How to find investment ideas

Looking for potential investments is one of the most core, and difficult things to do in investing. There are thousands of potential stocks to own, many represent good investments, and many don’t. So where are the best places to look for investment ideas?

How to find a good investment

1. Steal other peoples ideas

Have no shame in letting other people do the hard work for you, you shouldn’t feel bad about stealing ideas. Of course you shouldn’t pass them off as your own, but steal as much as you can! Read blogs (especially mine!), follow the investments of well known investors such as Seth Klarman or Warren Buffett and look at what they’re buying. That’s a great place to look for some good ideas. Always do your own research of course, but you’re more likely to find a gem where others have seen it than picking companies at random. Value Investors Club is another good place to find other peoples ideas.

2. Cheap stocks

Stocks trading near their 52 week lows are a good place to start looking for value investments. Guru focus also has a long comprehensive list.

3. Stock Screens

Not much to say on this, screens are fairly common. I look for high Return on Invested Capital (ROIC), lowish PE ratio and reasonable margins. I also run separate screens for companies selling for below tangible book value and those buying back large amounts of their own shares. Insider buying is also a useful screen.

How to find special situations

Special situations provide investors opportunities brought about by special events. My favourites are spin-offs, but takeovers/mergers and bankruptcy can also provide opportunities.

Read the press

I usually prefer to search the press than scan through myself, using Google News you can search for terms such as ‘WSJ spinoff‘ and ‘WSJ bankruptcy‘ and find news stories on situations arising. Also check this spin-off blog for a good up to date info.

1. Spin-offs

Use the EDGAR search function to search for spin-off filings (click here).

– Look for spin-offs where one side of the deal looks unattractive i.e. a company getting rid of a poor performing department for cheap and investor interest will be limited
– Look to see if the management has a stake in the new company, are they putting their own money behind it?
– Look for areas where there will be high initial selling e.g. institutions wont want to hold it as it’s too small, $40 stock splitting into a $38 and $2 stock.

2. Takeovers/Mergers

Look for cases where the takeover involves a package of smaller securities e.g. warrants. If they are only worth a fraction of the total takeover amount people may sell them regardless of value.

3. Bankruptcy

Look for companies that have gone into bankruptcy because of debt problems rather than a weakness in the underlying business. Only invest once they’ve emerged from bankruptcy and the common stock is trading. There can be initial selling due to bond holders now being common stock holders and shares not being suitable investments for them.

4. Rights offerings

Sometimes a spin-off is done through a rights offering. This can create particularly attractive opportunities. As always, look out for them and look at what the management is doing!

5. Activist Investors

This can usually act as a catalyst to release value, so is a good place to look. Follow a list of known activists that suit your investment style like Mario Gabelli (Gamco), Michael Price (MFP Investors), Third Avenue, Jana Partners, Crystal Amber etc. If you don’t know the names of any activist investors then simply do a search for a form 13-D on EDGAR. This form will detail the ownership interest as well as stating their intentions by acquiring this position of stock.

You want to look for companies where hidden value can be unlocked, e.g. there is a loss making division that can be closed, or excess assets that can be returned to shareholders. These will be unlocked by the activist investor.

This is far from a comprehensive list but should definitely provide more than enough lines of inquiry for weeks of research.