A reader sent me this email:
“I was curious about how you go about looking at companies A through Z. Obviously there are many ways to do that and many sites that can be used, but what is your method? Which site do you use for domestic securities? And do you have a list of all publicly traded companies that you go off of?”
For complete lists of the stocks in any country, you always start by going to their stock exchange.
Now back to your question. How to find stocks in the U.S…
Technically, the OTC Market isn’t a stock exchange. But for the purposes of generating this list, it’s just as good. And the OTC Market website is at least as good as NYSE and NASDAQ. Probably better. It’s definitely easier to navigate and much more geared to actually researching stocks.
There are so many stocks in the U.S. it can be difficult to go through them using the various U.S. stock exchange websites.
However, coverage of U.S. stocks is so good by screeners that you'll almost never miss an interesting U.S. stock using one of the better screeners out there.
A good site for U.S. stocks is Morningstar.
They have a screener for paid subscribers that covers just about every U.S. stock. So, if you tell the screener you want just U.S. public companies with a market cap of at least $2 million – to throw out stocks that are inactive but still listed on the screener – Morningstar will spit out a list of 6,267 stocks. That’s more than enough stocks for most people!
And these are just American companies. There are tons of foreign companies traded in the United States. We're not talking about them. Even if we just look at U.S. companies with publicly traded stock we're talking about over 6,000 choices.
My advice is to pick small sections of this 6,000+ stock universe and then work your way through them.
Let's say you're from the state of Illinois. If we do the same search for domestic stocks with at least a $2 million market cap headquartered in Illinois we get 209 stocks. Morningstar says the biggest Illinois based stock has a market cap of $78 billion. And the smallest has a market cap of $2 million. There are more than a dozen Illinois stocks with a market cap under $10 million.
That’s tiny. Let’s go a little bigger.
There are 58 Illinois stocks with a market cap under $100 million. If Illinois was my home state, I'd pretend those 58 stocks were my whole universe for a couple days and just go through that list from A to Z.
This works well for a lot of states. New Jersey has even more public companies than Illinois: 247. The biggest New Jersey stock has a market cap of $170 billion. The smallest has a market cap of $2 million.
There are 130 New Jersey stocks with a market cap under $100 million. That's the size of some foreign stock exchanges!
You might think all these New Jersey micro caps are trash, but they're not.
A couple of these small stocks have high returns on capital. Usually they fill a very, very small niche. Like one product.
Obviously, it's easier to find high quality businesses among big caps. That's how they got to be big caps. They retained a lot of earnings over the years.
So, I'd use a screener like the Morningstar Premium screener and then screen not for valuations but locations, size, etc.
You can screen for a specific industry if you want.
For example, Morningstar says there are 56 publicly traded property & casualty insurers with headquarters in the United States. There are 93 with headquarters anywhere. Some of these insurers are really American but headquartered offshore. Forget those for now. And just start with the 56 P&C insurers headquartered in one of the 50 states. The biggest has a market cap of $25 billion. The smallest has a market cap of $14 million.
Again, 56 stocks is a manageable number. If you thought you had some real insight or ability to learn the P&C business, that's a good group to start with.
An even better group to start with would be all publicly traded P&C insurers headquartered in the U.S. with a market cap under $100 million. There are just 10 of those. Start by mastering that group, then expand to the full 50+ P&C insurers headquartered in the U.S.
If someone asked me what's the best way to get started picking stocks, I'd say go to Morningstar and build a list of all the stocks under $100 million in your home state. Learn them. Then go from there.
I don't talk to management. But many of the executives at these companies are happy to talk to any investor who calls (since no one ever does). If you're local it's even easier. And local small companies are different from local big companies in that they tend to have all of their operations in the same state (often the same building). So, they're very easy to research in a Phil Fisher scuttlebutt sort of way.
Most people could improve their stock picking tremendously if they looked at local micro caps.
Warren Buffett did:
I found some strange things when I was 20 years old. I went through Moody’s Bank and Finance Manual, about 1,000 pages. I went through it twice. The first time I went through, I saw a company called Western Insurance Security Company in Fort Scott, Kansas…Perfectly sound company. I knew people that represented them in Omaha. Earnings per share $20, stock price $16…I ran ads in the Fort Scott, Kansas paper to try and buy that stock – it had only 300 or 400 shareholders. It was selling at one times earnings, it had a first class (management team)…I’d never heard of Western Insurance Services until I turned that page that said Western Insurance Services. It showed earnings per share of $20 and the high was $16. Now that may not turn out to be something you can make a lot of money on, but the odds are good. It’s like a basketball coach seeing a guy 7’3” walk through the door. He may not be able to stay in school, and may be very uncoordinated, but he’s very large. So I went down to the Nebraska Insurance Department, and I got the convention reports on their insurance companies, and I read Best’s. I didn’t have any background in insurance. But I knew I could understand it if I worked at it for a while. And all I was really trying to do was disprove this thing. I was really trying to figure out something that was wrong with this. Only there wasn’t anything wrong. It was a perfectly good insurance company, a better than average underwriter, and you could buy it at one times earnings. I ran ads in the Fort Scott, Kansas paper to buy this stock when it was $20. But it came through turning the pages. No one tells you about it. You get ‘em by looking.
And, of course, Warren Buffett also bought Nebraska Furniture Mart and Borsheim’s. Both businesses are in his home town of Omaha.
One of the first stocks I ever bought was Village Supermarket (VLGEA). Village runs the biggest supermarkets where I live. When I was 15, I worked as a cashier in one of their stores.
I hated the job. I’m not cut out for customer service. But I loved the store. It was very well run.
No one told me Village was a public company selling for less than its book value.
That’s why you need to start with a list you can work through from A to Z.
No one tells you about these stocks.
You have to find them yourself.