08/30/2025
As a financial advisor who manages client investments in-house, what is my process for evaluating individual company securities?
First, I think itās important to take a step back and get a good look at stock return data over decades. Remember that according to academic research, only about 3 out of 7 company stocks end up outperforming 1-month Treasury bills. Additionally, during the period studied (1925 to 2023) a slight majority of stocks produced negative total returns for their owners. Sobering stats, no?
Second, prudent portfolio management demands and statistics show the benefits of diversification in an investment portfolio. Before you hit that Buy button, make sure you donāt already have too much invested in this particular company, industry, country, etc. (Weāll cover what I consider true diversification in a later post). Relating this individual stock to your total portfolio will help avoid over-concentration.
Now that weāve covered the above, whatās my equity analysis process?
To begin, are revenues increasing and projected to increase? Itās harder to grow the bottom line when the top line isnāt going up. Who wants to squeeze more pennies of profit from the same revenue dollar? Similarly, is the industry TAM growing? If so is the growth due to a fad or trend or customer loyalty that could change direction quickly, or is it more entrenched with its customers?
Next, how much debt does the company have? This is a trickier question due to the varied kinds of liabilities that companies can incur. However, by selecting investments with less net debt (debt minus current cash and cash-equivalents) we might be able to give ourselves a cushion during harder times. I believe this leads to less-risky portfolios as a whole.
Third, is management compensating themselves with shares to the significant detriment of the average Main Street Investor? This is a tricky area that is prone to management manipulation. Before the post-2000 Internet bubble blowout, management was able to hide the true expense of executive compensation by diluting shareholders. Monitor shares outstanding and share-based compensation. I look for companies that keep their shares outstanding at a relatively stable level throughout the years, or those that are even shrinking their share count. Remember when the number of shares increases your share of profit pie decreases ā¹. There is nothing intrinsically wrong with share awards for company employees, but they must be transparent and the share performance should reflect the company success.
Lastly, thereās nothing like some good old fashioned street research and channel checks. What do I mean? If possible, test the product or service yourself. Ask your social circle for their experiences with the company. Read online reviews, especially current consumer forums. Visit the company and talk to management and other employees. Listen to earnings calls, especially the analyst questions and managementās responses.
In sum, investing in single equities is extremely risky and you should always be prepared to lose all of your investment at any time. The rules above are not hard and fast, only generalities. Build your process, understand your prejudices and biases, and remember to always diversify. Happy Investing!
