Checklist I go through before I buy any stock

Lessons from Mr Market
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Hi

For the last few months, I am using this checklist as a working tool before I buy into any company. Some might feel, there might be lot of redundancies and many things which are quite obvious and need not be part of checklist. I am a little absent minded person and many times tend to forgot some basic stuff too. Feel free to modify the checklist as per yourrequirements. Most of the items I picked up while reading various investment books.

I am a very conservative investor andmany of the items in checklist will reflect my investment philosophy.

Checklist.xlsx (10 KB)

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Thank you Anil for sharing this very informative and valuable sheet.

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Thanks Anil… I just finished reading the checklist manifesto and your checklist is a good point to begin and maintain my own checklist.

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Hi,

Anil

Thanks for posting the checklist.

How do you arrive at buy decision? Are there some parameters which take precedence over others? Do you have any weight ages associate with them?

Regards

Shripad

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Hi Shripad

Excellent question, but I do not think I have any ready answer for that. Moreover this is not an exhaustive checklist but the purpose was to remind me to check certain crucial things. As Charlie Munger says âInvert always invertâ so let me reverse your question as I think itâs easier to explain situations in which I will not invest. To buy or not to buy depends on lot of factors and a positive on few items not necessary means itâs a buy and vice-versa. Buy decision is quite subjective and depends on lot of moving parts. Let me give you a few example of stock where I have decided not to invest for various reasons. (Not implying that these stock will not be wealth creator but they do not clear the criteria I have set)

Lumax auto (PE 4.5x, PB 1.2x):

1). No moat at all. 2) No leadership position in any of the products and no great value addition products. 3) Company manufacturers Chasis, exhaust system, parking brake etc. 4) Debt free company but very low market cap.

_Bharat Gears _

  1. Not a leader in its segment. 2) Exposed more to tractors - which I do not think can grow much or limited by availability of credit to farmers. 3) Volatile financial history 4) Incurred losses during 2001-04 5) debt equity ratio of 1x 6) Net profit margin improved from 1.5% in 2009 4% in 2012. But still far less.

Weizmann Forex (did not invest on corporate governance issues. Networth of the company is 60crs, so below numbers are material)

1). Receivables overdue for six months â 5.4crs. (AR 2012) â As per demerger doc âThe company being in the retail business has large number of customers and the business being highly competitive there is always a need to extend credit to the valuable customers.â

2). 30crs invested in Windwill in 2011â This is despite the fact that only during the same year group segregated and demerged its power business into Karma Energy Limited. I do not understand the logic of setting up a windmill under Weizmann.

3). Corporate guarantees issued on behalf of group company and JV (JV total liabilities is less than a cr, so major part must be for group company) â23 crs.

Narmada Gelatine: Story is based on ASP increase and volume lead growth not possible. I am unable to visualise whether company will remain profitable after five years. Historical performance very volatile.

Wim Plast:

1). Commodity nature of business. Lot of competition from unorganised players.

2). Quality of supreme furniture much better than Cello.

3). During 2000-07, their sales were flat and their net profit declined from 11 to 2crs. As per my friend the main reason was competition from unorganised group.

4). Unbranded playersâ market share is still more than organised players in moulded furniture. Unorganised player has advantage as they evade excise duty, use lower quality plastics and are able to sell at cheaper price.

5). Their fortune appears to improved in last few years only because of Cello bubble Guard product. Reliance on one product is dangerous.

6). ROCE of Nilkamal never crossed 20% in the last decade and mostly around 10% during 2001-07. There does not appear to be any moat in this business. Even for Wimplast ROCE during 2002-08 was between 5-10% and its not clear to me how long the current improvement in the business can last.

PS: I thought examples are the best way to answer your question, feel free to suggest any other alternative

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A successful investing is more about refusing to buy duds.

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Thanks for the detailed answer Anil. It is really helpful.

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Hi Anil,

Thanks for sharing your checklist and it looks great.

However, I couldn’t agree with yourreasoningin some of the stocks mentioned above and thought of sharing my views:

I think moat is not always because of brand or something like that. Word moat is very commonly used but many often very tough to identify. I feel at times a co may be having common products but still it may be a fantastic business due to quality of mgmt and managing of balance sheet (i.e… managing of loans, working capital etc). Good example is suprajit engineering.

I think Wim Plast is a good company. It had a poor past because a major part of the business was from trading and hence the volatility. Since last 5 years, the business has really improved. Infact even in a competitive market like moulded furniture, they have a sort of a brand and sell their products at a premium. Many often they are not able to supply enough. The stock has already given multi-bagger returns due to consistent growth, clean balance sheet and good div pay-out. Cello in itself is a valuable brand :slight_smile:

Lumax Auto Tech: I have been studying these co for sometime and it really interests me. Have a look at the snaphot of key ratios -http://www.screener.in/company/?q=532796&con=1#pl

Its amazing that this co has been consistently growing at 30%, having ROE of 30%, its debt free and giving a good div pay-out. I think this is a good stock idea, which is still unknown by the markets.

Regards,

Ayush

PS: Look forward to other observations you may have in these stocks :slight_smile:

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Thanx anil for the c/l. i will use it to upgrade mine.

I have attached my checklist also here.

Regd moat - Moat may not always be visible / clear. i think the best way to identify moat is ROCE. If a company is having consistent high roce, thats means it is having some moat otherwise how is it able to generate high returns on capital.
e.g Mayur uniquoters.

stock-checklist.xlsx (10 KB)

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Thanks for sharing your checklist…

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Hi Ayush

Thanks for your detailed reply and there is lot to learn from experienced investors like you. I have posted my comment on Wim Plast, in the Wim Plast thread. I do not disagree regarding your observation on moat also from quality of management and the way business is managed, but its tough to evaluate or atleast I am still not confident enough and would prefer to lay more emphasis on entry barriers and the company leadership position. Having said that, if one can figure out correctly which business or company can enjoy moat even when its present in commodity business, then one can certainly will enjoy a multi-bagger as and when market in generalrecognizesthat.

yourreasoningin

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Hi Ayush,

I was just going through this discussion and found your views on Lumax auto interesting. One thing thats concerning about Lumax, is their sundry debtors. In last 5 yrs BS, there sundry debtors have increased from 43 Crs in 2008 to 125 Crs in 2012. This is clearly evident in their operating cash flows also, which are less than half the NPs. I have slight doubts on their strength in business and hence IMHO i feel its more or less rightly priced in market. However i would love to hear your viewpoint on this aspect or any other.

Regards,

Vikas Kukreja

yourreasoningin :)) -http://www.screener.in/company/?q=532796&con=1#pl Link: http://www.screener.in/company/?q=532796&con=1#pl :))

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Hi Vikas,

The sales has grown from 291 crore in FY 08 to 756 crore in FY 12. The debtors also have to rise for such an “average” company. The percentage rise in debtors (as percent of sales) is not so significant, IMO.

NP in FY 11- 45 cr, operating cash flows- 48 cr. NP FY 12- 51 Cr, cash flow- 43 cr. It is certainly not half.

Cheers

Vijay

Hi Ayush,

I was just going through this discussion and found your views on Lumax auto interesting. One thing thats concerning about Lumax, is their sundry debtors. In last 5 yrs BS, there sundry debtors have increased from 43 Crs in 2008 to 125 Crs in 2012. This is clearly evident in their operating cash flows also, which are less than half the NPs. I have slight doubts on their strength in business and hence IMHO i feel its more or less rightly priced in market. However i would love to hear your viewpoint on this aspect or any other.

Regards,

Vikas Kukreja

Hi Anil,

yourreasoningin :)) -http://www.screener.in/company/?q=532796&con=1#pl Link: http://www.screener.in/company/?q=532796&con=1#pl

Regards,

Ayush

:))

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Presently reading the book One Up on Wall Street by Peter Lynch. I am attaching a list of check list while buying a stock which is mentioned in the book at various places. Hope this will go a long way in helping investors and readers of this amazing blog. Here is my small contribution.

CHECK-LIST-FROM-PETER-LYNCH.docx (10.1 KB)

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Hi Ayush,

I am new to the field of investing and on this forum. Its amazing to see such a vibrant community of value/growth investors (though I don’t differentiate much between the two) adding so much value to investment research/philosophy.

Regarding Lumax Auto Technologies: Looks a very good opportunity to me and have a researcher position. However, the preference shares issued by the company and the proceeds being used to invest in Lumax Industries is a bit confusing to me. I am not able to see the logic/rationale behind it. I was wondering if you have any idea about it.

P.S.: Lumax auto propped up on a screen that I created on Screener.in (wonderful site you have created) :smiley:

Thanks

Manan

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Hi Manan,

Yes, that is the one negative action I could notice in past by the promoters. It seems the intent was to raise their stake. These things have been there in the small/mid cap space.

Lets hope the same is notrepeatedby the co.

Ayush

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yourrequirements. andmany

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Hi Ayush,

Most auto ancillaries have low margins. Lumax has good ROI numbers, but is margins are not good in absolute terms for a business. In a downturn, the auto biggies squeeze their vendors hard to maintain their own margins.

Most auto ancillaries have lean OPM and the better ones among them have good ROI.

regards,
Arun

yourreasoningin :)) -http://www.screener.in/company/?q=532796&con=1#pl Link: http://www.screener.in/company/?q=532796&con=1#pl :))

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Hi Manish,

I could be wrong, but here’s what I think:

ROCE indicates how efficiently management is sweating the resources.

OPM indicates how effectively the company can take on competition - and to some extent indicates pricing power.

Auto ancillaries sell to auto biggies - no wonder their pricing power (& hence OPM) is low.

Regards,

Arun

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@T anil ,thanks for checklist.