"Hey! What stock should I buy?!?"

Wouldn't a better question be "How does one identify a good company?"

Like many who post portfolios online, I frequently receive some version of:

“Hello! I have $X. What stock should I buy?”

My honest-to-goodness best answer is:

“How the heck should I know?!?”

I am not you, and neither is any other random stranger on the internet. Everyone must determine their own what-to-buy answer based on goals, timeline, temperament and risk tolerance. Honestly, that is your best path to investing success. The good news is you can discover almost anything you seek online if you are patient, diligent and open minded. It usually begins with finding the right spots to ask questions, exchange ideas and educate yourself. At least that’s how I did it.

I recently received a thoughtful email asking for expanded ideas on stock selection and portfolio management. And truth be told, both are decidedly personal. However, I figure some general musings couldn’t hurt since this isn’t my first time (nor likely my last) getting this request. Before starting though, it is vitally important to put things in context. While I can describe my selection process, it is up to each individual to determine what fits in their own bag of tricks. It’s no different when I read or hear someone else’s method. Take what you like and discard the rest. No hard feelings.

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Here I will try to outline my basic steps for company screens. Sometime later I might take a crack at portfolio management, though I believe that is an even more individual topic. Please remember anything below is specific to my situation only and constantly evolving. I will undoubtedly change this process, maybe as early as the first comment I receive after posting. Frankly, that’s the way it should be. As an investor my greed is miles ahead of my ego, so I am not wedded to anything. I believe there is always a better way.

In my opinion the first step in stock selection is properly framing the task at hand. The truth is we never, never, ever just “buy a stock”. Instead, we become part-owner of what we believe will be a successful company. It is not about ticker symbols, stock prices or your daily portfolio moves no matter how often Twitter suggests otherwise. The goal is identifying businesses worth your research time and investment dollars. That’s it, and you need a trusted process to do it.

To help stay organized, I use a spreadsheet to track my portfolio and the companies within. Each holding and watch list name has a tab with the following:

• A brief description of what the company does. While I don’t need to be an expert in the company’s business, I do need to understand how it makes (or will make) money.

• Historical financial data. I use colors to identify trends at a quick glance. A green cell represents an accelerating metric. Yellow represents something that has slowed more than I'd like and should be watched. Red means a concern (and could possibly result in a trim or sell after considering the context).

• A history of company guides and actual results. These figures are on the top right and are used to determine rough ranges for forward estimates.

• Anything in green text is either the top end of a company guide or the placeholder I am using based on the estimate process linked above.

• The comments down the right-hand side are a running log of my notes on company news and quarterly reports.

Below is my sheet for Alteryx (AYX), which I chose because it has all three color codes for one company. [Please note: This version is prior to this month’s earnings.]

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If available, I will separate non-GAAP operating expenses into its individual components. I don’t have that info above for AYX, but here’s an example using CRWD:

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I realize these sheets might seem like a lot of work, and in some respects I guess they are. But c’mon man, your financial future isn’t worth it?!? In reality though, it is not nearly as bad as it looks. When a company initially hits my radar, it usually takes a couple hours to dump in figures and read the last few conference calls (assuming the numbers pass muster, of course). For stocks I own or watch, it takes 90 minutes or so each earnings report to update numbers and call notes. Things can admittedly get hectic when multiple holdings report the same day. However, I try to manage this by prioritizing my review order on days with more than one release. The three months in between I’m mostly scanning headlines and skimming some regular sources making notes where needed. That’s it. Easy peasy, right?

Not so fast. Every time I gather or update this info, I need to determine what I think of the underlying business. That’s the more challenging and admittedly more important part. As noted in prior posts, most of my recent holdings are Software-as-a-Service (SaaS) companies. The best seem to share some common traits:

• Strong revenue growth (accelerating growth is even better but tough to find).

• A large recurring or subscription revenue component.

• A low capital structure leading to high gross margins.

• Expenses, secondary margins and cash flows moving in a positive direction. That means shrinking as a percentage of losses or growing as a percentage of profits.

• Appropriate customer growth and/or company-issued secondary metrics to support current business momentum.

• High net expansion or retention rates.

• Conference call comments that match the press release numbers each quarter. This is more subjective, but I like to leave the call with at least the same general sense of enthusiasm I felt coming in.

When running a company through this framework, I want a combination of growth, secondary metrics and profit margin suggesting a potentially dominant business. I might accept less profit for higher revenue and customer growth (like CRWD). I might accept lower revenue growth for higher profits (as I did when owning TTD and PAYC). I might accept temporary dips in growth and profit if gross margins hold and I don’t view the declines as harmful to the company’s long-term thesis (like AYX after Q1). On rare occasions I might even find a company that simply overwhelms every metric in sight no matter how you look at it (well, hello there ZM).

The prior paragraph might make you wonder if there is a formula in here somewhere. Sorry to disappoint, but I’ve never found one. As implied above, the metric combinations are endless with very few serving as straight buy or sell signals in isolation. There is some intuitive feel to finding the right balance, and much of it depends on individual preference. In fact, I would argue most final investment decisions lean more art than science anyway. I view it much like field position in sports. Informational screens move the ball downfield, but instinct and experience usually punch it across the goal line. Don’t believe me? Take a second to consider the queasy feeling in your stomach immediately before hitting send on almost any stock transaction. See? Despite all our rational preparation, that final flinch of doubt is often one of the toughest and most emotional moments of all.

Don’t worry. It gets easier as you go (though for most never disappears completely). If you are someone who has yet to find your process, don’t fret. Any structured system should do as long as:

1. It fits your style.

2. It is information based.

3. It makes enough intuitive sense for you to follow along.

4. You have the time and patience to stick with it.

5. YOU ARE WILLING TO PUT IN THE WORK! (Frankly, the other steps are useless if you can not find a way to do this one.)

There is no single “right” way to invest. It is about finding the right way for you. If you see something you like in this article, go ahead and take it. If you prefer something else, use that instead. We all tend to steal a bit here and there as we go anyway. Once you build a system you trust, it becomes easier to not only follow your holdings but also better understand exactly what each one needs to do to stay in your portfolio.

Please note this legwork doesn’t always result in a buy, and it definitely doesn’t guarantee success. I have the scars to prove it (feel free to scroll down to my March comments on WORK for an example). Even so, I am 100% confident this process has improved my odds of beating the market. Remember though, it is customized to me and will always remain a work in progress. I eagerly await the next suggestion that might improve it.

Thanks for reading and good luck out there. As usual, the comments are open.