From not enough coverage, to too much (of the wrong kind), there are some quiet clues to how a stock may perform

If you find that your usual approach is no longer working in the stock market, maybe it’s time to try some new tactics. Here are five that you may not have considered before when examining a potential investment.

How rich is management?

This might seem like a strange question to ask when looking at an investment, but we think it is important. To explain, look at that common question, ‘Why do billionaires continue to work?’ Elon Musk, for example, is worth US$400 billion-plus according to the most recent estimates, but seems to work 24 hours a day running five, six, seven (?) companies. Jensen Huang of Nvidia Corp. has publicly stated that he works as soon as he wakes up, seven days a week, and when he is not working he is thinking about work. He is worth about US$130 billion. Is it wise to invest alongside billionaires? Often, it is. Think about it: These executives don’t need more money. They could retire, sit on their beach or yacht sipping margaritas all day. But they don’t. They work. Hard. That’s because they are not doing it for the money. They want to build something. They want to create a legacy. So, when looking at a stock we always check out the executives’ wealth situation. We want a team that has made money, went golfing for six months, and then decided to get back to building a company.

No analyst coverage

Look for companies that have absolutely no analyst research coverage. At times, this can be a red flag: maybe there is something at the company that analysts don’t like, so do not bother covering the company at all. But no coverage can also create opportunities. Owning a stock with no brokerage talking about it can often work out very well when they do start talking and promoting the company. It is surprising sometimes how little attention some companies get from the Street. IES Holdings Inc., for example, is a US$5 billion company in the electrical contracting business. Despite its stock being up 200 per cent in the past year and more than 20 per cent this year already, it has not a single analyst covering the stock. Zoomd Technologies Ltd. in Canada is much smaller, with its market cap at publication at about $85 million, but you would think that its more than 1,000 per cent gain in the past year might attract at least some attention. But no, not a single analyst.

Going against short ‘attacks’

Some short sellers use a “short and distort” approach, an illegal practice that involves publishing misleading reports about the stock they are shorting. Investors often react to short reports by immediately selling stock. Others see the stock decline and assume the short report is accurate. More selling occurs, and the cycle continues. Now, this can be a risky strategy, as sometimes, a company’s shares will go down a lot, and stay down. There are some famous examples of short sellers actually exposing outright fraud at public companies. These instances get a lot of media attention, but the reality is that many short reports are re-hashes of old news, and the stock decline is often very temporary. Aggressive investors going the other way and buying while others panic can often do well. Clearly, not a strategy for everyone, but it can work.

Companies that never issue stock

When a company never issues new shares, all of its growth is attributed and beneficial to its current shareholders. If a company is self-financing and never issues new shares, its stock typically can do very well. It can be very hard to find such companies, but they do exist. Constellation Software Inc., one of the best performing stocks in Canada over the past 20 years, has the same number of shares outstanding now as it did on its initial public offering. Many U.S. megacap stocks have fewer shares now than they did 20 years ago, so a long-term shareholder actually ends up owning more of the company (if they have never sold). Alphabet Inc., for example, with share buybacks now has one billion fewer shares than it had 10 years ago. Now, issuing stock for capital is the main reason for stock markets to exist. Companies need money. But companies that do not need money often turn out to be better investments. Since finding companies that never issue stock can be quite hard, when looking at a new investment try this: If you cannot even recall the last time the company issued new stock, you may be on to a good thing.

Simple contrarian investing

This is not our forte, not by a long shot, but it can work for many investors. The plan: Find a stock that everyone hates. Often, of course, said stock will be down, perhaps a lot. This increases investors’ anger with the company. Many will sell out of frustration, and give up on the stock. Institutional investors may sell because the stock has declined so much it is too small for them. Or, funds just do not want investors to see that they owned this loser when they report year-end holdings to investors. Such declining scenarios often see employees leave the company and also sell their stock. It can come to a point where sentiment is so bad that no one ever expects the company to do well again. Then, something good happens, and all the sellers are gone. At times, a beaten-up stock can soar just on some simple good news. It happened last week to Walgreens Boots Alliance Inc., a stock that has been in the doghouse for years. The stock had its biggest move in four decades on a sign that its turnaround is making even the slightest bit of progress.

Unlock the Power of Informed Investing with 5i Research! 

DIY investing doesn't have to mean going it alone. At 5i Research, we're your trusted partner in navigating the stock market. Our platform offers comprehensive stock and market research, empowering you to make smart investment decisions. 

• Investor Q&A: Have burning questions? Get answers from our team of experts and fellow investors in our dedicated Q&A section.
• Research Reports: With over 60 meticulously researched Canadian stocks, our reports offer in-depth analysis, giving you the confidence to invest wisely. 
• Model Portfolios, Alerts, Forums, Portfolio Tracking, and Much More.

Take Care,