There are numerous ways that investors use to create a watchlist of companies for them to trade. There is not a right or wrong way, more of a personal preference. A bottom up approach is a method where we start with analyzing individual companies and then work our way up to looking at the groups they are part of to decide whether to add to our list.
We perform a fundamental analysis on the companies that we want to consider. If the company doesn’t pass our fundamental analysis, we move on to the next company to consider. Once a company passes the fundamental analysis, we can then move on to the next phase.
The next phase is when we check to see what industry or sector the company is part of. We want to make sure that it is in a good group in order to finally add it to our list. Preferably, we find that the company is in an industry group that is performing well. If the industry group is performing well, we don’t need it to be part of a sector that is performing well. If the company happens to be in a good sector as well, that would be even better.
This can be a more time consuming approach. Using a screener like http://finviz.com/ can speed up finding the fundamentally sound companies. Once we screen out a list, we can go through the process of checking what groups they are part of.
A bottom up versus a top down approach will typically yield us some different results. There will be some overlap from the two approaches where we find the same stocks to consider. But doing a different approach can give us some additional stocks that we may have missed.
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