Picking Stocks? Your Brokerage Can Help

If you’re a regular reader of Kiplinger’s, chances are you know some basics when it comes to evaluating stocks. You know that you want to buy low, sell high and hold for the long term, for example, and that a low price-earnings ratio means that a stock is relatively inexpensive. But when it comes right down to it, out of the thousands of stocks trading on U.S. markets, do you really know how to choose ones to invest in?

Probably not. But to be fair, you’re not alone. Take it from Warren Buffett, the Oracle of Omaha, himself: “Most people don’t know how to pick stocks. Most of the time I don’t know how to pick stocks,” Buffett said in a 2019 interview. He believes that most investors—pretty much anyone who doesn’t research stocks for a living—should be invested in diversified, low-cost mutual funds.

We’re fans of a well-diversified core portfolio of funds, too. But part of the fun and challenge of investing is picking great stocks, and if you’re ready to branch out, your brokerage is an excellent place to start your search. “About 84% of investment research done by our clients on any given day is directly related to individual stock research,” says Cory Triolo, head of digital client experience for Merrill Edge. “We want to make that experience as seamless and intuitive as possible.” Merrill isn’t alone in this regard. Lowering fees and commissions isn’t the only incentive brokers are using to lure customer dollars. They’re beefing up investor tools and research offerings, too.

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Where to start? To funnel thousands of stocks down to a handful, investors first must establish a “circle of competence,” says Morningstar investment analyst Joshua Aguilar. “It’s incumbent on investors to familiarize themselves with certain areas of the market. These need to be businesses that you understand and can see where they might be headed,” he says. That doesn’t mean you need to have worked in medicine to buy a health care stock, or that only bankers should look at financial firms. But you should understand the dynamics of an industry—the overarching factors, such as interest rate movements, inflation or energy prices that could affect business, as well as the internal profit drivers for select companies.

Several brokers offer some type of “thematic investing” tool that provides lists of stocks, sorted by themes, that are drawing investor interest. For example, Fidelity’s lists include familiar investing themes, such as pharmaceutical producers, as well as newfangled areas, such as big data, cloud computing and natural foods.

Clients of Charles Schwab, Merrill Edge and WellsTrade have access to lists of stock picks curated by those firms’ affiliated advisers. Merrill Edge’s U.S. 1 and Endeavor lists, for example, are based on the advice of Bank of America Merrill Lynch analysts and investment strategists.

Narrowing things down. Once you’ve targeted a universe of investments to consider, it’s time to take your broker’s stock screener for a spin. No two screeners look the same, but they all function more or less the same way: Users select from lists of stock characteristics, indicating whether they’d like a measure—a P/E, say—to be within a certain range or above or below average compared with peers. The more filters you select, the more the pool of stocks that meet the desired criteria shrinks, effectively leaving you with a short list of potential buys.

Most brokers’ screens offer more than 100 criteria for winnowing your selections. According to our most recent online broker rankings (Best Online Brokers, 2019), Fidelity had 149 criteria, the most of any major brokerage. But you needn’t tick every box. Rather, investors should think about what they’re looking for in a stock and choose a handful of relevant characteristics, says Charles Rotblut, vice president of the American Association of Individual Investors, an investor education group.

Those seeking income from their investments, for instance, might screen for stocks with consistent dividends, high yields, a healthy dividend growth rate and a relatively low payout ratio (the percentage of earnings paid out in dividends). If building a screen from scratch sounds daunting, get started with a preset screen that you find appealing. Virtually every broker offers preset screens; among E*Trade’s are “Aggressive Small Cap” and “Inexpensive Growth Stocks.” From there, begin layering on characteristics or eliminating criteria to suit your needs.

Do your homework. Once you’ve run a screen, don’t mistake your short list for a buy list. Now is when the real work begins. Go to each stock’s page and examine the fundamentals behind the business by poring over the company’s income statement, balance sheet and cash-flow statement. Check the income statement for consistently growing sales and profits, for instance, and the balance sheet for whether debt levels are rising or falling.

Your brokerage may have something like an “Overview” or “Key Ratios” page, on which you’ll find key metrics such as the debt-to-equity ratio (the lower, the better) and return on invested capital (you want it to be high and consistent relative to peers). The sites may provide comparisons to averages among peer firms—Merrill’s site does this, for instance. To see what top executives are thinking, be sure to read the firm’s annual and quarterly reports filed with the Securities and Exchange Commission; they are often available on your broker’s site as well as the company’s web page.

Many brokers provide professional research and stock analysis. Virtually every brokerage offers quantitatively generated research reports, and several offer reports with in-depth qualitative analysis from investment research firms such as CFRA or investment banks such as Credit Suisse. Such reports can be useful for translating the Byzantine language of stock analysis into plain English and may lay out a compelling thesis for or against a stock you’re considering. Rotblut says he likes to use such reports as a gut check. “If I think a stock is undervalued and CFRA analysts say the stock is overvalued, then it’s a sign to stop and ask myself, Did I miss something?” he says.

Stocks that look attractive but you think are overpriced should be added to your watch list. Depending on your brokerage, you can set e-mail or mobile app alerts for when news breaks about stocks on your watch list, for instance, or when the stock’s price moves below a certain level. Waiting to buy until a stock loses some luster may take some courage, but, says Aguilar, it should be easier for investors who have done their research.