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CHECKLIST

“Checklist routines avoid a lot of errors. You should have all this elementary [worldly] wisdom and then you should go through a mental checklist in order to use it. There is no other procedure in the world that will work as well.” — Charlie Munger, 2007

Simpler is better, back of the envelope math or nothing

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Checklist For Doing Research

  • Find 5 peers

 

  • Get longest term stock chart possible, record the number of years and use money chimp CAGR calculator to get long term return. We’re doing this because we want to make sure the stock works geometrically overtime

 

  • Get longest term stock chart possible for the closest peers and repeat step one. Often, we won’t have the longest chart for a company because of spinoffs. Compare these CAGR’s to the overall market. We want to see if these could work geometrically relative to the market

 

  • Calculate EV/Sales, EV- EBITDA, Debt-EBITDA, and CAGR, do min, max, median, mean, SD, CV for all of them

 

  • Do a credit check, Net Debt-EBITDA, Consecutive years with a profit, EBIT Margin and CV on Margin, Check Z-score and F-score

 

  • If the company has a history, get a history of the past financials from EDGAR or OTC markets under disclosures, or from the co’s IR from past 10k’s for the longest term possible, always want Sales and EBIT for the company we’re studying. Get the longest-term EBIT margin. Take min, max, median, mean, SD, CV (anything under 30% CV is low and good) the lower the better. This predicts if we can predict the sales – If we can predict the sales and EBIT then we can predict what it’s worth. Calculate sales CAGR and EBIT CAGR – 3 yr, 5 yr, 10 yr, 15 yr, 20 yr if exists and 25 if it exists (want to see if it has slowed down a lot overtime)

 

  • Read most recent 10k and take notes

 

  • Check VIC and read the writeups

 

  • Use Google to find writeups/blog posts on the stock and read them

 

  • Try finding historical returns of the asset if it’s like Timber, MLP, etc

 

  • Try finding past acquisitions­ in the industry

 

  • Try coming up with an appraisal

Checklist For Going Beyond a 10k

Overview

  • Give an overview on the business – what is the business, what units make it up, what products do the business have, who are the customers, where do they operate geographically
  • Recent situations- spinoffs, the stocks down 50%, why are we looking at this?
  • Who’s their biggest costumer?
  • Who’s their biggest supplier?
  • What are their biggest product categories – or units, where is rev coming from?

Durability

  • Is the product durable?
  • Has the company always existed?
  • Have there been changes and challenges before? What was this based on?
  • Is this a fad? Why is this going to continue in the future?

Moat

  • Does the company have a moat?
  • If yes, what would it be?  EX from HBB- Do they outsource it to China, can they outsource it to China?
  • Can other people replicate this easily?
  • What’s their competitive advantage?
  • Where does the moat come from? – high switching costs, patents, contracts, network effects, shelve space, brand, economies of scale – logistics – sales per customer, location location location, regulatory, high barriers to entry, technical skill – reputation, apple can’t trust a company that’s a startup- intellectual property – owns something that’s intangible, data bases, credit records, sports rights, knowledge that others don’t have

Quality

  • Basically think about ROC
  • How do they get that return on capital?
  • Break it down, where does it come from?
  • Do they have a higher retention rate?
  • Where is the quality weak?
  • Geoff always asks for customer retention rate
  • Can you always find someplace where there’s reviews by customers?
  • Can you get anything that’s ranked in the industry? Like customer service, awards, customer satisfaction surveys, Glassdoor for company culture? Need to read between the lines on Glassdoor
  • Look at short interest vs float
  • Read the short thesis
  • High price or low price
  • Customer reviews
  • What do individuals think of the products?
  • Which brand would you trust the most? If it comes back a mix then it’s probably the cheapest
  • How much R&D are they spending as a % of sales and in general?
  • Where are they spending this R&D? Read Phil Fischers 15 point checklist for quality and growth

Capital Allocation 

  • History of dividends and stock buybacks
  • Stock issuance
  • CARG in # of shares outstanding
  • See how management is compensated in proxy (options, restricted stock, bonus – what are the targets that make up the bonus? ROE, ROC, market cap etc
  • How much does management own of the stock? And how significant is that in relation to their personal salary?
  • What did they say they were gonna do in the past?
  • What do they do with FCF historically?
  • Is there people on the board that we recognize?
  • How much FCF is there compared to Market cap? Could they buy it back?
  • Is there enough float and is the stock liquid enough?
  • Did the company ever pay special dividends?
  • Does the company ever acquire things?  What type of prices do they pay? Stock or cash?

Value

  • What’s the PE, EV/EBITDA and how does that compare to other companies?
  • Which competitor is better?
  • Why would a company be more expensive or cheaper? Use 5 peers? EX – Is GM cheaper than Ford and why would they make sense?
  • Look at what managements guiding
  • Relative value vs past and competitor
  • Was there ever an offer that was refused or that fell apart?
  • What would an LBO look like? Do they do LBO’s of companies like this?
  • What prices do acquisitions happen in the industry or did peers pay? If looking at Kroger what did AMZN pay for whole foods, etc

Growth 

  • Break down growth – Let’s say it can grow 5% a year, how much is SSS? How much is price increases?
  • How many active users?
  • How much time might they be spending on it?
  • Are the ad price going up or down?
  • Break it all down by geography, are they going to grow in Mexico a lot but not US, etc.?
  • Can they gain market share each year? Compare it to something else that’s already big.
  • Always think in terms of nominal GDP, population growth, and inflation in the country that you’re in, can they match these? For advertising its closer to a % of GDP.
  • How much have real sales grown (inflation)?

Misjudgment 

  • What are other people seeing on the short side of it?
  • What can’t we predict that’s important to what we’re doing?
  • What may we get wrong that our argument rests on?
  • Check % short
  • Check short thesis
  • Look at press reports to see what people are saying could go wrong
  • Look at if all the stocks in the industry are affected or just this one
  • Basically, try finding an explanation for why it’s cheap
  • Check VIC, Clark Street Value, other blogs, read comments to figure out what other people think

Conclusion

  • Take all the things we’ve done and put a mini analysis together- create the elevator pitch – why why why
  • Whats going to drive the stock? (Ex if oil prices go up this stock is good, if not it’s bad)
  • Talk in terms of 3 things: how safe is this, how high quality is this, how cheap is this –
  • Safe: DEBT EBITDA, F Z Score, years of positive earnings, cash flow, is it positive? Is it always positive, FCF, Variation in margins, when will they need access to capital? Google S&P, Fitch, Moody to check bond ratings, interest rate on debt
  • Quality: long term CAGR of stock, is it high enough, is it a good industry – CAGR on other stocks, is it a cyclical, are these companies products, services etc as good as competition, is the culture as good as other places
  • Cheap: EV-EBITDA, EV-SALES, relative valuation (cheap compared to self, cheap compared to peers) private owner value, absolute value (is this stock cheap for a normal stock at a normal time – average stock is 15-16x PE in normal times)

Appraisal

  • come up with method for doing it and showing how you got that appraisal

 

Being the journalist

Go to the proxy statement and find out who owns stock in the company, Google all of their names to learn about who they are and learn about them

Get satellite imagery of their HQ and properties – get a sense of why they would put the HQ where it’s at, Google the town to learn about income levels and major things in the town

Glassdoor – if you see anything that’s weird, look into it

Look for news things on company

Look at BBB

See who else owns it, Insider Money, Wale Wisdom

TripAdvisor, Yelp

 

Good Business Qualities

  • One that can grow without need of reinvestment
  • Low priced consumer brands
  • Low cost operators with economies of scale
  • High switching costs
  • Network Effects
  • Powerful brands
  • Good Management
  • Can grow internally at high rates of return
  • Has opportunities to reinvest cash at high rates of return
  • Growing or stable margins
  • Not susceptible to change
  • Endures some sort of competitive advantage
  • Simple
  • Predictable
  • Free Cash Flow generative
  • Managements incentives are aligned with the shareholders
  • Management is long term oriented

What are some barriers to entry?

  • High switching costs
  • High capital costs
  • Brands
  • Lower operating costs
  • Addicted products (tobacco)
  • Patented technology
  • Government regulations
  • Customer captivity and Economies of Scale

Questions to ask yourself and think about

  • Does the business have “mind share”?
  • What does the customer base look like?
  • Do they have some sort of exclusive distribution rights giving them a competitive advantage?
  • Where’s the location of the assets?
  • Does the company have pricing power or untapped pricing power?
  • What does their competition look like?
  • Do they invest cash intelligently?
  • Can we understand the business? What will it look like in 10-20 years?
  • Does the company generate Free Cash Flow? What do they do this this Free Cash Flow?
  • Is management promotional and aggressive?
  • Is management overly focused on short term guidance?
  • Is management candid and realistic?
  • How does management think about the business?
  • Is management rational long term thinkers?
  • Does management use sound metrics to measure results?
  • What’s managements attitude towards debt?
  • Are incentives and compensation sensible?
  • How does cashflow relate to revenue and earnings? (Think Enron: 100B rev, which only translated to 5B cash flow)
  • Stress test: how did the company do in 2008 and other crisis situations?
  • Does the business add or extract value from customers? Think Valeant
  • Does the company use “adjusted” numbers for earnings a lot?
  • How much capital is the company reinvesting into their business and what are they earning on that?

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