6 ways to find a new case!

6 different ways to sniff out that 10-bagger

In investing, turning over new stones is highly correlated with performance in your investing portfolio. It is also one of the lessons in my last post, How to find 10-baggers.

But how do we find new cases?

There are many ways to find a new company or asset to research, and it depends on one’s strategy and mandate. I consider myself a stockpicker, so I try to find companies that perform despite current and future macro environments. Occasionally even a stockpicker should look at cyclical companies when they are cheap enough and has the worst behind them.

But the ways I list below are ways to find a new company to research from a stockpicker’s perspective.

Usually, there are two schools of thought when it comes to finding cases and also when applying an investment strategy. Top-down and bottom-up.

Top-down, you look at the macro level and then work down through asset classes, industries, sectors, and an individual asset, e.g., a company or a fund, commodity, or similar. This is usually a big asset allocator’s (BlackRock) way of investing.

Bottom-up, which is more the stockpicker approach. You start with the individual asset and work up the chain to understand the individual asset in the greater scheme of things.

My list alternates between the two approaches. However, the focus will always be on finding the right company to research, which should be a good investment despite the macro environment.

Go through a stock list from A to Z

This is actually not a joke. I went through all the Swedish stocks on my net broker when I started investing. I have no deep due diligence; I just read what the company does and then put it on the watch list of companies I will research later. It gave me a good overview of companies; to this day, I remember a few of them and what they do based on this exercise. It is good for every new investor to do it: you get a good sense of what kind of companies are out there and what business models you understand from a short glance.

Screening

Using a stock screener is great for finding companies that fit a specific list of criteria. However, it stipulates that you know what you are looking for. Screener is like any tool; you need to hone your skill and practice. Using it a certain way to find a certain type of company and using it in another way to find another type of company.

Some tips when using a screener:

Less is more. Adding a new criterion when searching can hurt your screening and worsen it. No more than 2-4 criteria.

It is backward-looking. Usually, the screener is based on actual numbers; in some cases, the screener has access to estimates of the companies.

Some criteria to start screening with. (There is some great suggestion in my article How to find 10-baggers.)

Revenue growth

Gross margin

Profit margin

P/E

EV/EBIT

ROIC

ROE

Net/EBITDA

Interest Covering ratio

Insider ownership

Share count (preferably decreasing)

Market cap

I suggest you play around with them and see what works for you. Most importantly, you can exclude the bad companies and keep the quality companies in the screening.

I recommend a few screeners in my article 10 free or cheap sites to do better financial analysis check it out!

Themes & Megatrends

Searching for companies within a theme can be very profitable for an investor due to the support in growth from secular trends. Watch out for the valuations as tends to run away because every money manager wants to be where the hot stuff is to attract more capital from investors. With EFT joining the mix, some valuations are becoming ridiculous as the ETF doesn´t care about the valuation.

Let´s get into theme investing or mega trend investing. You find a specific area to invest in, which could be a sector (cybersecurity, fintech), a company model (roll-ups), a business model (platform companies), a geographical area (South East Asia), megatrends such as the creator economy, or any other subset you want to limit yourself to. What is great about this is you can become an expert pretty fast. Reading up on one company can be applied to another company, and you get a good understanding of the market and competitive landscape.

On the other hand, you are locked in your area. If the theme or megatrend falls out of favor, as gambling/Igaming has done in Sweden for the last few years, you can be in a world of hurt. That is why you should diversify and follow 3-5 themes or megatrends.

Value Chain Investing

Value chain investing is the second-level thinking version of Themes & Megatrends. A theme or mega trend creates some kind of demand, need, efficiency, or another new dynamic in the market. Using this dynamic, you can analyze the value chain and conclude that part of the value chain will have tremendous benefits.

Peter Lynch mentioned one of these examples in “One up on Wall Street” (greatly recommended read). In his example, computers were the new thing, and they got more and more powerful. However, the computer market got flooded with computer makers. So the margins started to go down. But he thought about what companies benefited the most from computers. Automatic Data Processing! Ticker ADP. They process salaries for thousands of companies, and computers are far better at processing data than a human is with pen and paper. As computers got faster and more powerful, ADP could become more efficient in processing salaries, increasing the margins.

You can apply the same thinking to the big trends of today.

AI will have a huge impact on our society, probably a lot more than the computer and the internet have on society. It may be in parity with industrialization or the wheel.

Think which sector or companies will have the biggest benefits in the value chain due to this technology!

Serendipity/Observation

Sometimes cases are just in front of your nose!

We have companies’ products and services all around us. We use them at home, at work, when we go to work, when we practice one of our hobbies, essentially all the time. Be on the lookout for anything changing in your friend group or at work. If they are an early adopter, you could be sitting on insights into the new Monster or Celsius. I was one of the people ignoring these companies with drinks I would never touch but missed how popular it was. Monster is up 113,600% in the last 20 years…

It is also a good place to work from one’s interests because you are probably more knowledgeable than the average fund manager in that area. The research won´t be taxing as you dive deep into your interest.

From others/Social media/Stock recommendations

We like to have everything served to us, and it is only natural. We were evolutionary set to do as much as possible with as little effort as possible. So listening to a friend, someone on social media, a finance magazine, or your broker is natural.

You should treat all cases from the list above as ways to find a company to research. Not to buy without looking up what the company actually does!

I especially want to highlight this when a research firm, a social media person, or your broker recommends a stock. Their interest may not be aligned with yours, so think about why they recommend it in the first place. They may want to make a transaction with the company and therefore has a positive view of it, or someone just wants to pump up the stock so they can sell it because you and some more people have bought it, so it rises in price.

My own experience with listening to others’ cases and then buying them is by far one of my worst-performing subsets of stocks.

These are the six ways I find new interesting cases to research. I hope it will help you in your search for new cases to research.

Did I miss a way to find new cases? Tell me, and I can update the list!

Otherwise, I wish you happy hunting!

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