Chapter 7: Building a Value Investing Watchlist

Why You Need a Watchlist

A watchlist is simply a curated list of stocks you’re monitoring for potential investment. For value investors, it’s more than a random collection of “interesting” companies—it’s a pipeline of under- or fairly-valued opportunities waiting to be bought at the right price.

• Organized Approach: Having a watchlist ensures you don’t miss opportunities when the market price dips.

• Focused Research: It helps you focus your deep-dive research on a manageable number of companies, rather than chasing every new ticker you hear about.

• Long-Term View: As a value investor, you aim for well-researched positions that you can hold. A watchlist keeps you focused on quality and guards against emotional or impulsive trades.

Deciding Which Industries to Follow

Value investing doesn’t mean you blindly look for cheap companies in any industry. It involves understanding the competitive landscape and long-term prospects within specific sectors.

1. Personal Expertise or Interest

   • Start with industries you already understand or have some familiarity with. Maybe you work in technology, healthcare, or automotive—this inside knowledge can give you an edge.

   • If you’re passionate about a particular field, you’ll be more motivated to keep up with industry news and trends.

2. Stable or Growing Industries

   • Seek out industries with proven track records or rising demand (e.g., consumer staples, healthcare, essential utilities).

   • Growth prospects matter, even if you’re a “value” investor. It’s easier to find undervalued gems in industries that have a stable outlook or a positive long-term growth trend.

3. Avoid the “Too Hard” Pile

   • Legendary investor Warren Buffett often talks about the “too hard” pile—areas you don’t understand or that are overly complex.

   • If an industry is too unpredictable or beyond your expertise, it may be best to avoid it until you’ve done more research or built your knowledge base.

Screening for Undervalued Companies

Once you’ve narrowed down industries, the next step is to screen for companies that might be undervalued. Here’s how to do it:

1. Use a Stock Screener

   • Websites like Finviz, Yahoo Finance, and MarketWatch have basic stock screeners. Paid tools like Seeking Alpha Premium or ValueLine can offer more advanced options.

   • Filter by valuation metrics (Price-to-Earnings, Price-to-Book, EV/EBITDA), market cap (small, mid, large), and geographical location if relevant.

2. Set Your Valuation Parameters

   • Price-to-Earnings (P/E): Look for P/E ratios below the industry average or below a certain threshold (e.g., < 15) to start.

   • Price-to-Book (P/B): Check P/B ratios below 1.0 or the industry norm if you’re seeking undervalued financial or asset-rich firms.

   • EV/EBITDA: Especially useful for capital-intensive industries; a lower ratio can signal an undervalued opportunity.

   • Dividend Yield: If passive income is important, filter for a history of stable or growing dividends.

3. Profitability & Financial Health

   • Look for consistent Revenue Growth, stable or growing Earnings, and a manageable Debt-to-Equity ratio.

   • Healthy Return on Equity (ROE) (usually above 10-15%) can indicate an efficient management team.

4. Add a Margin of Safety

   • Even if the metrics look attractive, remember you’ll want a buffer—a margin of safety—so you can handle unexpected setbacks.

Refining & Organizing Your Watchlist

After running your initial screen, you’ll likely have a list of possible candidates. Now it’s time to organize and refine:

1. Create Categories

   • Core Stocks: These are companies you strongly believe in (e.g., stable, industry leaders).

   • Speculative Value Plays: Slightly higher risk but potentially undervalued stocks, often smaller or turnaround plays.

   • Industry Buckets: Group companies by industry or sector, making it easier to compare them side by side.

2. Track Key Dates

   • Note upcoming earnings reports, product launches, or industry conferences—events that could impact the share price or reveal new data.

3. Monitor Fair Value Estimates

   • If you’ve done intrinsic value calculations or followed analysts’ price targets, keep track of them.

   • Update these estimates every quarter or whenever significant news breaks.

4. Tag the Reason for Interest

   • Identify why each company is on your watchlist—e.g., “Undervalued due to market overreaction,” “Strong cash flow,” “Dividend aristocrat,” etc.

   • This reminder helps you stay grounded in your original thesis and not get swayed by short-term price fluctuations.

Maintaining the Watchlist Over Time

A watchlist isn’t static; it should evolve as market conditions and company fundamentals change.

1. Regularly Review Financial Performance

   • Read quarterly and annual reports. Look for changes in revenue, debt levels, or management guidance.

   • Is the investment thesis still intact? If not, remove the stock from your watchlist to keep it lean and relevant.

2. Stay Updated on Industry News

   • If you notice a sudden sector-wide drop (e.g., healthcare stocks falling due to regulatory changes), this could be a buying opportunity—or a red flag.

   • Subscribe to relevant trade publications or email alerts for breaking news.

3. Reassess Valuations

   • A company’s metrics can quickly become outdated. When a stock’s price changes or new data emerges, revisit your valuation models or ratio thresholds.

4. Set Price Alerts

   • Most brokerages or financial websites allow you to set alerts when a stock hits a certain price.

   • This automation prevents you from needing to check prices constantly.

Getting Ready to Buy

Having a well-curated watchlist prepares you to act decisively—but only when the conditions are right. If your research points to a fair value of $50 per share, setting a price alert at $40 or $45 ensures you’re notified when the stock trades within your margin of safety.

• Be Patient: The market can remain overpriced—or undervalued—for a long time. Good deals require patience, and your watchlist is a tool to help you wait efficiently.

• Double-Check the Fundamentals: Before hitting “buy,” do a final check of any new company developments.

• Stay Rational: If the stock never comes down to your target price, don’t chase it—look for other opportunities or adjust your thesis only if new facts warrant it.

Final Thoughts

Building a well-structured watchlist is a crucial step for aspiring value investors. It helps you keep your research focused, manage your time effectively, and prepare for moments of opportunity. Start by picking familiar industries, use screening tools to find undervalued companies, and diligently maintain your list. By staying disciplined and regularly reviewing each company’s fundamentals, you’ll be ready to strike when the market offers those rare bargains—without succumbing to fear, greed, or hype.

Key Takeaway: A watchlist is your personalized roadmap of potential value plays. The more organized and disciplined you are with it, the more likely you’ll capitalize on undervalued opportunities when they arise.

Next Steps

• Continue Learning: Dive deeper into the art of valuation and specific metrics.

• Case Studies: Look for examples of famous investors building watchlists and how they acted on their research.

• Practice: Start a small, hypothetical watchlist today—even if you aren’t ready to buy. Track the performance of your selections, refine your process, and build investing confidence.

Stay patient and consistent, and over time your watchlist will become a powerful asset in your investing journey.

The information is provided for educational purposes only and does not constitute financial advice or recommendation and should not be considered as such. Do your own research.