Bottom-Up Stock Picking Approach (With Examples)

Last updated: Sep 4, 2022


The bottom-up stock picking approach can lead to finding undervalued companies. Every investor should know how to perform one.

Bottom-up stock picking is a great way to find underpriced stocks. These stocks are less discussed. And more often than not, disliked.

When going through this way, you need the stomach to buy oversold stocks.

I have often found interesting securities using this method. Then made a thorough analysis of the company.

And end up not buying since they are so disliked. In my cases, I have been very wrong, not acting.

Top-Down versus Bottom-Up

Think of both these strategies as a part of a single ladder. They are different starting points. But both can work for you.

The question is, do you want to start at the top or bottom?








First, look at the macro picture of the company/branch.

Top-down focuses on the top economic aspects and then going down. The individual stock is last, if at all.

Is the GDP good?

Is unemployment high?

Is the country in a good state?

Then moving down the ladder, for example, what sectors are performing the best?

And at the end, go to the individual stock if they even reach that high.

Would you believe that energy demands will increase a lot? And that there will be a lot of money there. You could buy a part of all the major companies.

Or you continue on the ladder and research the underlying companies.

Typically, considered easier than bottom-up.


Bottom-up focuses on the individual stock first. Disregard the sector, the market, and the rest of the economy, at least not at the beginning. And then, if you want, move up the ladder.

The idea is that even if the business branch is lousy and the economy is performing poorly. There are companies inside that branch that will perform well.

Here, looking for numbers inside their 10-k or annual reports is typically the case. Look for good key ratios and compare them to other companies at the same branch.

Great for bargain hunters and value investors. Ignoring the economy and focusing on the specific company.

Cons can involve low momentum, a very hated sector, and the economy may be terrible.

The first step towards bottom-up picking often begins with screening for stocks.

Best Stock Screener

There are a lot of different screeners out there, but the most popular and free one is FinViz. But remember that there are better premium alternatives based on your investment style.

And many screeners don't show every country's stock. So especially if you want foreign companies, you must be open to trying different ones.

How To Screen Stocks

The question is, what kind of strategy should we go from here? Now, there are a lot of options out there.

It matters what we should focus our search on, for example, I like to screen for low NAV or PTBV. To find a company that sells under their assets. But, having difficulties doing this on the free version on FinViz.

Go for low P/E, High D/E, and low P/S. Trying to find companies that earn a lot, have low debt, and have some revenue.

Here's a list of several premade stock filters in FinViz.

There are also several other types of strategies to try out. But these premade stock screeners are pretty good.

It can be good to screen for one key ratio. Or change the ratios because you can sometimes miss great companies. There can always be some anomaly.

Then go by the companies one by one. Ignore the ones that don't meet our criteria. By a considerable margin, at least.

Remember that stock screening is to find fascinating stocks and then research them.

So they don't always have to be perfect. Only worth the extra time to take at least a closer look.

These companies are valued at this price by the market for a reason. Our job is to see if the valuations are excessive.

Comparables Analysis

It's a fundamental analysis method also called The Comparables Model. I would say it's a simple approach. Particularly with using a stock screener.

When we have a list of stocks, we must move up the ladder and compare them to different companies in the same branch. Search for anything special about their numbers.

A debt of 90% sounds awful, but what if you find that almost every company in the same branch has that insane amount of debt?

A P/E of 5 also sounds great, but the same thing here. What if every company in the same branch has about the same?

It can mean that that key ratio is an awful valuation metric for that specific branch. Or more unlikely that the entire sector is undervalued.

The debt example is the norm for banks, so 90% debt can be okay in that branch compared to others. In most other industries, it's a big no-no.

The P/E one is normal for real estate and investment companies. P/E ratio should most likely not be used at all for these businesses. Rather look at the assets or rental/dividend income.

But if we see that the average P/E is 15 for the industry/sector. And our company have a P/E of ten then we can be on to something.

It's also a relative valuation method if the market is wrong about an entire sector. Then we can also be wrong since our benchmark is wrong.

Stock Fundamental Analysis

After finding stock and comparing it to others, there are still ways to dig deeper. It all depends on the type of stocks you have.

But almost all starts with reading the annual report from the company website, or the 10k fromĀ

Annual report vs 10-k

10-k is a detailed annual report because it has to show everything. Without pictures and the CEO's little paragraph. Think of 10-k much like an annual report, minus all the useless stuff.

What now?

Here you can read about six stock valuation strategies. And here, can you read a basic fundamental guide, assuming you want to continue?

Always use some basic investing strategies. Since we can always be wrong, this isn't an exact science. Think of investing as a form of gambling, just that the odds may be in favor if we do the research.

And applying the proper strategies.