Back to the Basics: How to Find Great Stock Ideas (Rabbit Holes vs. Screeners)

0:00One of the hardest things for any investor, no matter whether you're beginning or you've been doing it for 30 years, is always finding new good stock ideas. And it's even tougher when you're new because there are literally hundreds. There's so many different ways to go about finding good stock ideas, whether it's screeners or whatever. And no matter what investor you ask, their way is always the best. So today, Andrew and I are going to dive into how we do it personally, because we do it totally different. And we're just going to kind of compare our strategies on how we do it. And we're going to see if we can't give you guys a good basis for getting yourself started and finding your own amazing stocks.

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3:10Stephen:You're tuned in to the Investing for Beginners podcast. Investing for Beginners podcast. The show for the long-term investor. We cut through the noise to focus on what works. Compounding, discipline, and the conviction to buy wonderful businesses and stick with them. Your path to financial freedom. Start now. And welcome back to Investing for Beginners podcast, everybody. My name is Stephen Morris and he is Andrew Sather. the very opinionated Andrew Sather, and I'll tell you why. Because before we get diving into finding stocks and stock screeners and all that stuff, I wanted to give you an update because it is April 23rd, and we are a few short weeks from the Ferrari Luce.

3:59Is that how you say it, Andrew? L-U-C-E, Luce. So the Ferrari Luce EV getting launched, and we learned some stuff about it, And I wanted to bring it up and just kind of share that with you because we just did an episode about Ferrari. But Andrew is opinionated because he thinks it's ugly.

4:18Stephen:I'm getting like, you look at the side view. I had to close the window. I can't look at the Google image search anymore. But it just, it reminds me of this old car we had growing up that it made pin-by-ride cars. Like the cars before they would go on pin-by-ride, it would make those cars look pretty nice. it was a beat up beat up hatchback like it was actually it was a station wagon so i guess that's a whole nother level but this thing i i don't get the hatchback look i just don't get it so i remember when the stis went hatchback and i absolutely like i love stis like one of my long time like before i i i'm going to build a rally car for myself not to like actually race just i want a rally car because they're cool and i think it would be awesome to do like 80 miles an hour down a dirt road um but i want to build a rally car and so i've always kind of been into like the the evos and stis like that type of tuner car and when they went to hatchback the stis the wrx's like i was appalled they they were the ugliest things i've ever seen in my life but i gotta disagree with you man i think the ferrari loose ev looks pretty dope man it looks pretty awesome the reason we bring this up is one of the things we've learned recently bloomberg reported that the estimated retail price for the new ferrari is going to be 650 000 ish dollars which is freaking insane considering 12 years ago a ferrari was about four hundred thousand dollars so that it's a pretty huge price increase andrew over just a decade and plus we're getting a massive increase in price with um a complete it doesn't look like the traditional Ferrari it doesn't you're not going to see that and think Ferrari um until it gets more familiar I guess um so I mean there are a lot of ways I can see Ferrari maybe making a mistake here because they're getting away from the iconic motor they're getting away from the iconic look they're getting away from like the brand itself and so i don't know i when i finally saw the the car i'm like it looks cool but it's not a ferrari and then i saw the price tag i'm like oh man like i don't know what are your thoughts on that it's it's interesting right and that's what makes stock picking so potentially lucrative like it's probably not being priced in like if it is the hottest thing and like it sets the trend and every other supercar wants to model themselves after a hatchback uh well then then like that's a huge profit that that's like a a huge thing that would just give them a whole new level of growth that they haven't had before right so i if you buy that stock like are you kind of betting on this or not or is it kind of like the cherry on top i don't know ferrari stock enough to to say for certain but i i agree with you like it seems risky it seems a little bit out of like a like a little bit of a bigger swing that we're going to go and kind of depart from our brand but you could argue it's like that's part of innovating too anyway i just wanted to bring that up and share um i'm pretty excited to to see what happens definitely i definitely of course hope it works out for ferrari because i big ferrari fan um love the company and definitely love the cars so i hope it works out for him but i don't know i am concerned i'd be lying if i said i wasn't so we will see but anyway if you're interested it is l-u-c-e-e-v so it's the ferrari loose ev um and i'm sure i'm not pronouncing it right because it's probably something in italian but hey i don't speak italian so we're going with english anywho so yeah so diving into how we find good stocks um if it's okay andrew i kind of wanted to describe my how i do it um because i feel like mine is is going to be much simpler than what you do um so basically how do how does steven go about finding a good stock pretty simple i have stocks that i own well you will say uh general dynamics or we were just talking about ferrari i don't own ferrari but ferrari is a great example in and of itself so we'll say steven owns ferrari and um i need to to find another good stock and so what i'll do is what i call the rabbit hole method and i will just start jumping down a bunch of rabbit holes around ferrari um i'm going to start asking questions so what what makes ferrari super unique one of the things is their custom leather work um so does ferrari own a leather shop probably not they may but probably not so who makes ferrari's leather and so i'm going to go find that out and then i'm going to find out who their provider of raw materials are to make that that leather are Are these companies publicly traded?

10:24What is their pricing power? Things like that. One of the big questions I want to ask, Andrew, is the reoccurring demand. If this company goes out of business, is Ferrari going to be screwed because their custom leather is going to be totally jacked up? I actually want that answer to be yes, because then I know Ferrari is not going anywhere. so as long as ferrari is not going anywhere whoever makes their leather isn't going anywhere and so then from there it's like okay let's start diving into the numbers let's start getting into the valuation and start figuring out if this is a good company um general dynamics i mentioned earlier i do own general dynamics um one of the questions i might ask are who makes their microchips who makes, you know, the sheet metal, who's their sheet metal provider.

11:25And another something I didn't mention that I meant to is this is a good way to diversify too, because, you know, how often do you think of sheet metal as being a good, sheet metal company as being a good investment? That's kind of the 30 ,000 foot view. Actually, I'm not going to even lie. that's that's the exact view of how i do it there's no 30 000 foot like that is how ridiculously easy it is uh for what i do so i don't know andrew what what are your thoughts

11:58Stephen:yeah i like it um so when you are you mentioned like leather and you're basically branching out i'm imagining like stranger things when he's got the tentacles and they're all sprawling out and And then leather company, sheet metal distributor. So like how, how, how wide is that expanding? And you mentioned suppliers. Are you looking at suppliers of suppliers and just keep going until, yeah. You know, I, when I was thinking about this episode earlier this morning, cause I knew we were going to talk about Ferrari. One of the things I thought of is I know Ferrari's paint is a big deal. um does ferrari make their own paint i don't know but i'm sure they don't make the raw materials for their own paint like i mean even if they have a separate division to make their own paint like let's be honest like eventually it's getting way too big and we know ferrari isn't that big of a company so i think it's logical to assume that the ferrari doesn't make their own paint um so who makes their paint who makes the raw materials for their paint like and yeah i will go all the way down to um if i don't find anything decent i will go all the way to the end of the rabbit hole um until i find something good and if that doesn't work if the paint doesn't work then it's like okay who makes the raw materials for their leather who makes the raw materials for their rims like and we will go you know we talked about cat a couple episodes ago um same questions who who makes the rubber for cats hydraulic lines somebody's got to make that cat doesn't make that i'm sure so and i just keep branching out until i find good companies that i that i like once i find them i start you know like i said doing the math watching them um listening to their earnings goals reading their 10ks things like that so how do you keep it from getting so far deep that you're like oh crap there goes 12 hours of my life that i'll never get back like i hope you're not all the way in i'll be honest like i have spent an entire day doing this just let's keep going zoom zoom i'm naturally a curious person so like i enjoy it like i enjoy just learning because like when we did the ferrari episode i did not realize like the amount of custom work ferrari does on every single car super fascinating so let's learn more about this let's figure this out so you know cat like i i loved learning more about cat you know and how they operate and um trying to think oh the the the they're super distributors i don't remember the exact word they use now but you know the they're uh the companies that that sell uh their products um I had no idea that's how Cat worked.

15:15I thought that was super fascinating. And so, yeah, then I spent like another two hours researching those companies as well. And that's how I figured out like, holy crap, some of these companies are multi-billion dollar companies in and of themselves. And they are also publicly traded. So, again, like there's that. Like, okay, are these good companies to invest in? Maybe I'm already investing in Cat. maybe maybe their retailers or companies i want to invest in too um so yeah i i can totally spend hours and hours and hours and i don't have guardrails to keep me from doing it because honestly i enjoy doing it so um if it sucks up my entire day then that's fine um i haven't

16:03Stephen:scheduled so it is what it is my daughter would say you get locked in you just lock in locked in man yeah we got to get you like a airbnb for the week and you can you can dive into apple have you done that one yet no oh that one is yeah you'll need a week but i need to because it was announced this week that Tim Cook is retiring and that's going back to last week the markets cray cray man and like that's how old is he he's not that old he can't yeah he can't be like you would think as important of a job that he has and how much capital flows through that company i was shocked i was very shocked i was not expecting tim cook to to do that um it sounded like they had been intentional about it for a while and the the timing of it's weird because i i subscribed to business uh bloomberg business week i'm like shouting out bloomberg almost every episode at this point but so they they send it like a monthly magazine in the mail and the article said what would happen like speculation what would happen if tim cook were to leave and then you and then you show me that thing that literally like two weeks later it actually happened right like whoa these guys maybe they can tell me where the next uh ai bubble is or something they totally had the inside track they knew he was retiring but i googled he is 65 years old he was born november 1st 1960 so a little bit older than i thought but i mean still i am surprised so like when you look at major ceo retirings like just in four months we've had Warren Buffett uh see uh see the CEO of Adobe yeah um Constellation Software that one is medical I think yeah what is what is going on like this might be the year for retirements I don't know whenever I I saw the headline and I text Andrew as soon as I saw it and I don't remember what said but my reply to him was uh i suspect conspiracy and so

18:39i'm joking let's go there i'm joking but i'm not so i want to i definitely want to dive into apple and see what's going on see if i can figure out anything tasty huh are you concerned as a shareholder yes really just because i mean it's been like everyone's biggest dig at apple for for the longest time that apple hasn't innovated in forever and you know their ai sucks each iphone like what's great about it all the camera is so awesome no one cares like it gets to the point to where yeah our camera's good enough as it is we don't care about the camera i am concerned because the further they get away from steve the the the i don't know i don't know if i want to say that out loud on air um it's just the further they're getting away from steve you know tim worked with him for ever so he knew the vision he knew how like you know what i mean yeah and so So it's like eventually that style, that mindset is going to go away and is going to become something completely new.

19:55I don't know if that makes sense, but yeah, I'm actually really concerned with Apple.

19:59Stephen:One of the comedians I follow on Instagram, he just did a bit where he's using Apple Maps and he's like, bro, I swear we're right there. And they're like in the woods and stuff.

20:14Stephen:who uses apple maps i know one person in my life and he's like adamant i don't really yeah but that's like the joke is like everybody has that one person in their life who i don't think i know anyone really i don't think i do if you love to diversify with etfs but are overwhelmed with all the options the plink app can help whether you're looking for For stronger growth potential, stability, or ways to help hedge against inflation, the Plink app makes it easy to browse nearly 2 ,000 ETFs with thematic categories built around your goals and comfort with risk. It has categories like commodities, bonds, international, large-cap sectors, and more.

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22:57Stephen:I reveal that stock pick in a deep dive research report in A Generational Moment, Reigniting Human Connections Through a Tangible Network of Intangible Assets, which you can access at einvestingforbeginners.com slash reignite. So getting back on topic, Andrew, just a couple of important things I think that important that I want to throw out there. Going back to the Ferrari example, and I'd be really interested to hear your thoughts on this and your approach to this. Just because a company touches Ferrari, so just because a company makes Ferraris leather or paint or rims or whatever it is that they make for the company that does not necessarily mean that company is decent um so when i'm whenever i'm going through this process i described it's i'm approaching approaching it automatically with a fair amount of skepticism um keeping that in mind and part the reason i do that is because it's so easy when you're like oh this company makes ferrari's leather they must be solid because without ferrari's leather they're not ferrari um so i mean it's easy to get sucked into that automatic buy rather than let's pull pull the reins back a little bit and remember this is just idea generation not we're buying today super key can i throw something in there so yeah we had um had an episode while back about like apple and skyworks solutions a company that is heavily reliant on apple was heavily reliant on them so they were like they were like as deep in with apple as you could be if you look at their stock 80 percent of their business was through apple there's like a crazy it was it was very high yeah 60 80 somewhere in that ballpark uh you look at their stock over the last five years they're down almost 70 so i don't know if something happened like i haven't followed the company very closely because i was like oh that's that's so much risk um that's too much risk for my appetite so that's like an example of like apple's done great but there's their partner their supplier has not So like what you're saying is absolutely, absolutely relevant.

25:30Stephen:We should totally respect that. Definitely. I appreciate that. I remember that episode and I remember it was just crazy, crazy high. And it was funny. That was a good learning moment for me because I was like, that's great. Right. Because Apple isn't going anywhere. We know that. And you're like, well, that doesn't mean anything. Let's look at whatever. And I don't remember the process you took me through, but that was kind of like the defining moment when I learned like the skepticism that I was just talking about. Just because they they're touching a Ferrari or touching an iPhone doesn't necessarily mean anything.

26:12The next key nuance to my my approach to this is what is mission critical? um mission critical meaning the materials manufacturing tech um distribution um financing we talked about a cat's financing arm and now it's one of the largest in the industry so things like that are are also something i i pay very close attention to um and to how a company is not necessarily performing, but how they measure up to the company I'm coming from, if that makes sense. And then the final thing I want to throw out there is who benefits if Ferrari is in a headline or who benefits if Cat or iPhone or who at Google or sorry, Alphabet is in the headline.

27:12um that is also another solid way to go down those rabbit holes and find companies that might be good investments just simply who is going to benefit from google or i'm sorry alphabet making record revenue um yeah love that yeah that one's really really good

27:38um and i like i said the reason i wanted to start isn't because i'm super proud of my method um i understand it's very uh archaic we'll say it's uh very low-key um there you go but uh i'm sure i'm sure there are pieces of the way i do it that you also do andrew um but i'm also certain that yours is very much more complex than mine so i guess my first question when it comes to andrew's stock screening method is what is step number one like where do you start You sit down at your desk and you're like, I need to find a new stock. What's the first move you make?

28:30Stephen:So there's two pieces to this, and both of them are based on fiscal.ai, which I've been using more and more these days. But one of them, they have a feature called dashboard, and you can have different portfolios inside the dashboard. So one, I keep my portfolio. It's all the stocks I own. And then another one of the dashboards is like a watch list. and I have several different types of watch lists. And so when I'm like, when we're chatting and you mentioned a company or if I'm reading, you know, Substack or I'm on Twitter or anywhere I'm at and something sounds interesting, I usually, if I'm on the go, I'll just write in my Apple notes and then I'll throw it in the fiscal.

29:13Stephen:And then I just have this like long list. Are you making fun of me for using Apple notes? Totally. What do you use in public? what do you use in public on your phone in public what do you use um google to do or google tasks what on your phone on your iphone all right we can argue about that later um so i have like a long list of companies that are like okay i'm gonna sift through these and so either i'm excited to do that and that's starting point number one or if i feel like i've kind of picked through that and nothing stood out and I'm kind of bored of that list, I like to do a screen. So I've talked about screens for years.

29:56Stephen:It's evolved over the years. My latest screen, I'll just run through it real quick if you guys are curious. I like a revenue 10-year growth of 6 % a year. Stock-based compensation, less than 10 % of revenue. Cash from financing, less than zero. So that means they're in the more mature stage rather than the capital raising stage. 4P less than 20, net debt to EBITDA less than 3.5, return on investor capital 15. And then it looks like I have another revenue one here. So like that's just one example of a screen I like to run. But I also have several other screens that, you know, just to have a different mix of companies in there.

30:38Stephen:I even have one screen, like I feel naughty for saying this, but I have one screen that tracks like stocks with high momentum. So like show me the stocks that are doing really well, just cause I'm curious and I want to know. And, and as a value investor, that sounds like almost like, you know, who is this guy? But, but I just, I like to do that. So I do that every once in a while, but those would be like step number one when I'm, when I'm trying to look for something. I think that's your inner day trader coming out. A little bit, huh? I'm supposed to take for too long.

31:16So whenever you run your screens and you find something that piques your interest, you start at the macro stage versus the company, right? You start with the numbers rather than going to the company itself and its mode. Yeah. yeah i thought so um i'm the exact opposite um i i like to learn about the company and learn about its moat before i take the time to do the math um and that's probably because i'm so slow at doing it i guess um i guess that makes sense i don't know i've never really thought about it but awesome um what what is it about those companies like when you run through your screeners that will make you say, okay, this deserves 30 minutes of my time?

32:16Stephen:Yeah, it's a great question. I have different charts I look at. So this is one of the newer features that they have. And this is turning into a sales pitch for fiscal. But you can save in the dashboard different metrics that you care about. Because there's so many metrics, right? Like you could click on any metric on the income statement and it could feel overwhelming. But since I can preset different metrics, then I just click, okay, this preset, how does this look? Okay, how does this preset look? So I have probably like four or five, and then I'm also just looking at surface level metrics. So I can run through those now in probably four or five minutes.

32:57Stephen:And then I'm just looking for hard pass red flags. And then if it can pass all those tests, then I'll spend time like 30 minutes or whatever it may be to dive deeper. What are some of those instant disqualifiers, red flags? Yeah, good question. I mean, I can run through one. So like an example would be net debt to EBITDA. If net debt to EBITDA is really, really high, that means they have a lot of debt and not as much profitability. And if that's a consistent year after year kind of thing, then I'm out. That's too risky for me. I like safe companies. I was very tempted with when I first started trading in general was buying one of those fancy screeners.

33:47Have you seen those? Some of them are really expensive too. Really? What are your thoughts on buying a screener versus building your own? I think it depends.

34:01Stephen:I think it depends on who you are, what you're trying to do and where you think your competitive advantage is. That's something we have down the pike, a little spoiler sneak peek. But yeah, I think it's individual for everybody. And you got to find the tools that make the most sense for you. Yeah, I agree. And, you know, for myself and particularly, I am not good at building screeners. I've tried, didn't work out. So fortunately, I've had people kind of gift me theirs to copy. And so that's how I got my screeners. But I definitely, I'm definitely okay with paying for it. But I would say I would be very, very picky about what the screener does, what it's looking for because you might end up with a whole lot of crap especially if you don't have a whole lot of control over the screener itself and what it does so I would say be be very cautious of buying a screener and if it is ridiculously ridiculously expensive it's not worth it would be better just to find find a friend that knows how to invest and has a screener themselves and just copy theirs.

35:34Learn and learn a little bit, watch a few YouTube videos. And it is to me, it's just not worth. I mean, some of these screeners are thousands of dollars. And to me, it's just not worth it. Where do you? I don't know. Could you ever see an example or a space in your life where you'd be like, you know, a thousand bucks for a screener is OK.

35:58Stephen:there's tools I've considered, um,

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