Ep 14: How to Analyze a Stock for Beginners

Ever wondered how to pick a stock? We are putting your money to work. We're not just getting your money a job—we're giving it a full-fledged career path. Tune in as we match your dollars with the perfect corporate culture, make sure they're in a position with room to grow, and find a place that offers the financial cushion to weather any storm

In today’s episode, we’re diving deep into the how-tos of analyzing a stock. You’ll learn how to:

  • Craft an investment thesis that’s as strong as your coffee ☕
  • Size up a company like you’re the world’s best HR rep 🕵️‍♀️
  • Get geeky with the numbers without breaking a sweat 🤓

Using our fictional favorite—Ought to Be Creative Inc. (ODBE)—as a case study, we'll guide you step-by-step. (In the episode, we used a real example. *this is not financial advice: key word example*)

Episode Equity

How to Turn Your Money Into Your Hardest Working Employee: Analyzing Stocks for Beginners

Investing is like hiring your money to work for you. Imagine sitting your dollars down for a pep talk: "Listen, it's time to grow up and get a job." Well, you've picked a company where your money can clock in—now let's find out if it's a gig worth taking.

To learn how to spot the perfect job opening for your money, check out episode 8: "How to Find Stock Ideas and Have an Investment Thesis". Just a heads-up, this isn't the be-all, end-all guide but a solid start to becoming an informed investor. In legal jargon: this is for educational purposes, y'all. (Wink, that's a disclaimer.)

Step 1: The Birth of Your Money-Making Idea (Investment Thesis)

This is your lightbulb moment. Your investment thesis is your educated guess—think high-school science fair, but with real money on the line. You've got a hunch; now, it's time to roll up your sleeves and prove it. Think of it like your hypothesis in a science project. You have dissertation as to why you want to buy the stock. This could be based on the overall macro environment, a trend you saw on social media, based on external factors like fiscal policy, or rising energy costs. Your idea can come from anywhere.

Example: Labor Shortages & The AI Revolution You hear in finance media that there's a labor shortage, meaning not enough people to fill jobs. To attract workers, companies are offering high bonuses and better pay, making it more expensive to run the business. You believe investing in productivity tech, like AI or software, can help businesses do more with fewer employees. So, you think stocks related to AI and productivity software are a smart investment because they address this big issue.

This is where your brilliant idea comes in. You've read a ton about AI and productivity software—like our play for today, Ought to Be Creative Inc. (ODBE). You think they've got the solution to a larger issue.

Ought to Be Creative has two business models spanning direct to consumer and direct to business. They offer a variety of products inthe creative space that utilizes AI to automate digital offerings across the Oughtto Be Creative Suite and have set the standard in the industry.

Step 2: The Job Interview (Qualitative Analysis)

Before you send your money off to its first day on the job at ODBE, think of this step like you're the HR rep and the company is the job applicant. You're gonna grill them in the interview. To back up your investment idea, you need to dig deep into the company, just like preparing for a job interview. Knowing the company's growth, leadership, and future potential is key. You're essentially asking if this is a company you can "grow with" as an investor. You can find all this info on the stock's profile page on your brokerage website.

What Does ODBE Do?

  • Explanation: Think of this as your elevator pitch for the company. In one sentence or less, encapsulate what the company does.
  • Application: You've got this! They create AI-driven solutions in the creative space.

How Does ODBE Make Money?

  • Explanation: A company can have multiple streams of revenue. It's important to know where the cash flows from so you understand the company's stability and growth potential.
  • Application: ODBE has a dual revenue model: Direct-to-Consumer and B2B, spanning from software subscriptions to specialized services.

Who's in the Ring with ODBE? (Competitive Advantage)

  • Explanation: This is about understanding the company's unique selling proposition (USP) that sets them apart from the competition.
  • Application: ODBE faces stiff competition but stands out for its cutting-edge, AI-driven creative solutions that have become the industry standard.

Who’s Steering the Ship? (Leadership)

  • Explanation: Understanding the corporate leadership helps you get an idea of the company's direction and ethics.
  • Application: Executives at ODBE have stock options, aligning their interests with shareholders. Their ESG score also suggests a responsible approach to business.

The Winds and Currents (Industry Trends)

  • Explanation: Knowing the larger forces at play in the industry helps you foresee potential headwinds or tailwinds for the stock.
  • Application: For ODBE, the labor shortage crisis acts as a tailwind, pushing them into a favorable position for growth.
We're looking at EPS. We're looking at revenue. We're looking at profit margins. We're looking at P E ratio. We're looking at all of these things to analyze if the stock is worth buying now, if it's too expensive or not and what the projected growth is. If you don't want to do all of that fundamental analysis yourself, or you're still like learning about how to make sense of it all, just go to the analyst ratings.

Step 3: The FUN-damentals! (Fundamental Analysis)

You've had the warm, fuzzy conversations—now it's time to peek under the hood and look at the numbers.

Earnings Navigate to the earnings tab on your brokerage firm’s website and look to see if earnings have been beat or missed on past quarters. You also need to look forward, have analyst raised earnings estimates? (this is normally in bar chart form, you want to see the bars increasing)

  • Explanation: Earnings are a report card for the company. You want to see passing grades and preferably some A+'s.
  • Application: Look for ODBE's earnings on your brokerage site. Are they beating estimates? That’s a great sign.

Revenue This is where the sales are coming from.Companies can have increasing EPS or go up in value with out revenue. We need to check this, is revenue going up? Is it growing and/ or is it expected to?

  • Explanation: Revenue tells you how much money the company brings in. Growing revenue usually means growing business.
  • Application: Is ODBE's revenue increasing year-over-year? This could validate your investment thesis.

Operating Expenses Is this decreasing? What is the trend here?

  • Explanation: These are the costs required to keep the company running. Lower is generally better, especially if revenue is rising.
  • Application: Are ODBE's operating expenses decreasing while revenue grows? This is a sign of a well-managed company.

Profit Margins The combination of revenue and operating expenses will then give you a profit margin. This is the cushion the company has; you want to see that cushion expand. This can come from an increase in revenue and/ or a decrease in expenses. Preferably both. A profit margin is like the company’s emergency fund, the higher the profit margin, the higher the ability to navigate any potential turmoil that may arise.

  • Explanation: The profit margin is the percentage of revenue that turns into profit. A rising margin could mean a growing safety net.
  • Application: For ODBE, if the cushion (profit margin) is getting fluffier, it can better absorb any financial bumps in the road.

P/E Ratio To figure out if a stock is priced fairly, it's helpful to look at its forward P/E (Price to Earnings) ratio and compare it to its sector and the overall market, like the S&P 500. If the company's forward P/E is lower than both, it might be undervalued. You may have heard financial experts say a stock is "cheap from a valuation perspective" or "has an attractive valuation." This is one way they make that judgment. But remember, this isn't the whole story; you'll need more info to make a solid investment decision.

  • Explanation: This ratio tells you how much investors are willing to pay for each dollar of earnings. Lower can mean the stock is undervalued, but context is key.
  • Application: Compare ODBE's P/E ratio to its sector and the S&P 500. If it’s lower, you might be looking at a bargain.

When you put it all together, if you find that a stock has both a higher P/E ratio and higher expectations for revenue and earnings growth, it generally means the stock is more expensive compared to others in its sector or the overall market. However, the higher price might be justified if the company is expected to grow significantly in the future. In this case, the high valuation could be a sign that investors are willing to pay a premium now for anticipated future growth. Use this combined data on P/E ratio and growth expectations, along with other metrics and research, to either validate or reassess your investment thesis.

Additional Metrics
  • PEG Ratio: A PEG lower than 1 usually suggests the stock is undervalued relative to its growth prospects.
  • Dividend yield: If you’re interested in earning some passive income from your investment, look here.
  • Debt to Equity and Debt to EBITDA: These ratios give you an idea of how well the company can handle its debt. Lower numbers typically indicate a more financially stable company.

Step 4: Quantitative (Technical Analysis)

Jess is actually known for this, and we’ll tackle this in a future episode. But if you're itching to know more, shout out to us on social or Spotify!

Jessie's Questions

  • Q: How do you start analyzing a stock?
  • A: You begin by developing an investment thesis, researching the company's background, and assessing qualitative factors such as competitive advantage, management, and industry trends.
  • Q: What does "PE ratio" stand for, and why is it important?
  • A: PE stands for "Price-to-Earnings" ratio. It's important because it helps determine if a stock is overpriced or underpriced based on its earnings. A lower PE ratio may indicate it's undervalued, while a higher one suggests it's overvalued. You compare this to other stocks, the stocks sector, sub-sector and the overall market’s PE ratio.
  • Q: How can you make stock analysis easier?
  • A: Utilize resources like analyst opinions and ratings to get expert insights. This can complement your own analysis and make informed investment decisions.
  • Q: Why is diversification important in investing?
  • A: Diversification spreads risk across different assets, reducing the impact of a poor-performing stock. It's a strategy to manage risk and protect your investment portfolio.
  • Q: What are some key qualitative factors to consider when analyzing a stock?
  • A: Key qualitative factors include assessing a company's competitive advantage, understanding its business model, evaluating management and leadership, and staying informed about industry trends.
  • Q: Can you explain the significance of a stock's forward PE ratio?
  • A: The forward PE ratio helps determine if a stock is priced reasonably priced by considering its future earnings. It's a crucial indicator for investors looking at the stock's growth potential and valuation.
  • Q: How do you assess a company's competitive advantage during stock analysis?
  • A: Look at factors like product differentiation, market share, and unique strengths that set the company apart from competitors. A strong competitive advantage can indicate a promising investment.
  • Q: What is the role of earnings growth in determining the attractiveness of a stock?
  • A: Earnings growth reflects a company's ability to increase profitability over time. Higher earnings growth both past and expected often correlates with a more attractive stock.
  • Q: Are there any specific resources or tools you use for stock analysis?
  • A: Consider using analyst opinions, financial news sources, and brokerage platforms that offer research reports and financial data to aid your stock analysis.
  • Q: How do analysts' opinions and ratings influence investment decisions?
  • A: Analyst opinions can provide valuable insights into a stock's potential. Investors often consider analyst ratings when making investment decisions, as they reflect expert assessments.
  • Q: What are some common mistakes to avoid when analyzing stocks?
  • A: Common mistakes include not conducting thorough research, relying solely on emotions, ignoring diversification, and neglecting to consider long-term goals and risk tolerance.
  • Q: How does a company's ESG score impact its potential as an investment?
  • A: A strong ESG score suggests that a company is socially responsible and sustainable. Investing in such companies may align with ethical values and contribute to long-term growth.

Plug in and learn.

Streaming on your favorite podcast app!

Episode Transcript

Jessie: You're listening to Market MakeHer, the self-directed investing education podcast that demystifies the stock market from her perspective.

Jess: We're your host. I'm Jess Inskip, the resident finance expert. Been in the industry for about 15 years now. I was licensed for 10 of those years and gave those up to post financial content on social. You can catch me on CNBC and Fox Business Weekly sharing my market views.

Jessie: And I'm Jessie DeNuit, your guide on this journey to financial empowerment. I convinced Jess to start this podcast with me to teach me how the stock market works and I'm taking you along on the journey with me, which means I ask all the questions you are thinking. Make sure we actually understand what is going on and more importantly, I keep Jess away from financial jargon land.

Jess: Yes. Thank you. Today by popular demand and requests from one of our listeners that Jessie met over the weekend, we are going to show you how to analyze a stock. I'm going to take Jessie through my process of looking at a stock as an investment opportunity and all the tools and resources that are available to you.

Jessie: I already see all of the rabbit holes emerging that we're going to go down today. Oh, we're already there. Drink that liquid that makes you smile. Here it is.