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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Madharry who wrote (37914)5/17/2010 11:54:50 AM
From: Dan Meleney1 Recommendation  Read Replies (4) | Respond to of 78673
 
Checklists for due diligence...I've not formally used them, but I'm leaning that way in lieu of trying to keep it all in my head. Here's my draft that still needs additions and simplification, but I'll use it for next due diligence and see how it goes. You'll probably notice that about 80% of this is pure plagiarism but I unfortunately didn't keep the sources to give credit where it is due. Comments encouraged.

QUESTIONS
o Is the idea within my circle of competence?
o What can go wrong?
o Where could I lose capital? What are my odds of losing capital?
o How might I lose my entire investment?
o Lawsuits
o Does it use SPEs?
o Catalyst: what and when?

METRICS
CASHFLOW
o Strong cash flow
o Operating cash flow higher than earnings per share
o Free Cash Flow/Share higher than dividends paid
LEVERAGE
o Debt to equity below 35%
o Debt less than book value
o LT debt less than 2 times working capital
o Current asset ratio greater than 1.5
o Quick ratio greater than 1
PROFITABILITY
o Pre-tax margins higher than 15%
o FCF Margin higher than 10%
o Growth in EPS
o High Profitability
o High Return on Capital
o What is Piotroski score?
o Altman Z Score > 3
MANAGEMENT
o Can I trust management?
o Management shareholding (> 10%)
o Substantial Dilution?
o Management incentives?
o Are the salaries too high?
o Is there heavy insider buying?
o Is there heavy insider selling?
o Do I like the management? (Operators, capital allocators, integrity)
o Profitable reinvestment
o What has management done with the cash?
o Where is Free Cash Flow invested? Share buybacks, dividends, reinvested, ROE & ROCE, incremental BV
STRATEGIC
o Enormous moat (switching costs, habit, low cost)
o What are the moats? What does it take to sustain the moats?
o Bargaining power of suppliers?
o Is it a low risk business?
o Is there high uncertainty?
o Is it a good business?
o How capital intensive is the business?
o Future growth
o Are the revenues and cash flows of the business sustainable or overstated / understated due to boom or bust conditions?
PRICE
o Is the stock screaming cheap?
o P/BV
o P/TangibleBV
o EVP vs MktCap vs BV
MY COMPETITORS
o Are respected investors betting against me?
o Short selling
o Institutional %
o Hedge fund activity
o Why don't others see the value?
VALUATION
o What's my current entrance price?
o What's my current exit price?
o What makes up the margin of safety?
o Is there a sufficient margin of safety?
o Did you write thesis of why a stock is undervalued? (side bennie post this to SI)
o Adjust for unaccounted assets & liabilities (e.g. advertising, distribution, process, operating leases)

DUE DILIGENCE PROCESS
Suggested (minimum) checklist for thoroughly researching a company:
o Annual reports / 10-K’s – five years (including those of competitors). Read the footnotes.
o 10-Q’s and Proxy Statements – one year, including transcripts of earnings calls (include those of competitors). Seeking Alpha is a good source of transcripts.
o Build a 10-year spreadsheet on the company, by operating segment if applicable. Don’t rely on third party sources for anything more than preliminary research. Going to primary sources will not only ensure the data’s accuracy, but also force you to think about the numbers and what they mean.
o All available relevant articles in the business trades and press. In addition to the general Internet (Google, Bing, etc.), many libraries offer excellent free online databases, such as Proquest.
o Build a database of all relevant private market transactions (minimum 5 years).
o Compare relevant valuation metrics for company to those of competitors (P/S, P/B, P/E, EV/EBIT, EV/EBITA, P/(Owner Earnings). Include an analysis of any industry specific metric, for example, ROA for banks.
o Study who owns the stock (and who doesn't). (You may be able to find information on the company in reports and letters of quality institutional investors that own the stock.) Are insiders buying or selling? Do they have "skin in the game"? What about the directors?


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