know. Appreciate your thoughts.

Aug 18, 2012 - 7:39pm

Our shop is tiny so it's usually a direct conversation with the PM.

Our process is fairly top-down so activist investments can be a plus but are never the deciding factor. It's helpful to deconstruct what others are doing and why when you hear about a position but we'd rather dig on our own, or look deeper into what other investors have said publicly. Ultimately price action matters a lot more on our time frame than your typical Ackman-style 'I'm right, the market will see it eventually' investing logic. If there is a glaring problem and a developing catalyst that will shift market sentiment, that's more like it.

Aug 18, 2012 - 7:41pm

For me, two ways -

  1. Observational - Sourcing ideas by going to places and living life. Example: the other day, I went to see a movie with a friend. The whole time during the movie, I was thinking how great movie theaters must be as investments. They're regional monopolies and people are always going to be watching movies. There may be some underlying property value if the location is not leased. First thing I did when I came home was seeing if the theater company was publicly traded and indeed it was...but the price was not right. But, if the price for some reason drops in the future, I'll be doing more research.

  2. My PMs gives me names that they source somehow. I guess they're just observant and/or know people in the business world.

Value investor working in the hedge fund industry. Portfolio Manager, Analyst at a $380+ million Texas-based value investing HF. Former Research Consultant, Analyst at a NYC-Based deep value and special situations HF.
  • 3
Aug 18, 2012 - 7:43pm

Sourcing Ideas, Investing, and Valuation (Originally Posted: 01/10/2010)

The drivers that lead to actionable investment plays:

HF idea generation is all over the place. We've had ideas sourced from WSJ, other funds, quantitative screens. Some will have a specific theme in mind (i.e. consolidating industries) and use that to guide the investment process.

Aug 18, 2012 - 7:55pm

idea sourcing (Originally Posted: 07/27/2015)

as the title suggests, where do you find stuff in which you can read about trends?

I do not want to sound generic: I am a constant reader of the FT altough most of the times, when you are covering a sector, most of what arrives there you should already know. (altough it's useful to keep up with sectors you do not cover to have a general idea of the stuff that happens or might happen). I also read blogs but most of the times the analysis is even worse than the one I do (and mine is objectively mediocre at least when dealing with complex situations).

I used to read the economist / businessweek / WSJ but in earnest, aside from some useful political analysis in the economist (you have to critically face the articles of course), when you start covering a sector everything becomes outdated and imprecise. bloomberg is indeed useful when I look at the industry reports that they prepare but sometimes they are a bit distanced one from the other.

qauntitative screens are useful only to a certain degree as false positive or peculiar situations are the norm.

obviously, we all try to leverage our network of people and try to check our channels (supplier / customers / competitors of the company) but ideally i'd like to have some newspaper / magazine / blog where I can find pieces from which I can extrapolate trends that are later converted into potential ideas that will be analyzed more in depth.

I am talking about short to medium term trends as the long term ones (which generally yield the very best ideas when correctly assessed) are (in my very SHORT experience at least) only gaugable by having deep industry knowledge.

would you so kind to point me to some source on which you sometimes find useful stuff? any sector will do.

Aug 18, 2012 - 7:58pm

How do you source investment ideas? (Originally Posted: 05/13/2015)

I guess this is applicable to institutational/retail investors alike, what approach do you take to finding a potential company? Doing this for a personal portfolio and a potential pitch to a club, but unsure how to tackle this. Top-down? Bottom up?

Thanks in advance for your feedback

Aug 18, 2012 - 8:00pm

How frequently are you expected to generate investment ideas? (Originally Posted: 03/28/2013)

I am new to hedge fund industry, my company is also small, so I am wondering if analysts are expected to bring something to the table every day or what...

and how long do you normally take to research a company and come into a conclusion whether to buy or not?

thanks a lot, sorry if this sounds like a stupid question...

Aug 18, 2012 - 8:07pm

How can you source ideas more efficiently? (Originally Posted: 08/28/2013)

Hey guys,

Just curious how you bring your idea to fruition from start to finish. Putting a sound thesis together itself is challenging enough, but I sometimes find it more difficult to come across an idea that is worth actually digging into unless it is pitched with a hook.

Let's step back from the screeners for a second (I think with those names one has to KNOW the business rather than exploit some sort of inefficiency), I follow quite a few people on twitter who chat about ideas frequently, I often log onto VIC, seeking alpha, and a handful of other blogs, I size up every spin-off and bankruptcy reemergence situations, and I diligently read most of the research / deep-dive pieces published internally.

Yet I'm still kind of starved most of the time and feel like I am going on a fruitless hunt. I stumble (literally) upon most of the interesting ideas completely by chance -- a mortgage insurer, for instance, came across my radar when I was stumbled upon his short pitch just by researching his hair (he does have good hair); a LatAm airline because of an internal deck for IPO of part of its business; two REIT names that recently split while I was screening for insider transactions. and WebMD's odd-lot provision (I know, $250 bucks is still pretty good) while I was just loling at this Chinese twitter. The point being, the process is utterly unstructured and I gawk at my inefficiency in doing so. Granted, I am a novice, have no in-depth industry knowledge, and thus lack the acumen to spot innuendos, but I can't help but think there's a better way out there.

What's your take?

Aug 18, 2012 - 8:17pm

Screening ideas (Originally Posted: 02/01/2011)

Hello everyone!

I have a project for a portfolio class and I need to do a screening on a portfolio.
the main criteria on my IPS is long term growth.

Any ideas on what would be a good criteria for screening stocks?

Aug 18, 2012 - 8:18pm

Look up the academic paper on Pietroski's* F-score. They walk through several value screens and I found some of his metrics appropraite for my sector (materials) as it is more geared towards the value approach. For growth there is a paper on a similar G-score metric. There are also some interesting related papers on turnover, volume, and cycles. LSV value screen is good as well. PM me if you have anymore questions.

Aug 18, 2012 - 8:19pm

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