2) Fundamental Analysis

How to Pick Good Stocks

This is the million-dollar question: how do you pick good stocks? The answer isn't 'follow tips in Telegram' or 'buy what's trending.' There's a systematic framework you can use to make your stock picks more rational and measurable.

Definition

Picking good stocks means finding companies with quality businesses, well-managed, and available at fair prices. Not just stocks that 'keep going up,' but stocks with strong fundamentals worth holding long-term. This requires a combination of qualitative analysis (business, management) and quantitative analysis (financial numbers). One popular quantitative method is the Piotroski F-Score — a scoring system from 0-9 created by Joseph Piotroski (Stanford accounting professor) to assess the fundamental strength of a company. F-Score uses 9 indicators from financial statements divided into 3 categories: 📊 Profitability (4 points): • Positive Net Income (+1) • Positive Return on Assets (ROA) (+1) • Positive Operating Cash Flow (+1) • Cash Flow from operations > Net Income / good earnings quality (+1) 📊 Leverage & Liquidity (3 points): • Long-term debt ratio decreased vs last year (+1) • Current Ratio increased vs last year (+1) • No new share issuance / no dilution (+1) 📊 Operating Efficiency (2 points): • Gross Margin increased vs last year (+1) • Asset Turnover Ratio increased vs last year (+1) Score 8-9 = very strong fundamentals. Score 0-2 = weak fundamentals. Piotroski's research shows that high F-Score stocks tend to outperform the market in the long run.

Simple Explanation (Analogy)

Picking stocks is like choosing a life partner. Don't just look at appearances (rising stock price). Look at the 'inside' too: stable income (consistent revenue-profit)? Not too much debt (low DER)? Good track record (high ROE)? And most importantly: is the 'price' reasonable for the quality offered (fair PER/PBV)?

Indonesian Stock Example

Simple framework for screening Indonesian stocks: start with LQ45 stocks (45 most liquid). Filter by ROE > 15%, DER < 1x, EPS growth > 10%, and PER below sector average. This filter usually surfaces names like BBCA, BMRI, TLKM, ASII, UNVR -- stocks proven quality over time. You can also use the Piotroski F-Score as an additional filter. Example: BBCA typically has an F-Score of 7-9 due to consistent profitability, controlled debt, and stable operational efficiency. Stocks with F-Score below 3 should be avoided as they show signs of weakening fundamentals.

How to Use

Step 1 - Check the business model: understand what the company does, who their customers are, and what's their competitive advantage. If you can't explain the business in 2 sentences, you probably don't understand it well enough.
Step 2 - Financial analysis: check revenue growth, profit margin, ROE, DER, and operating cash flow for at least 3-5 years. Consistency matters more than spectacular numbers in just one year.
Step 3 - Check Piotroski F-Score: calculate the 9 F-Score indicators to quickly assess fundamental strength. Score 8-9 means strong fundamentals across all aspects (profit, leverage, efficiency). Low score (0-3) is a red flag that shouldn't be ignored even if other metrics look fine.
Step 4 - Valuation: use PER and PBV to assess whether the current stock price is fair. Compare with historical and peers. A great stock bought at an overvalued price can still result in losses.

Common Mistakes

Buying stocks only based on 'hot tips' from group chats, friends, or influencers. Without your own research, you won't know when to hold or sell. When something happens, you'll panic.
Over-analyzing but never buying (analysis paralysis). No stock is perfect. Just find one that's 'good enough' at a 'fair enough' price, then start with a small position.
Ignoring qualitative factors like management quality, company reputation, and industry trends. Financial numbers can be great now, but if the industry is in decline, the long-term outlook is bleak.

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After understanding this concept, apply it in tools so decisions become more objective and measurable.

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FAQ

How many stocks should be in an ideal portfolio?

For retail investors, 5-10 stocks is usually sufficiently diversified. Fewer than 5 is too concentrated (high risk). More than 15-20 is too fragmented and hard to monitor. Warren Buffett once said: 'Diversification is protection against ignorance. It makes little sense if you know what you are doing.'

When is the best time to buy stocks?

Nobody knows the perfect timing. But the principle: buy when the price is below fair value (undervalued). If you can't determine fair value, use DCA (buy regularly each month) to reduce timing risk. Time in the market beats timing the market.

What is Piotroski F-Score and how to use it?

Piotroski F-Score is a 0-9 scoring system that evaluates a company's fundamental strength using 9 indicators: 4 for profitability (positive net income, positive ROA, positive cash flow, earnings quality), 3 for leverage & liquidity (debt decreased, current ratio increased, no share dilution), and 2 for operating efficiency (gross margin increased, asset turnover increased). Each met indicator earns 1 point. Score 8-9 indicates very strong fundamentals, suitable for long-term investing. Score 0-2 indicates weak fundamentals and should be avoided.