photo © 2010 Alan Cleaver | more info (via: Wylio)
I hope that you’re now convinced that you should have an investment checklist for your research and analysis process. If not, please read the first part of this series again.
We have discussed the qualitative portion of the investment checklist. The first portion of this series mentioned about the industry checklist, the business model checklist and the management checklist. In my view, if you could not understand those three portions, there’s no need to move into the later sections of your investment checklist.
Here’s the rest of the investment checklist that I am talking about:
Company Checklist
- Is this a great company? Mention the factors that will change your view of the company?
- Can you imagine holding stock in this company for ten years, even if the stock market closed down?
- If you had access to unlimited capital, how would much would you be willing to spend to dislodge the company?
- Compare to a weak competitor in the same industry. What is the difference and why?
- What is the company’s capital structure, and how does it compare to its peers?
- What are the trends in inventory turns, days payable/receivable, and working capital?
- What are its coverage ratios on interest payments?
Financial Statements Checklist
Cash Flow
- What are the company’s capital requirements and cash flow characteristics?
- How is the company choosing to invest its capital? CapEx? Buybacks? Acquisitions?
- Does the company need to access the capital markets? How soon/often?
Profitability
- Regarding the company’s sales model, how visible are earnings quarter-to-quarter, and year-to-year? Is this a fixed or variable cost business? How much cost leverage?
- Do earnings grow as a function of unit sales growth, price increases, or margin improvement? How sustainable is this growth?
Valuation Checklist
- Looking forward, what is the company’s valuation in terms of:
a) Market Value/Earnings
b) Enterprise Value/EBITDA
c) Free Cash Flow Yield (After-Tax Free Cash Flow/Market Value)
d) Market Value/Sales
e) What is the company’s growth rates in terms of earnings, EBITDA, and FCF?
f) What are consensus earnings estimates, versus your own expectations?
g) What are the key leverage points in our own and the street’s earnings models? What has to go right, and where is the most chance for surprise?Are their accounting policies conservative and in line with their peers?
Risks Checklist
- What are the things that you haven’t know and what are the unknowns? How much can the company control the unknowns?
- What could cause the investment to be a disaster?
- What are the catalyst for the price to move up?
- Who owns the stock?
- What’s the float of the company’s stock? What is its volume? Can you build a significant position on the company?
Of course, you can always add and copy other investment checklist as you go along. The checklist has no limits. Sometimes, you would add a bullet point based on your experience. The most important point is that you must always stick to your checklist especially when making big decisions.