No jargon, no stress: How to analyze a stock in just two hours

• First, understand the stock’s price action in the past using a site like Koyfin.

• Then, investigate the industry and look at its three most important drivers: growth, quality, and valuation. Use StockRover to crunch the numbers and the company’s annual statements to make sense of them.

• Last, make sure you check the company’s technicals and assess what macro factors influence its price. Sites like Portfolio Visualizer and Finviz will make this a piece of cake.

Some investors devote hours and hours to finding and analyzing their next investment, poring over balance sheets and crunching numbers to avoid picking stock market duds. But you don’t need a lot of time to sort the potential winners from the losers. Here's how to get the job done in just two hours.

Review the stock’s price action: 30 minutes So you’ve sat down with a stock in mind. First, ask yourself these three questions:

• How has the stock moved over the past five years?

• How has it performed versus the overall market?

• Has it outperformed its main competitors?

See, the historical price action of a stock reveals how the market feels about it. You should also pay particular attention to big price gaps, which could reveal significant events – and interesting opportunities – in the company's lifecycle.

So log in to your favorite charting tool (I like Koyfin), enter your stock's ticker, and take notes whenever you see jumps or collapses in its share price. Then, spend a few minutes on Google to work out what was going on around that time.

Investigate the industry: 30 minutes A significant portion of your stock’s returns will be influenced by the performance of its industry, which means you'll want to understand the dynamics and drivers of that sector. So next up, you’ll want to determine whether, say, the industry is exposed to an economic downturn, or whether it’s on the decline or growing rapidly.

To understand an industry’s dynamics, answer the following questions:

• How competitive is the industry as a whole?

• What’s the current dynamic between supply and demand?

• How concentrated is the industry? That is, do a few firms control it, or is it more fragmented than that?

• Are barriers to entry high or low? That is, how easy is it for newcomers to enter the industry?

Try to understand where the industry’s been and where it’s going, as well as the role of the company you’re analyzing within this narrative.

Here’s a good tip: check your company’s latest annual report and read what it says about its industry’s key strengths and weaknesses. Make sure you also understand the company’s strategy, as well as how its management plans to capitalize on opportunities and fix any weaknesses.

Assess your company’s fundamentals: 30 minutes Three fundamental factors are particularly important when assessing a company: quality, growth, and valuation.

To assess your company’s quality, you should examine how its margins have evolved, as well as how they compare to those of its rivals. If your stock’s profitability is above average and stable (or improving), you might be onto a high-quality company.

To assess your company’s growth, you should look at both its revenues and profit. Ideally, you’d want both of them to grow consistently (or at least stay level) over a few years. Again, to better understand its competitive position, make sure you compare your stock’s growth to that of its peers.

To assess your company’s valuation, you should pick a few relevant key metrics like price-to-earnings, price-to-free-cash-flow, or enterprise-value-to-sales, and compare the company's ratios to those of the market, the industry, and the firm's direct competitors. The lower those ratios, the cheaper the stock. Comparing your stock’s current valuation to its historical one can also yield useful insights into whether the stock’s always traded at a premium to its peers, as well as how cheap the stock is relative to its own history.

Assessing these three factors is useful in a couple of ways. First, it’ll stop you from buying a bad business at an attractive price – or a great business at a bad price. Second, it could help prove your thesis: if your stock is showing strong growth and profitability but trading at an average valuation, you might be onto something.

Plenty of websites (I like StockRover) allow you to quickly run the numbers for your stock, so spend a few minutes studying them and understanding the fundamental position of the company you’re analyzing.

Check the company’s technicals: 15 minutes Here’s what to check:

• Whether the stock’s liquidity and market capitalization fit your minimum requirements

• Whether analysts are bullish or bearish on the stock, and how that’s changed over time

• The amount of stock company insiders are buying or selling

• The “beta” (a beta above one means the stock is riskier than the market).

• The proportion of shares held by institutional investors

If you’re confident with technical analysis, you should also identify whether the stock is close to a “buying point” or not (a common entry point for growth investors is the cup-and-handle price formation, for example). By making sure price technicals align with the fundamentals, you’ll significantly improve the risk/reward of your investment.

A website like Finviz.com helps you visualize all these all at once. If you’re new to technical analysis, compare your stock’s numbers with those of other companies to put things into perspective.

Understand the macroeconomic drivers: 15 minutes Stock prices are never driven solely by their fundamental factors. Macro factors – including interest rates, inflation rates, and the health of the economy – also impact prices. It’s your job to understand how your stock is exposed to those factors, and which ones represent the biggest risks or opportunities.

Bank stocks, for example, tend to benefit from rising interest rates, while tech stocks tend to suffer from them. Consumer staples stocks are less dependent on economic growth than consumer discretionary stocks. Energy stocks tend to outperform when inflation heats up, but they’re exposed to any downside in commodity prices.

Tools like Portfolio Visualizer allow you to calculate your stock’s correlation to other assets, and you can use relevant exchange-traded funds that correlate with specific macro factors as a proxy. You might, for example, see how exposed your stock is to higher interest rates by correlating it with iShares 7-10 Year Treasury Bond ETF (ticker: IEF), to economic growth using SPDR S&P 500 ETF Trust (ticker: SPY), to commodity risk using Invesco DB Commodity Index Tracking Fund (ticker: DBC), and to inflation risk with iShares TIPS Bond ETF (ticker: TIP). It’ll also tell you whether that correlation is positive or negative, so you know whether it’ll prove an advantage or disadvantage. Then, make sure those numbers tally with your understanding of the business so far.

And that’s it. Now, are those two hours enough to give you an edge and help you beat the thousands of analysts analyzing the stock? Probably not: the more time you can spend on a stock, the better on that front.

But I see the benefits of this technique differently: assess your stock in just a couple of hours, and you’ll rapidly assess whether it’s worth pursuing further. By getting 80% of the thesis done in just 20% of the time, you’ll be able to cover more ideas and discard the non-starters before you sink too much time – and money – into them.

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Capital at risk. Our analyst insights are for educational and entertainment purposes only. They’re produced by Finimize and represent their own opinions and views only. Wealthyhood does not render investment, financial, legal, tax, or accounting advice and has no control over the analyst insights content.