To Pick a Winning Stock Just Listen to Small Talk
KENNETH JANKE remembers several years ago when his adult son tipped him off on a good investment. His was using an automated teller machine at a branch of Columbus Bank and Trust Company in Columbus, Ga. "Hey Dad," he casually shouted over to his father. "You ought to look into this bank. They're growing fast and doing very well."
Mr. Janke, who lives in Michigan, far from the Georgia-based bank, took his son's advice. Although unfamiliar with the bank, he tracked down an annual report and several independent investment house studies. The bank it turned out, was a subsidiary of Synovus Financial Corporation, based in Columbus, which owns a number of regional banks in Georgia, Florida, Alabama, and South Carolina. And there was "a kicker," says Janke: Synovus, listed on the New York Stock Exchange, owns 80 percent of Total System Services Inc., one of the world's largest and most-successful credit-card processing companies and it has been a consistent money-maker for investors. As president of the National Association of Investors Corporation, Janke is keenly attuned to the nuances of the financial market. The NAIC, in Madison Heights, Mich., is a national organization of investment clubs. But Mr. Janke says that how he "discovered" Synovus for a "satisfying' investment of his own illustrates that you don't have to be a big-time investor to pick a winner.
Janke is not alone. Philip Caret, founder of Boston-based Pioneer Fund, a mutual fund, says he profited from an investment in North American Van Lines after noticing so many of the firm's trucks on interstate highways.
Former Magellan fund investment guru Peter Lynch describes in his popular book "Beating the Street" (Simon & Schuster), what happens when you listen - or don't listen - to family small talk.
Sitting around the kitchen table, his wife asked if "Clearly Canadian," which makes a carbonated water-based soft drink, was a public company. Mr. Lynch didn't pursue the matter, something he regretted when the stock price shot from $3 per share to just under $27 a share in one year.
But Lynch did better with the Body Shop, a British-based company that sells environmentally friendly cosmetics and bath products. On a visit to a mall, Lynch writes how he watched his three daughters head directly to the Body Shop. Lynch followed, and noticed the shop was crowded and well managed. He subsequently became a big booster.
"You can get investment ideas from almost anyone or from almost anywhere," Janke says. "But once you get the idea, you have to do your homework."
Janke says he sees at least five basic "homework" steps before investing:
*Track down industry studies on the company, such as a Value Line report, available for free at many public libraries. Brokerage houses often publish reports on companies. So do newspapers and magazines.
* Ask the company for its annual report. "Look at the last two or three reports to see what the management's objectives were and if they met those objectives," Janke says.
*Check to see if the company is growing and growth-oriented. Growth can, in part, be identified by such factors as rising net sales; rising net income; rising earnings per share and steady dividends.
*Identify whether the company's growth is "management-growth" or "product growth." Product growth could be temporary, such as the spectacular, but short-term success, of the hoola hoop, he says. But management-growth sustains itself over time.
*Finally, ask yourself how an investment wizard such as Warren Buffett would view the company. Buffett would probably want the firm to demonstrate consistent earnings prowess, have little debt, have a strong management, and have a business objective that has a certain built-in simplicity.
Understanding the firm's product or services is crucial, particularly for a new company, say market experts.
"You must ask yourself, is this a unique product or service that clearly - through [your own] first-hand experience - has a leg up on the competition?" says Robert Natale, editor of the twice-monthly "Emerging & Special Situations." The financial publication, published by Standard & Poor's Corporation, looks at innovative, new companies. Examples, he says, include: Boston Chicken, Snapple, and the Gap.
Finally, asks Mr. Natale: "What are the finances of the company? Are its ambitions large? Do its finances match the ambitions?" If the answer is yes, then the firm may have investment potential.