One of the most common questions I receive from readers is regarding the source of my stock ideas. I seem to always have a heap of potential value stocks on my to-do list, so perhaps I take it for granted that I come across so many ideas worthy of further study. So on the advice of some readers, this post is dedicated to describing and discussing my stock idea sources.
There are three main categories from which I derive my stock ideas. The most obvious category is that of the stock screener. Using one of these, the investor can cherry-pick stocks with characteristics that are conducive to his style. Value investors would likely filter for things like low P/E, low P/B and net current assets, either separately or even all at once! The stock screener at Google Finance is intuitive and flexible, but my favourite screener is at robotdough.com (warning: I don't think you can use it without signing up), where one can select for a whole slew of very specific financial statement data. I am also a user of Joel Greenblatt's screener at magicformulainvesting.com (again, I believe you have to register to use it), which employs a method of screening that is the topic of his book which is summarized here.
The second category of sources I use to identify potential value stocks is related to the investor sentiment towards a stock. When investors are downright pessimistic on a stock, it will often show up on one or more contrarian indicators. Examples of such indicators which I scan for potential stock ideas include 52-week low lists, analyst downgrade news, and lists showing the stocks with biggest percentage drops for the day/week/month etc.
Screeners and contrarian indicators are useful ways to identify potential value plays worthy of further study, but by far the largest source of my potential stock ideas is the third and most important category: other value investors.