The 13 Steps to Investing Foolishly
Step 8: Get Information on Great Companies

"Looking for great individual stocks to research and invest in is no more difficult than studying the companies that provide great products or services in your life. Wall Street professionals trapped forty stories up in Manhattan may get overpaid to do just this, using a variety of tools, but then in contests against a chimpanzee armed with a finger (and some stocks symbols to point at), the pros often lose. 'The Wall Street Journal' runs a regular contest that demonstrates this, pitting expert stock pickers against stocks chosen randomly via the dart and a board, and the dartboard often wins. Nor will these experts at big investment firms win in competition with you, Fool." -- The Motley Fool Investment Workbook

Once you feel prepared to graduate from simple and mechanical forms of investing (index funds and the Dow approaches), your next step will be picking stocks on your own. You'll need to learn what kinds of companies to seek out and then you'll have to evaluate them, to make sure they're moving in the right direction and are worthy of your trust.

Mechanical Stock Screens

Let's spend a little time discussing how you might zero in on promising companies. With more than 9,000 publicly traded firms out there, the field of possible investments can be daunting and confusing.

One handy tool for investors is the stock screen. A stock screen is basically picking a measure or two, and running the entire world of stocks through those measures to see how many and which ones meet your criteria. For example, you could screen all stocks for those with a dividend above 4%. Or for those with annual revenues of $5 billion or more and net profit margins of at least 10%. You get the idea.

Another example of a stock screen is looking for a stock with a price of at least $7 per share, sales and earnings growth of at least 25%, $500 million or less in sales, and insider holdings of 10% or more. Seems like a natural idea, right? Just kidding. Actually, these are a few of the criteria on which we base our own Foolish 8 stock screen spreadsheet, which is a good place to start if you're looking to invest in "small cap" stocks, which we'll get into more later.

Now, should you go out and immediately buy the stocks that pop up through your screen? Not at all. At least not without further research. But screens can be an effective way to reduce your contenders from thousands of stocks to perhaps dozens. We have an area of Da Fool dedicated 24/7 to examining and explaining stock screens.

Other Screens

Screens can be even simpler. For example, a basic screen might be to ask yourself, "What products or services do I (and most people I know) use all the time and like a lot? What companies make them?" Your brain can perform this type of screen all by itself, and we'll help get it started: McDonald's, Coca-Cola, Gillette, General Motors, Wal-Mart, AT&T, Black & Decker and Federal Express are possibilities. Not a bad bunch of companies. If you were to take this list and study the companies further, you'd probably end up with quite a few very promising investments.

Another uncomplicated way to find interesting companies is through the news. If you hear that Costco is coming out with an exciting and innovative new kind of store, it might be a good time to take a close look at it. If a company announces that it's recalling a product and its stock drops 20% on the news, you might do well to investigate whether the market has overreacted. If so, this could be a good time to invest in the company (providing that it was and is a strong and growing company, with its financial house in order).

Other places to come up with starting points could be from the Fool's News area, which features a well-known company debated weekly in Dueling Fools. The Strategies area features evaluations and discussions of numerous other smaller and lesser-known companies. Check it out sometime if you're interested, but for now, let's assume that you've found a few companies you're interested in and you want to learn more about them.

Gathering Information

No right-minded Fool (and what other kind is there, really?) would think of buying a stock based merely on cocktail party chatter, a broker's recommendation, or even a message board overflowing with exuberance. Even if the stock is one you discovered on your own, you shouldn't just run out and buy shares. First get your hands on the company's financial information, and get to know the situation thoroughly.

It's easier than ever to get information for companies listed on U.S. exchanges. Below we list the telephone numbers for each of the three big players. Just call and ask for the company's phone number. (Your local librarian should be able to help you get the number, as well.)

Nasdaq (Over-the-Counter):	202.496.2500
AMEX (American Stock Exchange):	212.306.1490
NYSE (New York Stock Exchange):	212.656.3218

Give your company a call and ask for the "Investor Relations" department and request an "investor information packet." A full packet contains the following, all of which you would want and should ask for:

The Annual Report (most recent)
1. The 10-K (most recent)
2. The 10-Q (most recent)
3. Press releases (all recent ones)
4. Analysts' reports (any available up-to-date ones)

By the way -- are you wondering what all this is going to cost you? Nothing more than a holiday bottle of wine for your postal carrier who'll be delivering all the packets you order. These packets are free!

But, hey, let's face it -- you're online, and nowadays, this is really the place to do the best research. You can get a substantial amount of this information online. You can acquire all recent SEC filings, including company 10-Ks and 10-Qs, without ever leaving your keyboard. All you need to know is a company's ticker symbol, and you can acquire news, financial snapshots, and estimates of future earnings. Whoops, maybe we're getting ahead of ourselves with that kind of talk. Sorry. But keep reading and we'll explain.

Learning About the Company

You've got the company's information packet. Let's have a look. The first thing you'll want to do is scan everything in order to get a sense of the company's mission, its products, its attitude, and its prospects. Let's take a Foolish example.

Say you're an ice cream aficionado who's decided to sort through your favorite industry for potential investments. Let's further assume that while you love ice cream, you have a particular affection for Sal and Harry's Froosh, an irresistible all-natural fruit ice that is mixed, frozen, and distributed out of the company's headquarters in Bastrop, Louisiana. You have called Bastrop to request the information from Sal and Harry's Froosh, and now it's arrived.

The annual report will probably feature some glossy photos of Sal and Harry standing next to Froosh-making machinery. In the back, as with every annual report, you'll find more boring-looking financial statements. (Once you become a seasoned investor, these pages will actually be the most exciting ones to you.) There are three main financial statements included:

The Income Statement (or Statement of Operations)
• The Balance Sheet
• The Statement of Cash Flows

The easiest of the three is the income statement, which shows how much money the company made over the last year and its profit margins. Next up is the balance sheet, revealing how much cash, inventories, and debt the company has. The third and most complex is the statement of cash flows, revealing how much money the company is really making, as it works through operations, makes investments, and borrows money.

When studying a company's financial statements, you should be able to determine how quickly sales are growing, how the company is financing its growth, whether it has taken on too much debt, how efficiently it's collecting its accounts receivable, 

It's easier than ever to get information for companies listed on U.S. exchanges.

how much profit it's making on its products and services, and all kinds of fascinating things like that. You should also be paying attention to trends, to see if the firm's financial health is improving or declining. And finally, it's best to compare companies with their industry peers to see how they stack up.

These financial statements will also appear in the 10-Q and 10-K reports. The 10-K is issued once a year, along with the annual report, while 10-Qs are issued three times a year, at the end of the intervening quarters. The 10-Q summarizes the company's quarterly performance. The 10-K is dedicated to a company's financials, not its story, and thus includes information you simply won't find in most annual reports, like insider stock holdings and brief biographies of the management team. The latter is of extreme interest to a Fool. We love to read about how the company chairman filed for personal bankruptcy in 1989, or graduated from our college.

Press releases are an even more frequent source of information on your company, and should be read and followed by hands-on investors. Those who prefer to keep up less frequently with their stocks can usually safely ignore press releases, and just catch the quarterly reports. Of course, this works much better with safer, bigger companies; if you own volatile small-cap growth stocks that move radically based on info in press releases, it behooves you to plug into these things. Do keep in mind, of course, that press releases in general tend to put a positive spin on news, since they're issued by the company.

Analyst Reports

Most companies have been examined and analyzed by one or more financial analysts. These professionals, most often employees of brokerage houses, will write reports that include the analyst's opinion of the stock as well as estimates of future earnings and other prognostications. This information is public. Assuming the company whose financial packet you've received has an analyst following it, one of these reports might be included in the packet. (If not, the company will provide you with analyst names and phone numbers, so you can call and make your own request.) Reading analyst reports is a truly useful exercise. (However, there's one part of it that the analyst and the Wise media think is Very Important, and yet is virtually meaningless -- the Buy, Sell or Hold "recommendation.")

For a Fool, some of the most valuable information in the report are the estimated earnings per share figures. (The better reports print estimates quarter-by-quarter.) By matching the analyst's quarterly estimates against the quarterly earnings announcements as they come out, investors can determine whether a business and its profits per share are meeting, exceeding, or underperforming analysts' expectations.

We at The Motley Fool love getting our hands on analyst reports, recognizing that analysts know a fair amount about how to evaluate a particular company's prospects for growth. Hey, it's their full-time job. And while we don't accept every assertion made by any analyst, we think that confronting their analyses is a key ingredient to sharpening our understanding of the story of our companies.

That's the good side to analysts' opinions. (Red Alert. Red Alert. Fool attack coming. All Wise men of Wall Street prepare to be fired upon.)

We do NOT advise you to pay attention to the analysts' ratings on securities, whether "Strong Buy," "Buy," "Accumulate," "Attractive," "Speculative Hold," whatever. These subjective judgments may be slanted according to a blatant and unapologetic conflict of interest that exists in the brokerage industry. The same firms whose ANALYSIS you're reading ALSO have built their businesses upon FINANCING the companies they're analyzing. Thus, you won't be surprised to hear that the first buy recommendations you'll typically read about a new company that just came public will virtually always appear from the very same firm or firms that underwrote the public offering. (Hmmmm...)

Further, and more importantly, if the brokerage firm analyst were ever to put an outright SELL recommendation on a given company's stock, that company would probably never again consider doing any financing business with the analyst's firm. Thus, you'll almost never see a SELL recommendation from Wall Street. In fact, Wall Street analysts who see a stock selling at $10, which they predict will go down to $5, will still often call their rating of the company "Neutral" rather than "Sell." Next: Evaluating Businesses

In response to this situation, we at the Motley Fool are now providing an alternative to the analyst reports of Wall Street. Through our our bi-monthly Internet Report, our year-end Industry Focus, and our stock research reports, the Fool is producing research that is free of any conflicts of interest or inside-the-Street code words (like "Hold" really means "sell now"). If you're interested in some money-back-if-you're-not-totally-satisfied Foolish research, check our what we offer.

Now that you've gathered the information you need, it's on to what to do with it.