Great Businesses + Seriously Mispriced Stocks = What to Research

by Geoff Gannon


One of the most common questions I get from really good investors – not beginners, but people who are dedicating many hours a week to this – is how they can find the next stock to research. Usually, their approach is pretty haphazard.

I’ve mentioned before that I keep a sort of research “pipeline”. I started doing this explicitly when I was writing the newsletter. Quan and I always had 11 stocks on a white board (the one we were researching now plus the next 10 we planned to research).

I think that’s a good approach. But, it’s not the answer most people are looking for. They want something more like “how do you create a watchlist in the first place?”

Today, I wrote a couple articles at GuruFocus discussing the two filters I think are most effective at screening for stocks to research next.

I’ll give you the boiled down version here.

Research the stocks that at first glance seem especially likely to be:

A)      Great businesses

B)      Seriously mispriced stocks

Usually, they’re not the same thing. So, on the member site we’ve recently had write-ups about Dunkin Donuts (DNKN), NIC (EGOV), etc. Those are what I’d call “great business” ideas not “mispriced stocks” ideas.

A great business idea is usually something that appears to be non-cyclical, highly predictable, doesn’t require capital to grow, faces little competition, and seems easy enough for you to understand its durability.

What’s a “seriously mispriced stock” idea? It’s something messy, complicated, cyclical, small, unfollowed, boring, opaque, etc.

I’m very selective about which stocks I buy. And – if I’m being honest – I tend to really want to pounce when I see a little of “A” plus a little of “B”. In other words, I don’t just want to buy a great business that is recognized as such. And, I don’t just want to buy a special situation. I want to buy a special situation involving a great business.

For a list of potentially mispriced stocks, I recommend bookmarking these two pages:

Clark Street Value (A Special Situations Blog)

And

Insider Arbitrage: Upcoming Spin-offs

The last point I’d make about looking for “seriously mispriced stocks” is to avoid what the super investors, gurus, etc. own. Although we think of value investors as standing apart from the flock – most of the stock ideas people bring me are actually already popular with value investors as a group.

In fact, many people bring me ideas they first learned about from some well-known value investor’s presentation.

Value investing shouldn’t be crowd following of just a different sort of crowd. In great enough numbers, value investors become a sort of crowd of their own. And it’s often more comforting to crowd into the same investments as the people you look up to.

Is that a good idea or a bad idea?

I’d say if one value investor you know likes the stock – that’s great. Go for it: ride his coat tails.

But…

If five of them are all owning it at the same time – in my book, that’s a minus rather than a plus.

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