Anyone can learn how to research stocks
Instead, we at Ziggma argue that by using the best stock research website, finding the highest rated stocks is accessible to anyone. The reason for this claim is straightforward. Stock research is in large part about fundamental analysis of companies’ financials. What sounds complex at first, is not when you think about it. As any company, we all have income and expenses, assets and liabilities. The basic framework for a company’s finances and our own is essentially the same, albeit at a different scale and with fewer layers. Add in the comprehension of a few notions for stock valuation and profitability and you are already in good shape.
Not convinced or still not confident? Then we got you covered by doing the work for you with our proprietary stock ratings. But more on this later.
Growth
Without any need to further elaborate, to create value there must be growth. There are three reporting items for which growth is most crucial. These are revenue, net income and operating cash flow. You can conveniently find these in the Analysis view of any stock profile where you can also switch from annual to quarterly data. Quarterly data is available on the free plan on Ziggma.
Profitability
As is the case for your personal finances, it’s best to be in green at the month or year end. The most frequently used profitability measures in fundamental stock research are roe (return on equity, computed as net income divided by the company’s own funds) and net margin, which is simply a coefficient of profit divided by revenue. These and other profit metrics are also conveniently displayed in time series tables of any stock’s Analysis view.
Stock Valuation
It turns out that high dividend yields are too good to be true. Even though a high dividend yield is very enticing, the financial performance of companies with high dividend yield rarely is.
With valuation it gets a little trickier. But have no fear. We are still a far cry from rocket science or molecular biology. The first ratio most investors look at to judge a company’s valuation level is its PE ratio. It reflects the value of a share, i.e. the stock price (or marketap) divided by a company’s annual earnings, specifically earnings per share. The way to conceptualize the PE ratio is straightforward. Image you bought the entire company and all of the profit was yours. Then the PE multiple reflects the number of years of profit it will take to earn your money back. In real estate the analogous example for an investment in real estate is the number of years of rent it will take to earn back the cost of the real estate investment.
Some companies are traded with a high PE or even very high PE ratio, while others are trading with PE ratios in the low double digits. The difference is almost always explained by growth. The reasoning is that when there is growth, the earnings component of the PE ratio (the denominator) will grow and the price paid for the share will become ever more attractive. The only catch, the growth has to be there.
There is a ratio that will bring valuation and growth together. It is called the PEG ratio, in which the PE ratio is divided by earnings growth. As a very basic rule of thumb, companies with a PEG ratio below 1, i.e. an earnings growth rate that is greater than the PE ratio, can be considered as highly attractive.
Now comes the tricky part. Some companies’ earnings will not properly reflect its true earnings or future earnings power. The main reason for this lies with investments. In certain industries, such as chipmaking or biotech, massive upfront investments in R&D are necessary. Naturally, real estate also requires a great deal of upfront investment. At the opposite end of the spectrum, starting a consulting business will require very little upfront investment.
To get a better picture of a company’s earnings power, an investor will shift his or her focus to the cash flow statement, and in particular to cash flow from operations. To make it short, cash flow from operations will reflect the company’s cash earnings, after adjustment for amortization of investments. Think about it this way: Since the cash for a completed research facility or factory has already been spent, its amortization, which appears as a cost in the income statement, is added back when doing the “walk” from net profit to operating cash flow (see image below).
On Ziggma, you will find the income statement conveniently situated next to the cash flow statement enabling you to conveniently see the “walk” from net profit to cash flow from operations. Hence, in certain industries it makes sense to value a company based on price to operating cash flow.
This begs one very important remark: When carrying out stock comparison, do not compare stocks’ valuation levels across industries. Each industry has its specific growth profile, investment intensity or profitability levels. By way of illustration, it makes absolutely no sense to compare stocks’ PE ratios across industries. Yes, JP Morgan’s PE ratio is much lower than Nvidia’s, but this says little about the two stocks’ relative valuation. One has to compare a stock’s valuation level against industry peers to be able to draw meaningful conclusions.
Qualitative factors for top stock research
Beyond the financials there are some qualitative factors that have been proven conducive to stock returns, such as insider ownership, i.e. management owning a significant number of shares. Put differently, with a significant share ownership management has skin in the game. It is easy to find insider stakes on a best-in-class stock research website, such as Ziggma.
