IDEA SOURCING

Here are a list of resources you can use to source an idea and/or research a company, and my
thoughts on each one:
1. Materials from Companies
If you do nothing else that I recommend, please read annual reports. These are the best way to learn
about companies. Read a lot of 10ks for a lot of different companies. Read their 10Qs, listen to their
CCs (or read transcripts), and read their investor presentations. A good way to do this is to go find a
hedge fund's 13f then read through the material of the companies they own. Try to figure out the
bull and the bear case and why the fund is holding the stock. This exercise helped me and is a more
organized way to learn about stocks than just searching randomly.
2. Sell-side Reports
It's always important to know what the street is saying about a company. I recommend looking at
Sell-side reports AFTER doing all your other research and making your models. Typically looking at
these reports before doing all your own work will sway how you feel about a company and you'll be
tempted to bring your estimates in line with consensus. Try to find ideas where your thesis materially
diverges from consensus. Then figure out why your idea diverges. If you have solid work backing up
a strong thesis that is material different from consensus, you're on the right track.
3. Newspapers
I strongly recommend that you read at least one newspaper at least once a week. This is the best way
to keep up on news and get updates on events. Other newspapers to read are local papers for major
metro areas, especially if you're interested in specific niches. I.e. if you're interested in E&P, read the
newspaper from Houston. Financial Times is also very good.
4. Magazines
Read The Economist. You don't have to read every article but skim through it. I usually read their
leaders (5-6 main articles), "The World this Week," any special reports, the business section, and any
other country specific things that look interesting. This is probably the best way to stay up to date
on international issues and their writing is usually very well-done. They did a report a couple weeks
back on the history of financial crises and how they shaped the current regulatory system that was
really good.
Read Bloomberg BusinessWeek and Barron's. As you all saw a couple weeks ago, a lot of money
managers read Barron's (as evidenced by the "Barron's bump" on TRIB). These two magazines will
give you tons of ideas, and although they might not do in-depth research on companies they are
great places to start (find a thesis and start digging).
5. Seeking Alpha
There is a lot of crap on Seeking Alpha. There is also some very good analysis. It doesn't take much
to figure out which is which. I recommend reading all of it. It's always good to know who your
counter-party is and why they are either buying from or selling to you. One of you is going to be
wrong. As Marc Cuban says, "Don't force stupid people to be quiet, I want to know who the
morons are."
6. Sum-Zero

7. Investor Letters
I would put these a lot higher, as they have been one of the most useful tools for me to develop as
an investor. However, they are very difficult to find. The SEC has strong restrictions on how much
hedge funds can advertise and has considered publishing returns a form of advertising. Thus, hedge
funds restrict access to their letters to qualified investors. Guys like Klarman (who runs Baupost) sue
people who post their letters without permission. It is possible to find some investor letters and they
typically give a lot of insight into how the investor looks at the world and how they do their
research.
8. Investor Letters and Presentations
These are always good, but be warned: Investors don't typically share their freshest, best ideas with
the public. Don't watch or listen to these in hopes of finding amazing ideas. If you look at the
performance of picks from last year's Sohn Conference, they were below-average (to put it kindly).
Rather, watch and listen to these presentations to understand the way investors think about
companies. Try to figure out how they do their due diligence, what resources they use. Then apply
these techniques and mental models to your own work.
9. Miscellaneous
A lot of investors will publish reports on companies through various media. These are fun to read
and give you insight into their research process. They typically don't publicize when they will be
releasing a report and they usually take positions before they release and sell the reports to the buyside before they release. The stocks usually move dramatically when the reports get released as the
market digests their opinions. Again, read these more for process than for ideas.
Here is a list of resources, I'm sure to miss many very good ones so don't take this as the be-all endall:
Subscriptions:
Bronte Capital
Muddy Waters
Citron
Kerrisdale Capital
Oaktree Capital Management Memos from the Chairman
SumZero
Websites:
StreetSweeper
Southern Investigative Reporting Foundation
Sharesleuth
footnoted.com
wsj
NYT
FT
valueinvestorsclub.com --time-delayed ideas, but sometimes interesting case studies and often in
unusual industries
www.stockspinoffs.com/ --Spinoff calendar
ben-evans.com/ --Tech newsletter

valuewalk.com/ --General
Also good is http://www.marketfolly.com/ which publishes letters from hedge funds and covers
interesting news and commentary regarding public markets.
I'm also a fan of http://basehitinvesting.com/ , which is basically a site dedicated to Buffett-style
value investing (quality at low prices). Lots of informative articles.

SOURCING AN IDEA IN A PARTICULAR INDUSTRY

Pick an industry that you find interesting (ie: retail, commercial cancer drugs, casinos, oil pipelining,
spandex pants lol) and then run a screen with 5-10 comparable companies in that industry, looking
at the basic metrics mentioned above. Then, research the cheaper names and try to understand why
they are cheaper than the others in the space. If you can't find a good reason why one name is so
cheap, you may be onto something. This is one of the best ways to find ideas while taking valuation
into account.

USING A STOCK SCREENER

http://finviz.com/screener.ashx
Look for free cash flow generating names that have a demonstrated history of growth, trading at low
multiples. What does that mean? Some sort of combination of the following (not an exhaustive list):

Gross Margin Above 10% (most of the time if a Company can't sustain 10% gross margin,
there's something wrong with it's basic cost/pricing structure or it's in a commoditized
industry)
EBITDA Margin above 10% (for companies with lower than 10% EBITDA margin, small
movements in margin mean equate to large swings in cash flow)
CapEx as a % of Revenue or EBITDA (ideally low--capital-light businesses are preferable)
Revenue and/or EBITDA growth over the last 8-10 years. Ideally you want to see that this
business's Rev/EBITDA have grown to some degree since the recession. Don't want to own
a business that peaked in '07 and never recovered
Return on Invested Capital over 5% (low expectations for this one, but the higher the better)
Industries: pick what you know. If you don't understand an industry, stay away. Also, some
industries (fin. services) are not relevant per the metrics listed.
Other:
o This is not necessarily a screener item, but always take a quick glance at what the
company did in 08-09, and then from 09-Today. Is it cyclical? Countercyclical?
Neither?
o Organic growth: if possible, get a sense of which growth is "organic" (incremental
without the use of significant CapEx or acquisitions), and which growth is
"inorganic." For retail, for example, this would be the "same store sales growth rate."
For almost every unit-based business (where you have "boxes" like stores or clinics
that generate cash flow) you can find some sort of organic growth measure.

o Revenue growth is less meaningful when it comes as a result of gross margin

engineering (aka selling products cheaper to boost sales, thus taking a hit on margin).
Then sort by multiple and start at what's trading the cheapest. EV/EBITDA is probably a good
place to start, but if it's a capital intensive business look at EBITDA - CapEx. Do not use P/E at the
screening stage; instead use EBITDA, ROIC, and EV / EBITDA. Heres why:
Net Income affected by many things including leverage. Companies in the same industry
might have different capital structures, making their EPS, ROE and P/E non-comparable.
True, as an equity investor, these issues are important, but at the "screening" stage you
should be more focused on figuring out, "which are the highest quality businesses in this
cohort?" instead of "which businesses have the most optimally levered cap structures?".
Including EPS and P/E into the mix will introduce variables related to leverage that cloud
other variables like margins and growth. Figure out which businesses look good on an
unlevered basis (and EV / EBITDA basis) and then once you think one or two look
attractive, make an isolated judgement on whether its capital structure is appropriate for the
company (can the company sustain debt? How much debt? What would that debt be used
for--dividends, acquisitions-- and how would that positively impact me as an equity-holder?)