What is a Stock Pick?

A stock pick is when an analyst or investor uses a systematic form of analysis to conclude that a particular stock will make a good investment and, therefore, should be added to his or her portfolio. This is also known as active management. The position can be either long or short and will depend on the analyst or investor's outlook for the particular stock's price.

Understanding Stock Picking

Stock picking can be a very difficult process because there is never a foolproof way to determine what a stock's price will do in the future. However, by examining numerous factors, an investor may be able to get a better sense of future stock prices than by relying on guesswork. Since forecasting is not an exact science, an investor or analyst who uses any forecasting technique should include a margin of error in the calculations.

Active management utilizes teams of analysts who pick stocks for investment. These active management ETFs, mutual funds or separate accounts, can utilize a bottom-up or top-down strategy to pick stocks. It is common for a fund company to offer a "high conviction" fund which includes a small number of stocks that analysts have picked as their best high-performance bets for the next several years. Usually, these high conviction funds hold 20-40 stocks. This is much a much smaller number than the average actively managed fund, and certainly a small number than a fund that tracks an index.

Active management (stock picking) can be contrasted with passive management, where there are no teams of analysts picking individual stocks. The investor that buys a passively managed ETF or mutual fund will automatically be invested in the underlying basket of stocks that ETF or mutual fund invests in. These baskets of stocks are usually based on an index, such as the S&P 500 Index, or a sector, such as health care.

Key Takeaways

  • Stock picks, which fall under the umbrella of active management, are stock selections made by investors using systematic analysis of various factors affecting stocks.
  • Active management differs from passive management, in which investors buy passive investment vehicles such as ETFs.

Example of a Stock Pick

Jay is an investment analyst with a firm and he is focused on the tech sector. Jay picks the stock of company ABC, which is a social media network, as his pick after careful analysis. He considers a number of factors while analyzing ABC's stock. These include the company's revenues and profits during the previous year and the current regulatory climate for tech companies across various jurisdictions.

He notes that ABC is in hot water in some of the geographies it operates in but that those problems will not have a significant impact on its bottom line. ABC has also diversified away from its core product to include offerings that span a range of emerging technologies. As a result, even if the company loses market share in social media, it has other sources of revenue to mitigate those losses.