How to find investment opportunities

As a corollary to my other post about the job I started, my boss wants me to find investment opportunities, not given any cap specification, just that it’s domestic equities. I’m assuming there are plenty of PMs and investment analysts on AF, and was just curious how you went about it. Is it just running different filters like P/ Book, stocks at 52 week low?

Well, if you’re just going long/short when you find yourself running out of ideas opportunities take some profits and look for shorting candidates. When you start to see opportunities flip your strategy. Play options likewise. Equity markets are a joke these days.

This is a long post, because this is actually a part of my job now, so I hopefully can help: Firstly, figure out what your boss has a preference towards and shoot for that. If you have a fund prospectus or marketing info with your funds ‘limits’, read it cover-to-cover. No point presenting biotech if he’s already decided it’s outside his circle of competence. With thousands of public companies out there, you need some stuff to whittle down the possibilities. Good filters, for me, will give a list of like, maybe 50-100 candidates, at which point I can take a half day and start narrowing possibilities by hand (meaning more than just ratio analysis, reading the 10-k, reading the proxy, reading the chairman’s letters, whatever). Once you’ve found a filter that seems to get you some decent stuff, save it in the program you use to screen and run it once a week. This will take time at first but will get quicker - the names won’t get dramatically different from one week to the next, but the valuations will, and that’ll be relevant to the decision makers. Best of all is when you come up with a name, research it, and your boss says, “OK, I love the company at X, but it’s trading at 1.4X.” Five weeks later, the market goes bump, your target company trades at X for a week, and you can build a position immediately because you and your boss already have researched the situation. Here are some easy quantitative metrics, most of which you can run through your computer screening program of choice: Market Cap: Your boss is probably overstating things. If you come to him with a company with a 10 million market cap, I bet you lunch he’ll reject it. He has a lower limit for size (maybe even an upper one). Find it and you’ll eliminate a few hundred companies. Leverage: Assets/equity, debt/equity, tangible assets/tangible equity, all the various interest coverage ratios, etc. This one really depends on the industry - an acceptable leverage ratio for a manufacturer is completely different from leverage requirements for banks and insurers, because they’re in the spread business and not making widgets. Line of business: It’s a small chance, but your boss may have socially responsible guidelines, or industries that s/he won’t invest in because they require really specific knowledge (again, biotech is a common one here). Find out if she’s got anything like this, you’ll eliminate some companies. Operating history: Some funds won’t touch an IPO or anything with less than 3, 5, or x years history. Again, use this to help focus your efforts. Price: Some folks won’t touch a share that’s less than $5 or something, because most institutions won’t pay attention to a $3.25 stock (since their charter says they won’t own sub-$5 stocks) and it just plain won’t get momentum. Growth: If your boss is totally growth focused, she’s not going to be impressed when you bring her a textile manufacturer that has reduced book value p/s by 35% over 5 years and has cut sales in half, no matter what the valuation is. Setting even low limits in a filter (sales/margin/whatever growth over 3 or 5 years CANNOT be negative, for example) will help you get down to that magic list where you can print it and start going through the annuals or whatever. Value: This one is tougher, because some value criteria aren’t apples-to-apples across industries. Cyclicals, for example, are almost always TERRIBLE plays when they’re at low p/es, because this tends to happen when the market is peaking and investors refuse to increase the multiple on a stock that has temporarily high EPS; hence they trade at a low p/e. Regardless, you can use some of this stuff to focus your efforts. I like price/book, price to tangible book (eliminate goodwill and intangibles), price to cashflow, price to sales, cash-to-price. Returns: This is relevant for growth focused funds, especially. Return on sales, return on assets, return on equity, return on invested capital. Like with the ‘growth’ ones I mentioned, start with small hurdles (return on equity CANNOT be negative over the last 3/5/whatever years, for example) and adjust them up to narrow your results. There was more I was going to say on this subject, but I just re-read what I wrote, and I think this is quite enough. If you want qualitative factors, reply and I’ll give you some that I use. Best of luck.

^ That is good stuff, I am surprised no one has replied to this. Well done supersadface.