How to Research a Stock on the Information-Overload Highway The challenge these days isn't how to find enough data online--it's how not to get distracted by all the resources. That's why investors need a road map.
(Business 2.0) – Interactive NanoHypnotics!" says the breathless guy on the stationary bike next to yours.
"Interactive ... Nano ... Hypnotics," he puffs. "Guy in the sauna swears the stock is going to 150 in a week. Check it out!"
Well, of course you're going to check it out. You know better than to act on a tip without investigating it first. And why not poke around? Thanks to the myriad financial websites at your fingertips, you can check the living daylights out of this baby. You could check it until its price chart was burned into your retinas. You could check it until you had the P&L memorized. You could check it ... well, you get the picture: An investor's toughest battle today isn't lack of information. "The biggest problem," says Douglas Gerlach, author of The Complete Idiot's Guide to Online Investing, "is that all the data is overwhelming."
That's why Gerlach and other Internet investing experts say the key to investigating any stock online is to set your expectations first. Sure, you can learn a lot about a company on the Web, but you can't learn what you most want to know: whether its share price is going to go up. Since all the information you'll find online is either already public or unreliable, don't expect it to give you an edge on the market. You're better off limiting your investigation to a few trusted websites and using them for what the Web can reliably do--help you get a fix on the risks the stock represents.
The following guide shows how an online investor might check out a real, reasonably attractive company--Activision, the $910 million No. 2 maker of videogames (and, as it happens, No. 70 on Business 2.0's list of the 100 fastest-growing tech companies). The steps outlined here should take about an hour, and for an amateur sleuth with basic financial knowledge, Gerlach says, that's enough time to form a reasonably astute impression of Activision's risks and prospects. More than that you cannot ask.
EXIT 1 Drive by the company website.
What you're looking for here is basic information about the company's business and leadership. Take the rest under advisement. "Be skeptical," says Hewitt Heiserman, a financial analyst and a columnist for TheStreet.com. "The website is one of the ways that the company tries to burnish its image."
Read the CEO's bio. How long has he been in charge, and what's his standing in the industry? Activision chief Robert Kotick has been at the helm for 13 years and serves on the board of Yahoo, which is reassuring.
EXIT 2 Pull into the investing sites.
Head to Google--that's right, Google--and type "stocks:" and your stock's ticker symbol into the search field. You'll go straight to data specific to the company on Yahoo Finance and will see links to similar information on Fool.com, MSN MoneyCentral, Quicken, and ClearStation. In general, you get a wide array of data and analysis. "In 10 minutes you'll be able to get a pretty good picture," says Pat Dorsey, director of stock analysis for Chicago-based Morningstar. In the case of Activision, its balance sheet looks fine, what with $425 million in cash and no debt. But last year's annual revenue growth, at less than 10 percent, indicates that product isn't flying off store shelves.
EXIT 3 Park awhile with the official disclosures.
In a series of standard documents, the Securities and Exchange Commission requires the company to disclose just about anything of consequence to shareholders every quarter. The result rarely makes for riveting literature, but there are some must-read sections in both the annual 10-K and quarterly 10-Q forms. Look for items titled "Legal Proceedings," "Management's Discussion and Analysis," "Forward-Looking Information," "Risk Factors," and "Notes to Consolidated Financial Statements." Sure enough, if you'd dug into the 10-Q filed by Activision in February, you'd have found that the SEC is probing the company as part of an industrywide investigation into questionable bookkeeping. Even if nothing comes of it, the action isn't a positive, Heiserman notes, if only because it distracts Activision's management from running the business.
EXIT 4 Cruise the headlines.
Keeping up with the news surrounding a company and its industry gives you a better understanding of the market and helps you interpret the effects that future events may have on your investment. For example, if you know that Xbox games currently make up a considerable 20 percent of sales (according to Activision's most recent 10-Q), you'll want to keep tabs on Microsoft and know when its next-generation console will be unveiled.
Where do you go for the best news? The investing websites only deliver feeds from wire services like Reuters and limited content from online publications like the Motley Fool. As for the message boards maintained by many big websites, don't bother. "At least 80 percent of what you find on the boards is b.s.," Heiserman says.
Instead, consider paying for an online subscription or occasional access to a news database. LexisNexis, a database that includes decades' worth of stories from papers of record such as the New York Times and the Washington Post, runs $30 per day. A yearly online subscription to the Wall Street Journal is $79.
A recent scoop on Activision came in April, when the company appeared in a 1,000-word Journal piece. The paper reported that Activision was partnering with Nielsen, the TV ratings company, on a program to track the number of gamers who see ads that run during videogames. The research could ultimately help Activision court advertisers, who are anxiously watching young men abandon TV for gaming.
That brings you to the next step, which is to make up your mind about buying the stock. Whether or not you decide to take the plunge--and, in the end, whether or not you make a killing on the investment--you'll have the satisfaction of knowing that you made an informed decision. Of course, there is a downside to that: You can't blame the guy on the exercise bike if you're wrong.