How to Discover New Stocks for Your Portfolio

In this segment from Industry Focus, the hosts dedicate their discussion to discovery and new stock ideas, including the different ways investors uncover lesser-known tickers. Find out why you should take the effort to drill down into a company's financial details before clicking "buy".

A transcript follows the video. For the full episode, click here.

This video was recorded on April 24, 2018.

Vincent Shen:  I'll kick off the episode with a question and a request for listeners, actually. First, for Fools listening, I want you to take a second to think about your process for discovering new stock investment ideas. So whether you have a very formal standardized process, or you get your ideas from reading publications like The Wall Street Journal or something else, or maybe listening to podcasts like this one, or just your day-to-day life experience, take a second and think through the last few stocks you purchased or looked into purchasing, and recall how those companies ended up on your radar.

Now, for you, Asit, I'll ask you the same thing: Where do you usually turn for your stock ideas? And how do companies usually end up on your watch list or in your portfolio?

Asit Sharma: For me, Vince, it's a combination of several things. I do like the method espoused by Peter Lynch way back in the 80s, which is to invest in things that you understand and that you see around you. An example is Canada Goose, which we've talked about on this show, and how that company, it's a very vibrant clothing company. If you've been around one of their flagship stores in a big city, it's something that you might have encountered, just visually. "This company is selling a parka," like we said on the recent show, "for $1,000. I wonder if they're publicly traded?" So that's one method. I do tend to read widely in the markets in my relationship with the Fool, so interesting things that come up if I'm reading a trade journal or a financial publication and I'll dig down.

And the third way, of course, is using stock screens. Both of us have talked on previous shows about stocks that we've uncovered using screeners -- that is, websites which present filters that allow you to drill down into the market based on characteristics you like to see in a company. And that's the third way, and more of an empirical way, that I like to go about finding a stock to invest in.

Shen: I think we are in a somewhat advantageous position based on my working at the Fool, you writing for us and being on this podcast, just being in an investing mindset throughout your day-to-day. That definitely gives us a lot more exposure to discovering new companies, new stock ideas.

But I ask all of this, and I'm glad that you mentioned those screeners, it's very convenient, because for today's show, we're going to take a break from the company-specific coverage that we've been focused on recently, because Eric, that Foolish listener I mentioned earlier, he wrote to me last month wanting to learn more about stock screening, because it came up on an episode in March. Specifically, he said, "I know I would appreciate an episode on your techniques for screens, various metrics you filter on, which software you prefer, how you further pare down a large number of results, for how many results you actually read 10-Ks, etc." And he mentioned a quote, "Give a man a fish and feed him for a day. Teach a man to fish and feed him for a lifetime."

Asit, you heard him. Let's do some fishing and teaching. To start, I'd like to lay out our approach. We'll talk about the metrics you can use to filter down your screen lists, and after that, we'll talk about the actual resources that are available to you for performing these screens. Then, at the end, we'll close out with some thoughts on what to do once you have your screen results, and talk about some best practices and warnings, as well, for this approach.

First thing's first, the core approach and benefits of stock screening are no different, I think, from the decision-making process that people often take when they make a major purchase such as buying a new car. Technically, if you're really approaching that purchase with an open mind, you might start with a large basket of various makes and models available in your market, and then you start applying the filters, like size, cost, fuel efficiency, passenger capacity, aesthetics. With enough criteria, you shrink your basket of options down to a reasonable number of vehicle models, and then you go out to talk to dealers, do some test driving, or look for online listings, and eventually you take the plunge and you have the car that you want.

For stock investing, we start in a similar place, for example, with all publicly traded companies. For the purposes of this discussion, this is usually the case for Industry Focus in general, we'll limit our basket to stocks that trade on major U.S. exchanges. That comes out to approximately 5,600 companies, give or take some based on varying definitions, but all in all, lots of options to choose from.