Stock watchlist is simply a list of stocks that one wants to buy when the conditions are right. Buy conditions can be triggered by a short-term company issue or industry specific downturn, but many times they can also be triggered by a broader market correction.
My watchlist contains stocks that I've already researched and interested in buying at sometime in the future when they are trading at the right valuation or price.
As part of my stock watchlist, I track the fair value, P/E multiples, and 52 week movement of such stocks to determine when they are prime for a buy.
I use MS Excel spreadsheet for my watchlist and have conditional formating setup that would highlight a stock when it enters a buy condition such has fair value.
Having a stock watchlist helps me take advantage of good buying opportunities when they arrive and minimizes the risk of falling for bad stocks or buying at the wrong price.
Think of stock watchlist as a shopping list that you take to a store with you and the price of each item is already predetermined by you and you would only buy the item if it is on your watchlist and at or below the price that you have previously determined to be a fair price/value.
How many stocks should one have in a watchlist?
It's really a personal choice, I like to keep somewhere between 5-10 stocks in my watchlist at all times. This gives me an ample choice of basket of stocks to buy from when the market dips or any of them meet my buy conditions.
What are buy conditions?
Buy conditions are the valuation and dividend specific requirements that I've set for all the stocks I buy. Valuation means how the stock is valued when compared to broader market, its peers, and future growth prospects. Is the stock cheap or expensive?
Dividend specific requirements have to do with whether the stock has enough yield to satisfy my buying minimum yield requirement (normally 3%), and has sufficiently low payout ratio for the yield to be sustainable and grow over time. Also whether the stock has a long history of paying dividends and growing them as well.
Future prospects are growth prospects of the underlying business. For example, are sales and profits growing? Are margins increasing or decreasing? A shrinking margin would imply more competition from competitors.
How do you know if a stock is cheap or expensive?
In order to know whether a stock is cheap or expensive, you need to know the fair value of the stock. Fair value takes into account many factors, such as future cash flows, historic and forward P/E multiples, peer company comparisons, estimated earnings growth, etc.
What I've found is that there is no perfect way to value a company or to determine its stock's fair value as there are literally hundreds of metrics that come into play. Also, depending on the industry the valuation criteria and metrics could be completely different. For example, REITs are valued against their FFOs (Funds From Operation) and not earnings and financial companies such as banks are valued using their book value.
Fortunately, for most investors the hard part of determining fair value is already done by numerous analysts who cover their specific industries and companies. They are the experts and follow every little financial details that is made available by company management.
The result of these analysts work is available for public to view and use as part of analyst's reports and also integrated into various tools and websites.
The problem is that there is just too much information out there and it is easy to get lost.
Therefore, I like to limit my valuation and fair value research to three different sources and a total of four methods. This allows me to have sufficient diversification in determining fair value and valuation while not overwhelming with information.
How do you determine a fair value of a given stock?
I use four methods that are spread across the following three valuation tools or resources:
2. CFRA Reports
Let's take an example of determining fair value of Intel's stock, stock ticker INTC.
First we would use the FastGraph tool. There are actually two methods within the FastGraph for this purpose.
FastGraphs Method #1
The FG method #1 uses analyst estimates for future earnings to determine fair value. In the graph below, I'm using next year's earnings to determine fair value.
Per the FG, INTC has a fair value of $42.75 on next year's earnings estimate and the stock is currently trading at 35.77. That's about a 19.51% discount to fair value.
FastGraphs Method #2
In the FG Method #2 we use what is called a Normal P/E multiple to estimate fair value of a stock. A Normal P/E is determined by a P/E where the stock has been trading within a period of time. In other words, it is the P/E that the stock normally trades at.
We would use 5 Year Normal P/E as that gives us a good mix of historical P/E trend while still keeping it close to the current time frame.
A 5-Y Normal P/E of INTC is 12.9 which means for the past 5 years, the Intel stock has been mostly trading at or around a P/E of 12.9.
So, based on this normal P/E, we see the current stock prices is just below the fair value of $36.77. That's a 2.80% discount to current price.
Therefore based on a 5-Y Normal P/E , the Intel stock is only slightly at a discount.
CFRA S&P Global Report
CFRA reports are from S&P Global which is an independent stock analyst company. They recently changed the name to CFRA from S&P IQ.
Below is a snap shot of analyst reports available at a brokerage. I used Fidelity as an example here. As you can see, there are about 13 different analyst reports on this one stock.
It could be quite daunting or confusing to go through all of them and then try to decipher all the data.
I've looked at all these reports and have found CFRA report to be most comprehensive and to the point in estimating a fair value. You should be able to find these reports under the Analyst Reports section of your brokerage account. Access to these reports should be free from the brokerage account.
Here is a snippet of Intel's CFRA report. Per this report, the Fair Value of Intel's stock is $39 and the Fair Value Rank is 4 which is pretty high which is CFRA's proprietary quantitative ranking model. A rank of (1) implies most overvalued and a rank of (5) means most undervalued.
Therefore, per CFRA Intel stock is currently close to being most undervalued with a fair value of $39.
|Source: CFRA S&P Global|
MorningStar has their own proprietary method of determining fair value and they currently have a fair value of $31 for Intel stock
Note that the fair value information on MorningStar website is only available to premium members which is currently running at about $199.00/year. It's a bit expensive.
I was able to get this premium membership for only $60 for the entire year. I will tell you how later in this post.
Alright, so now we have gathered fair values from three different sources using four methods:
FastGraphs Method #1: $42.75
FastGraphs Method #2: $36.77
As you can see it's quite a wide range of fair values/prices that we have obtained from these broad range of valuation methods and tools. They all have their merits when it comes to which metrics they are using to determine the fair value. Some are more conservative than others.
What I do is take the average of these four fair values and this average then gives me the best estimate coverage for fair value across the four different valuation methods.
The above process gives me a combined average fair value estimate of $37.38 for Intel's stock.
Again, this is just my way of determining a fair value of a stock and it has worked well for me. You can choose whichever method or tool you like. I don't think there is any one right method.
How much does it cost to subscribe to the above investment resources or tools?
FastGraphs is a Fundamental Analysis tool and probably one of the best tools I've used for investing. It's simple to use but at the same time very powerful. It is one tool I cannot live without and would not mind paying for. Fortunately, FG is not too expensive when you compare it to some of the other tools available on the web.
It costs me $9.95/mo for basic subscription and I started using it few years ago. They have recently increased the basic subscription fee to $15.95 (I still pay the old fee) which is still pretty cheap compared to other tools. You can also test drive FG for free for 14-days before deciding if it is right for you.
CFRA reports are available for free from all major online brokerages and should not cost you anything to access them along with many other analyst reports. So check your broker's Analyst Report or Research link.
MorningStar's premium subscription costs about $200 a month. You can just register at their website and use it for free but it would not include fair value estimates and many other features that are only available to premium members.
I got their One Year Premium subscription for $60.
Here is how:
1. Register for free 14-day subscription, you have an option to cancel it at the end of 14-day trial.
2. At the end of 14-day, cancel your trial subscription. They will try to offer you a discount here, you can take it or do what I did. See step 3.
3. Wait for the phone call and/or deeply discounted offer to arrive in mail. Can take a few weeks.
4. Call the customer service and claim your deeply discounted offer.
In step 2, to cancel subscription, I had to call them as there is no online method to cancel it. It seems like a pain but it wasn't for me. I was quickly able to talk to a customer rep person and when I told them that I wanted to cancel my free subscription, they right away offered me a premium subscription for a reduced price of $9.95/mo, that's $120/year.
$120/year seemed like a great deal at the time as their premium subscription was running for about $260/year. This is back in April, so not too long ago.
Still, I didn't want to pay $10/mo, so I told them it is still too expensive for me for the value I get. Therefore, I went ahead and cancelled it without any trouble as they were not too pushy.
What happened next is that I started getting calls from Morningstar, though I would not answer them. It went on for 2-3 weeks and then one day in mail I found a post card from MorningStar that had a special offer for me of 1-year premium subscription for $60.
That was a deal I couldn't say no to. So, I called them, gave them the promotion number on the card and my credit card information. Within five minutes, I was logging in as a premium member. They charged my credit card with a one-time fee of $60 and now I'm set for a year with a premium membership with access to all the premium features and data.
So that was it, from a standard $260/year down to $60/year membership and all it took is some patience.
I can't guarantee if they would offer the same $60/year deal to you, but you have a better chance of getting a deep discount when you cancel your free trial. And if you are really patient, and give it a few weeks, you may even get the same deal that I got. Good luck!
Having a stock watchlist is very useful as it helps you get ready to buy a stock when conditions are right. Start with a a small list and then spend some time learning about those stocks and figuring out what prices or conditions you want to come true before you would actually buy them.
Well, I hope you learned something new from this post and found it to be useful.
Disclosure: I am long INTC.
Disclaimer: Author of this article is not a licensed/registered financial or investment advisor and does not provide investment advice. Any mention of stock names/tickers in this article or website is not a recommendation to buy or sell. This article is for informational purpose only. Full disclaimer can be read here: Full Disclaimer