How to Find Good Stocks

Peter Lynch always says you should buy what you know. If you like Nike sneakers, get some NKE stock. Buy Gillette (G) if you really like the Mach 3 razor.

But most people don’t buy what they know; they buy what they have heard about. Every newbie starts with Microsoft (MSFT). Why? Because everyone else already owns it.

Fund managers do the same thing. With perfect circular logic, they buy whatever the other fund managers are buying. It’s the only way to keep up with rival funds, they claim.

But if everyone buys the same 50 stocks, then market caps go up, the "Nifty Fifty" dominates the main averages and all the fund managers keep buying the same stocks, over and over and over. Repeat after me.

I’m not saying your portfolio shouldn’t be built around sector leaders. But when it’s time to diversify, you need to jolt yourself off the beaten path and look for new stocks in unusual places.

Start with the obvious – everyone buys the leading US stocks, so look at foreign stocks too. Many European, Asian and Latin American stocks trade on the US exchanges as ADR’s (American Drawing Rights).

JP Morgan (JPM) was kind enough to put together a Web site which tracks nothing but ADR’s on US exchanges. Anyone can access it at http://adr.com.

JPM’s ADR site lets you slice and dice the growing list of ADR’s in all sorts of interesting ways. Interested in Irish computer companies? The JPM site turned up CBTSY, IONA and SAVLY. I had heard of all three before, but didn’t realize they were Irish.

If you just want to search by country, pick a place like Singapore and you will find unusual companies you never heard of, like United Overseas Bank (UOVEY), a bank with lots of branches in Singapore and 60 offices overseas too.

I decided to see what Yahoo could tell me about UOVEY. Like many obscure ADR’s, UOVEY didn’t turn up in Yahoo’s database. I would have to contact my broker to get a firm quote if I wanted to buy some.

I double-checked Yahoo’s alphabetical company list just to make sure that United Overseas Bank wasn’t trading under a different symbol somewhere. No luck, but I decided to look at a few other stocks called "United" something, just to see what turned up.

But now I was only two clicks away from one of my favorite stock-hunting tools – Yahoo’s Research lists.

The Yahoo lists are organized by industry category, according to Zacks classifications. They show average broker recommendations for each stock covered. You can see right away which stocks the analysts like most in a given sector (a stock with only Strong Buy recommendations gets a 1.00 average).

A quick look through some software stocks took me to the COMPUTERS-SOFTWARE research list to see which software companies are currently #1.

One word of warning – lots of small companies show up on top of their sector list because only one analyst follows the company. If the sole recommendation is a Strong Buy, an obscure little outfit could suddenly look like a star. But most investors may never hear about it.

The fewer the recommendations, the riskier it is to buy the stock.

Where else should you be looking? The best $70 you can spend on the Web is Briefing.com. Their daily market news and analysis is timely, objective and insightful. If you don’t make enough to cover a lifetime subscription in the first few months, you aren’t reading it closely enough. E*Trade members get part of the service free.

Your next $60 should go into the online Wall Street Journal, which gives you WSJ Interactive, Barrons.com and SmartMoney.com. A Barrons or WSJ mention won’t move stocks the way they used to, but you should know what they are saying about your favorite companies – and the companies you haven’t heard about yet.

Sixty bucks is 1 ½ round-trip trades in a NASDAQ stock on E*Trade. You can afford it.

Find out if your broker offers research from a big-name service. E*Trade offers access to BB Robertson Stephens research reports to its customers.

Finally, there are hundreds of newsletters out there ranging from a few dollars to hundreds or thousands of dollars per year. I doubt that many are worth what they charge. Some aren’t even worth the paper they are printed on, since their principal aim is to entice you to buy crappy stocks which they already own – and can’t wait to sell at a fat profit to unsuspecting readers.

And please avoid any "hot" Web sites you see spammed on Yahoo message boards. That’s like hanging out in a sleazy bar hoping to meet the woman of your dreams. You are in for a disappointment.

However you do it, get your head out of the weeds and stray off the beaten path from time to time. You never know what new gems you will find.