WIN 2016: How professionals generate investment ideas

Fund managers offer expert guidance on selecting stocks

WIN 2016: How professionals generate investment ideasinline-block

At the Parker Center’s Women in Investing (WIN) 2016 conference, investment managers from sponsoring firms shared insights on how they identify the most promising stocks for investment. 

At the panel discussion on November 18, fund managers and analysts advised attendees to begin by looking at a broad area of interest, such as an overall asset class, industry sector, or geographical region, then using screening tools such as Capital IQ or FactSet, to narrow the group down to the most attractive selections. 

The behavior of the overall economy can significantly influence investment ideas, said panelists. So, taking a look at the impact that recent macroeconomic events, such as the U.S. presidential election, might have on any of these stocks is important. Panelists advised students to always think about the big picture and how events might affect different portfolios. 

When looking for potential investments, panelists advised paying attention to which companies are hiring. For example, are your classmates excited about working for their employers? These might be promising stocks. 

Once you’ve identified an interesting idea, panelists recommended researching each target investment thoroughly. How does one do this? By talking to suppliers, customers, and competitors and using the company’s product or service, if you can. You’re conducting primary research, panelists reminded listeners, and your goal is to identify two or three things that will drive the company’s business further. 

To identify prospects for short positions (i.e., those that you expect to decline, with the intent of repurchasing at a lower price), panelists recommended 

using either a top-down approach (e.g., looking at macroeconomic factors, such as inflation, unemployment, or consumer spending), or a bottom-up approach (e.g., looking at microeconomic factors affecting specific companies). Ideas offered by panelists include seeking companies that are structurally stressed or that have precarious ownership—for example, those more than half owned by hedge funds. To gauge a stock’s viability for short selling, 

panelists recommended analyzing how it has traded historically, compared with its competitors, and factoring in industry dynamics: is the company’s current trend sustainable? Look for companies that will decline with the occurrence of certain events, advised panelists, such as industry regulations, over leveraging, unpayable debt, or unrealistic expectations. 

These were some of the insights shared by panelists. Some important takeaways for new analysts: Be open to feedback at the beginning of your career, stay open minded about revisiting your ideas, and be ready to continue learning over time. Be able to react quickly, panelists said, as change is happening faster than ever before, and the amount of available information has grown immensely. If you can navigate this environment with awareness and sound judgment, you will do well in your investing career.

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