An Insight into My Research – Background Analysis

I thought it would be an ideal time to discuss some of my researching methodology and analysis techniques so that you all can get a better idea of how I chose my investments. I will break my investment approach down into a number of separate posts which will be published over the next few weeks. For today I am focusing on the very first step which is the background research I conduct into the company.

Once I have found a company that I am interested in or has what I believe to be good future potential I undertake a significant amount of research into the background of the company. This normally involves reading past ASX announcements, broker reports, news articles and investor presentations. Luckily for me most of the stocks I research have been listed for around 4 to 8 years so it only takes a couple of days to wade through all this information. For both of my current investments (OBJ and MHM) I have read and taken notes on every announcement released since their listing.

I know this may seem extreme, however, it helps me understand where the company has been, where it is now and where it plans on going in the future. For companies that have been listed on the market for a long time or have undergone a significant restructure I normally only read from this point forward. An example is Northern Star Resources (ASX: NST) who acquired Paulsens Gold Mine in 2010. Prior to this the company did nothing of note (in my opinion) so I only spent a small amount of time reading over these earlier announcements. That said if I believe information and a further understanding of the company’s past is required then I commit the time to read it all.

After reading about the company I have normally developed a list of questions and concerns that can affect my investment decision. In particular, my research can help highlight poor management, a failure to meet deadlines or targets or a general chopping and changing of the company’s activities on a regular basis. I will also be better able to understand the company’s future potential from these announcements and what their “vision” is. For example it may highlight that the share price has been depressed for many years due to poor management. However a new senior management team could have been installed six months ago and acquired a project that is moving towards production. This can provide an opportunity as the market may be pricing them at a discount due to the previous management and their old projects.

After I understand the company it is important to do further research into the industry and associated partners. This is particularly evident in the bio-tech space where there is a steep learning curve in regards to understanding the link between large pharmaceutical companies, their smaller partners, the approval processes and timeframe to development. For example with my stock OBJ Limited case we are dealing with three partners, two of which are unknown (due to confidentiality agreements) and as a result links need to be drawn between potential partners to get a clearer picture.

For stocks in the resource sector this analysis can involve looking at nearby mining operations, other similar companies listed on the ASX and other exchanges and considering the future demand of the commodity. This allows for additional analysis and comparisons to be made between companies when I finally proceed to the calculations and forward projections part of my research.

Finally the last part of background research I undertake is into the senior management team and Board of Directors. With Google and Linkedin it is very easy to gain an understanding of what each person has done in the past, the success they have had and any failures along the way. It is important to look for different sources other than what the company tells you because naturally they will only highlight the positives. Now just because a manager may have failed with a project elsewhere does not mean the company is immediately removed from my list of potential stocks. I am more concerned about repeated failures, illegal dealings and anything that indicates that the manager just jumps from one thing to the next with little considerable for shareholders.

As you can see the above does involve a significant amount of time and after starting with some advice from Warren Buffet I am going to conclude with some of my own. Don’t worry about the thought of wasting hours and hours of research only to find out that the company is a dud. It is better to waste 20, 30 or 40 hours of your time than lose all of your money in a poor investment. Sometimes it feels like you have wasted all that time researching a stock only to conclude it is not a good idea to buy, but you should take this as proof that the research is worth doing. In the long run you will be better for it!