Investor tutorial: How to do initial research on a stock

Hey, how's it going? So you want to research a stock. So in this video, I'm going to walk you through exactly what kind of information you want to be looking for. We're going to look through three different sources. So the first is the investor presentation and the investor documents. Second is the SEC filing, so the 10K primarily. And then the third are the earnings release and the earnings transcript. And I'm going to walk you through where they are and the type of information that you want to specifically focus on, which between the three of them will help you get up to speed on the story of the stock. So let's get right into it. Let's take a look at this company, Paylocity. We want to go to the investor relations page of the company's website. And that's where the company will put together all the different information for investors, whether it's press releases, earnings releases, presentations, filings, and so forth. This is all the investment related information that you want to look at. So first step, I like to look at the investor presentation first because that's the quickest summary of the company. It gives you the pitch and it's just an easy way to get up to speed. So let's look for the investor presentation here. It's probably under investor presentation and we got our presentation here. So what do we look for? The nice thing about the investor presentation is it gives us a quick overview. So here we know that it looks like the past couple of years have been growing quite quickly. We can see that it's really accelerated this year, 39% growth, but it does seem to jump around a little bit. We got 20, 13, 34, 36. So the growth rate is a little bit lumpy, just something to keep in mind. But generally this is a pretty high growth company. And right here, you can see that we got our TAM, right? It's addressable market, right? They have an $18.6 billion TAM, but I believe their revenues are close to 273. So it's essentially saying, hey, we have a big market for this company to expand to. Now beyond the business overview, there's also sometimes information about the competitive landscape. So this is also useful to keep in mind as we dig further into the industry and the company. A little bit more there on the competitors, what they believe is our competitive advantages, why are we growing? This stuff is the growth strategy for the company. They're saying we get a lot of growth from our referrals. We have great sales reps and so forth. What I like to go down to is long-term financial targets. If we were to buy this company and be owners of this business, we want to understand what is the growth trajectory or how will this business perform in the future? And a lot of that depends on what the company sets out for its own targets. We can see that revenue growth, they're targeting about 20 plus percent. And over here, we have our different margin targets, which are telling us how profitable they believe the business will be. So free cashflow has been growing at about a 10% CAGR. So that's compound annual growth rate, which essentially means it's about 10% per year. Adjusted EBITDA is growing 21% per year. So just based off that, right, if we're at about a 20% target growth rate, so they're basically keeping expenses in line. So I should expect earnings to grow about 21%. I don't know if that's going to be the same for earnings per share, because I don't know how many shares that's involved. And I can see that free cashflow is growing slightly slower. So that does say to me, they're probably investing a lot. Maybe it's CapEx, which is capital expenditures. And that's why free cashflow is a little bit lower. So already this tells me this is a growth company. It's probably early in its growth because they're investing a lot. There's probably some way to go for margin. I can see margins are improving. So that's a great sign. And so that's the general takeaway. We have an overview of the financial targets, a little bit about the market. But if we actually want to know about the business, the best way that I suggest, and this is Kuifin right now. So this is my favorite financial data product, which is great. When you're looking at companies, they go about and they present at these bank conferences, right? So we see JNP Securities, and this is where they present an overview of the business to investors. So this is really the place to start. After I got a high-level presentation, I'll basically read through this transcript and I'll get a pretty good sense of the business. It's the CEO. He's going to give us an overview of the business. He's telling us about the market, what kind of companies you serve, and a lot of overview information. So this is a really great place to learn about the business from a high level. I can tell you from the transcript that this is a payroll company. They sell software. They sell to small businesses. It's generally a subscription. They hire sales reps. They use other referral channels, and that's how they grow. You read this and you get an understanding of what the business does, the growth strategy, and the long-term financial targets, which gives you the investment thesis, which means like, okay, if I invest in this business, how much is it going to grow? That'll determine what kind of returns should I expect. I expect that this company should grow at about 20%. So we can quickly look at the performance over the past, say, 10 years. The stock price is growing at 26%. They keep this up. We're looking at something that could grow the same rate. So that's sort of the link between investment performance and the company performance at a high level. Now, say you want to dig in a little bit deeper, understand the business so you get more comfortable building conviction of whether or not you want to invest in the company. The next step to go is the 10K filing. It's an SEC filing, so we can go here. I can look for annual filing, just filter that out. All right, so we have our annual filing. It's a pretty comprehensive report that it'll give you the financials, it'll give you risk, as well as a bunch of other notes on the company itself. So a couple sections I want you to focus on. The first thing is the business. Get a good overview of what the company does, what are its products, who are its clients, how does it grow? We see our strategy, our products. That is great to give you a general business overview. Now, second thing is risk factors. This tells you all the different things that management can think of that could be a risk for the business and for the value of the stock. The point of this is you get the full spectrum of risks. What I'd like to focus on are risks that happen outside the business that could impact the performance. If we look right over here, we have the number of our client's employees. It's not something that they control, but that does tell me their client's employees determines their growth. That means it's exposed to the job market. Another thing is interest rates and inflationary pressures also has an impact to the business. New products. The risk section can give you a sense of what will impact the future performance of the business. So here already, I know it's probably new products, clients, employees, and potentially interest rates. The next important thing is the management discussion analysis of financial conditions. So this is a commentary from management about the business. And generally, filings are written by lawyers, so it has to be quite accurate. It gives you the management's assessment of the business and its prospects. It gives you the drivers of the business. So it's client count growth, meaning the number of clients they have, and in turn, the employees they have, the retention rate. They give you an understanding of the metrics that the company is using, which then helps you interpret the earnings released. Here, they talk about how we measure recurring revenue or what are our revenues, which gives you an understanding of what this business does, what are the costs of revenues, what are the different expenses. By understanding all the different expenses and the revenues, it starts to build a picture in your head of what this business really does, and what is this business model. And the purpose of that is so then you get a better understanding of what are the potential factors that might impact that. We're talking about revenues driven by client count. So client count is probably related to sales, as well as the number of employees that their clients are going to have. That gives me an idea of how the business is going to grow. And then with an understanding of the different expenses, I have a sense of what's the earnings going to be in the future. Beyond MD&A, there will be the financial statements. Here we have the balance sheets, we got the income statement, and the cash flow statement. When you're going into the notes for those financial statements, you'll get an overview of those numbers. This is important as you dig into the company and really do your due diligence. It gives you an understanding of how they account for different costs and different accounting metrics that are posted on their financial statements. Now that we know about all these different metrics, we're ready to go and look at the earnings release. I'm just going to pull up the financial results. Generally, they'll give you a bunch of metrics to begin with. So here I can see they're starting with revenues, recurring revenues, and then we got operating income. So that's why it's important to first get an understanding of the different metrics that they use and why they use them. With that knowledge, you understand what it means. The second part is the business outlook. So the business outlook or financial guidance is management's expectation. So fiscal 2023, we believe 1.156 to 1.61. So that's what they're telling Wall Street is going to be the revenues. Now why that's important is because that determines the expectations of the company. If you look at almost all stocks, they reflect expectations for the business. The way that you can look at that is Wall Street's estimates for the business. So here we have sales, NTM, which means next 12 months, expected sales for the business. And we also have stock price here. You can see generally the stock price does tend to follow earnings, which makes sense. The value of the company generally increases as its earnings power increases or the amount of earnings that it generates increases. If we look at EBITDA, which is a cash earnings metric, we can see points in time where the stock price has reversed or accelerated up based off earnings estimate changes. In 2020, there was a big contraction in earnings estimates. We see the stock price went down during that period and then rocketed, of course, back up when earnings really went up. You can see that it had sort of this boom and bust right now. So that suggests something else going on with the stock price, which actually makes it interesting right now. But generally speaking, you can see that earnings estimates tends to go up alongside the stock price. Now we've gone through the earnings release. I'm going to walk you through how to read the transcript to help you to read it quite quickly. So the first part of the earnings transcript will just be commentary on trends, right? It's usually a rehash of the press release and maybe just some color like this product led to this sort of growth. And that's helpful to understand what's going on, what are the recent trends of the business, why is it growing really fast or really slow and so forth. That's the first part of the call. Then you get the questions, which are from analysts. The questions tell me what investors are thinking about right now. Okay, we're seeing a little bit of weakness from SMB companies and software vendors. This is around February 2023. There's been a lot of talk about recessions, a lot of layoffs. That probably indicates that investors are worried that maybe growth will slow down. That makes me think that's probably why the stock has been going down. And we can see what other questions people are asking about product use cases, what's the demand environment like. So the analyst question gives you a sense of the story of the stock rate. When I look at the stock, I can see that earnings estimates are going up, which means that business trends are doing pretty good and the company has been guiding to positive earnings growth, but the stock price has been quite volatile. So it says to me that there's probably some concerns of the demand environment going forward. And so we'll get into that later. How do you actually dig into that? But that's the overview of how to use the earnings call. This can probably take you anywhere between 20 or 30 minutes or up to an hour. But now we understand the company's long-term targets. We know its business model. We have an understanding of what the business does, how it makes money. We have a sense of recent trends and some sense of the sentiment in the stock. And so that's how you get the fundamental information. Now you can start to make a determination of other questions that I have. Is there anything that I want to start to analyze? And generally speaking, now I should have a decent sense of what will make the stock move. And I'll go into that in a different video. But once I know what makes the stock move, then I can focus my efforts on further research to get confidence on making a judgment of where the stock will go based off that specific factor. That's generally how you research a stock from an analyst's perspective.