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Ten ways to generate new investment ideas

Generating ideas and gathering information is an ongoing process for our investment team. At Wilson Asset Management, we analyse data from a broad range of sources available to any investor with a keen market interest and a desire to learn. In fact, investors now have an unprecedented amount of information available to them to expand their knowledge base. We generate our investment ideas predominantly from the following 10 sources:

1) Media

The media provides a wealth of information on individual stocks, market themes and economic trends. Our investment team starts each day reading media reports that include local and international news.

Valuable media sources include newspapers (The Australian Financial Review and The Australian), radio (Ross Greenwood’s Money News on 2GB), television (Sky Business News and CNBC) and online platforms (Cuffelinks and Livewire). Market data provider Bloomberg, which is universally used by institutional and professional investors, has free daily email alerts and newsletters available on its website.

2) Market tables and price movements

After the market closes each day, we review share market tables to identify companies with share prices that have reached 12-month rolling highs and lows. In our experience, when a price hits a 12-month high, it can indicate a degree of momentum (particularly in a bull market) that will drive it higher. Conversely, if a company hits its 12-month low, this is often a sign of fundamental company issues and the price is likely to fall further.

If a company reaches its one-year high and we are not already invested, this can be a trigger for us to review the business. Similarly, a sharp share price increase also creates a compelling reason to investigate that stock further.

3) Word of mouth

While company executives can provide a biased perspective, personal and business contacts with knowledge of a company or industry can be more objective. Some of our most illuminating investing insights have come from personal and professional connections such as family, competitors, sell-side analysts and other fund managers.

4) Stock brokers

Stock analyst reports provide valuable and well-researched business insights. If a company is covered by sell-side research analysts, we spend considerable time analysing their reports along with understanding the consensus forecasts. Once we’ve determined what the market anticipates the company will earn, we build this into our modelling.

5) Directors buying

As a general rule, a company’s directors know more than others in the market. Therefore, directors buying shares is a very strong signal about the business. The announcement of a Change in Director’s Interest Notice revealing a company director has substantially increased their holding may prompt us to examine the company further.

6) Observations of a business

Everyday observations can also offer insights into a company. To my wife’s frustration, a visit to a shopping centre becomes a fact-finding mission including quizzing retail staff. Apple’s share price languished for many years until after the release of its portable media player iPod. Around this time, the casual observer would have witnessed thousands lining up to buy the iPod and an increase in foot traffic at Apple stores, however this strong demand was not reflected in Apple’s share price. Apple subsequently sold 55 million iPods, generating US$9 billion in revenue and spurring the share price.

7) Life experiences, behaviours and preferences

Our own life experiences, behaviours and preferences, and those of the people around us, can also reveal a consumer trend, or structural industry change, that leads us to an investment idea.

Last year, I tried to buy a tin of a2 Milk infant formula only to find there was a considerable shortage. This experience demonstrated demand for the product was vastly outstripping supply. This insight was the catalyst to investigate The a2 Milk Company (ASX:A2M) and subsequently invest in it.

8) Company meetings and site tours

Company meetings and visits offer insights into a business such as the quality of management and its culture – both are critical factors to our evaluation of a company (for more, see ‘Why bother with company visits?). Our meetings may also generate investment ideas. For example, an executive’s remark that a certain competitor is giving them a ‘run for their money’ could prompt us to investigate that competitor business as a potential investment.

Any investor can contact a company and ask to meet the CEO or other executives and, while access to executives at larger companies may be limited, micro and small-cap companies should welcome interest from potential shareholders.

Retail investors may also have the option of listening to earnings results teleconferences, giving them the opportunity to interpret the executives’ tone, as well as their words. Larger companies often host investor days for shareholders.

9) ASX announcements

We have found previously undiscovered investment gems through our regular scan of ASX company announcements. Company announcements can be a particularly good source of micro-cap investment ideas during reporting season.

10) Ask a lot of questions

Having a fascination with the market and an inquisitive attitude are indispensable attributes for investors. In my experience, the most successful investors ask a lot of questions and are driven to gain an in-depth understanding of a company, trend or investment theme.

It’s possible to generate a worthwhile investment idea, or a piece of information that leads to one, from a vast range of sources. Some brilliant investment ideas arise from a single, but valuable, insight while others are spawned from a combination of insights. Constantly gathering insights to develop a broader knowledge base and being alive to potential investment ideas is key.

Happy hunting!

 

Chris Stott is Chief Investment Officer of Wilson Asset Management. Disclaimer: Listed Investment Companies managed by Wilson Asset Management invest in A2M.

 

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