How To Find Winning Stocks: The Brute Force Method

You have to turn over a lot of rocks to find those rare hidden gems. Sometimes the best approach is to simply start at the 'A's.

Searching For The Next Undervalued Opportunity

There are a number of different ways to go about searching for your next great investment idea. I plan to explore some of these in future blog posts, but I’ll start with my favourite: the brute force method.

Nothing beats simply sitting down with a long list of stocks and going through them one by one, looking for that rare gem that has been overlooked and mispriced by the market. Not only can you stumble across opportunities that have slipped under the radar, you also get a very valuable perspective on the market. Researching individual stocks, in isolation, it is easy to get lost in the weeds. Going through a whole bunch of different stocks at one time gives you more of a bird’s eye view. By studying many different trees, you get a much clearer picture of what the forest looks like.

To apply this brute force method you need a list of stocks to start with. Screening tools can be one way to generate such a list and I’ll cover that in another blog post, but when the market you’re dealing with is reasonably small (Canada, the UK, Hong Kong), you can simply start with a list of all the stocks in the market and narrow down your search from there.

At the end of this blog post, you can find a complete list of the stocks on the Toronto stock exchanges, broken down by market cap and sector, that I use as the jumping off point for my own stock market investigations.

To get your own, up to date list of stocks, head on over to the TMXMoney.com website. Click on the “Investor Tools” menu item and select the “TSX Discovery Tool”.

TMX Money Discovery tool

You’ll be given a number of options to narrow your search, but just leave all the options at their defaults and hit "search" to get a full list of all the stocks listed on the Toronto and Toronto Venture stock exchanges. The resulting list can be downloaded in excel format and from there, you can sift and sort it at will.

In it’s unadulterated form, it’s an intimidating list! Currently, there are 3158 securities issued on these two exchanges. I’m keen, but even I’m not about to go through over 3000 different stocks one by one. Fortunately, I don’t have to.

Many of these issues are not actually stocks. The list includes closed-end mutual funds and exchange traded funds (labelled ETP). It also includes CPCs or Capital Pool Companies which are companies that have raised money but haven’t found something productive to do with it yet. It is easy enough to winnow all of these out by sorting the “sector” column of our excel spreadsheet. As well, we can eliminate the odd debenture and preferred share by looking for the .p or .db suffix at the end of the ticker symbol.

Doing this reduces the list to a somewhat better but still frightening 2424 common stocks.

The Canadian market is a resource powerhouse. It is the leading market in the world for companies engaged in the mining and oil and gas industries. Out of those 2424 common stocks, 59% of them are directly involved in these extractive industries. For the most part, I avoid investing in this sector. It is not that I think these are bad companies, it’s just that my method of evaluating a company based on its past earnings and future earnings potential simply doesn’t work well when analyzing mineral deposits and well-decline rates. The companies that service the exploration and production companies in these sectors, though, do lend themselves more easily to an operating earnings based approach and fortunately, these mining and energy services companies are tagged separately in the TMX database.

By screening out the companies in the mining and oil and gas sector (but leaving in the service companies) we can get our list of prospective stocks down to 999.

We’re getting there, but that’s still an awful lot of companies to weed through.

The next step is to narrow our focus down to a specific market cap segment. Here is how our list of 999 companies breaks down by market cap:

For most small investors, the $10M to $100M segment will be the sweet spot. Here’s where you’re likely to find the best opportunities and the greatest mispricings. These “micro cap” stocks are too small for the big mutual funds and Wall Street professionals to invest in so you’re mostly dealing with other individual investors in this space and most of them won’t be paying their investments the same level of attention that you are.

There are also good opportunities to be had in the small cap segment and this is the area I would focus on next.

As your portfolio grows and matures, or if you’ve finished with the small and micro caps and are still on the hunt for more opportunities, then you can try to beat the big boys at their own game and tackle the large cap sector.

And for those very adventurous souls out there, the “nano cap” sector is a unique segment of the market that occasionally can bear fruit. This segment is a mix of previous failures and future dreamers. Very rarely, you might find the next Apple Computer being run out of someone’s garage.

Once you’ve decided on a market cap segment to focus on, the numbers become much more manageable. At any given point in time, you’ll find that up to half of the companies you come across are losing money. While there can be good turnaround opportunities amongst this group, for the most part, you can skim over these and focus your attention on the companies that are actually earning a profit. This means you’re really only dealing with a couple of hundred or fewer companies at a time. You can narrow down your search even further by zeroing in on the industries that appeal to you. The TMX database helpfully categorizes each stock into a sector and sometimes a sub-sector and you can use this information to look at, say, all the technology stocks or all the consumer discretionary stocks on the list.

My goal is to always own the cheapest stocks in the marketplace. Out of a list of 200 starting candidates, I’ll be very pleased if I come up with 2 that I think are worth buying. Once I’ve worked my way through one list, I can tackle another. And revisiting the same list 6 or 12 months down the road is likely to yield a different set of possibilities as new earnings reports come in and company share prices change.

(If you're looking for some guidance on how to analyze the individual companies in your list to see if they are undervalued investment bargains, you can check out the series of value investing tutorials I've posted here.)

As of today, here is the current list of all companies listed on the Toronto and Toronto Venture exchanges that are not in the mining or oil and gas industries. I’ve sorted them by market cap and industry sector. You can copy and paste this list into your own spreadsheet or download an excel version of the list by clicking on the button below. (The excel version also includes the mining and oil and gas sectors.)

Happy hunting!

The following tables were made using data downloaded from the TMX Money website. Their sector categorization is reasonably accurate, although as with trying to assign the proper genre to albums in a record store, some companies don't fit neatly into any specific sector category. Market Cap numbers are also reasonably reliable although sometimes, if the number of shares they've used is wrong, their  final market cap number will be off as well.