Checklist I go through before I buy any stock


(Arun S G) #18

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 :))


(Arun S G) #19

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


(jatin) #20

@T anil ,thanks for checklist.


(Ravi Duggirala) #21

Anil

Your checklist looks quite good! Why do you not want to invest in a company which has less than 10 years of listing history? Don't you think you might lose on lapping up some really high quality businesses in the initial stages?

"Not to invest in any company which is listed for less than 10 years ago (in exceptional cases atleast 5 years), because company has not yet faced complete cycle, and it is difficult to make any judgement about the management"

(mahesh112) #22

Hi,

The checklist is not openning please share the updated checklist.


(mahesh112) #23

The attached Xls are not openning


(Manu Thrissur) #24

Could not open the attachments.


(T Anil Kumar) #25

Please find attach link to the updated checklist… Apologies for late reply

https://drive.google.com/file/d/0B8Mr8IuAEwz7OGFObl9Fa182UUE/view


(Raj Panda) #26

Hi Anil,

Is it possible to share the mindmap file (in it’s original format, not the pdf export) ?

Regards
Raja


(mahesh112) #27

Sir,

thanks for the reply.

I’m a new learner to this world, requesting you to share one stock example analyzed with the checklist and if possible please share your portfolio.

Thanks
Mahesh


(T Anil Kumar) #28

you can download Tasty bites mindmap as example from here


and xmind format from here


(Raj Panda) #29

Hi Anil,
Still don’t see the xmind format, only see the pdf. Can you recheck please.

Regards
Raja


(T Anil Kumar) #30

sorry for delay Raj… Try this link


(Raj Panda) #31

Thanks Anil for your kindness. Very obliged :smile:


Equity Investing as a full time career?
(zygo23554) #32

Some folks PM’ed me to upload the checklist and qualitative criteria I use to analyze businesses on the “Equity Investing as a full time career thread”, one of them suggested I post on this thread.

In case there is a better/more active thread for this requesting one of the mods to guide me to the same

Nothing fancy about the attachments, just covers some basic questions I’d want to ask myself before I buy any business. This is more of a 2-3 day exam I force myself to go through for every story :slight_smile: Nothing original about these either, I have adapted interesting fundas I come across into my equity research templates as and when I come across them

Credits -

Idea of using a checklist - Mohnish Pabrai, Sanjay Bakshi
Moat Framework - Pat Dorsey
Industry Attractiveness - Michael Porter
Stock Evaluation - Michael Mauboussin

Jugaading all of this into a cohesive framework - Me

One very important criteria I have come around to recently (not covered in the attachments) - Buy businesses which are significantly promoter owned and promoter run. I do not see the value in buying a business which is full of professional managers with their Ivy League MBA’s, swanky ppts and irrelevant excel models. Having spent some time in the corporate world I think there is nothing that can worsen organization culture than top managers who don’t believe in meeting customers and instead waste their time in meaningless reviews and status checks every day. CEO’s in such companies rise to the top by eliminating other smarter people, not by grooming them; what got them to the top won’t help them take the business to the next level. The NIFTY is full of such companies whose best days are behind them for this very reason

Credit for the above criteria - Thought process behind the ASK IEP PMS

Frameworks.xlsx (7.4 KB)
Checklist.xlsx (12.4 KB)


(Chirag) #33

I feel 80-20 rules applies well while researching companies.

One can find 80% of things needed to rate a company by considering 20% of parameters. After that it is a law of diminishing returns.

I would simplify things even more to just two points. Answers to these two points will give you 70% information about the health of the company and what can be expected from it in future.

  • Is the company making money (profits), organically without raising debt or diluting equity
  • Is the company making more money (growth) with increased efficiency (margin growth), organically without raising debt or diluting equity.

(Chirag) #35

Please do name some companies that have passed your checklist. Thank you.


(Chirag) #37

Thank you for pointing out Greaves Cotton. I did some initial investigation and it does look good.

Only concern I had was about declining net profit margins.

But at current levels of 126 (strong support at 115 and immediate support at 121) it does look like a good investable idea.


(phreak) #40

I have been trying to come up with a checklist - Its not a standardised test where a score be generated by an algorithm to choose pass/fail but more of a reminder to view the scrip from different vantage points to ensure past mistakes are not repeated. Its very much a work in progress. Thoughts welcome. I might come across as being all over the place - its because these are the unorganised thoughts from my mental model.

Screening

  1. D/E – Under 1 definitely. Under 0.5 better. If it’s close to 1, is debt increasing/decreasing over last few years? How is the interest coverage ratio? EBIT > 5 times interest would be nice.
  2. High RoCE and RoE -> Above 20% must, higher the better. Make exception for commodity/asset plays.
  3. How is the Sales and Profit growth for recent 3 yrs? (For most) Recent few quarters? (For turnarounds) 5/10 yrs? (For mature businesses)
  4. Track OPM trajectory. Expanding margins with more scope for expansion is very, very nice. OPM above 40% (non-financial) with great market size – Ignore valuations.
  5. Capacity utilization? Ensure there is scope for expansion.
  6. Capex plans? Better to enter companies that have recently completed capex.
  7. 10 Yr balance sheet view -> Is it growing/shrinking? How/Why?
  8. Dilution – Lesser the better, none preferred
  9. Promoter holding – Higher the better. To quantify – Above 70 would be great, above 50 acceptable.
  10. Cash flow – Positive CFO? Positive 10 Yr FCF? Is the company generating lot of cash?
  11. Market cap – micro/small better

Business Quality
12. Does the business have repeat customers? How is the client concentration?
13. Recognizable Brand?
14. Does the business have longevity and simplicity?
15. Does product need frequent replacement (very, very good).
16. How is the Marginal utility of the product?
17. Commodities that are consumed irreversibly are good even if they are commodities. Shrimp or Basmati Rice are irreversibly converted while Steel and Aluminum can be recycled in the secondary market.
18. Avoid businesses that allow employees to put their hand in the till (eg. Banks). The very act of business that are in the business of money for making money has a bit of GEB (Godel, Escher, Bach – the book) in it.
19. High Working capital requirement?
20. How is the company managing Inventory?
21. Asset turnover – Historical, base rate for business and current state
22. Does the business depend on subsidies? (Sugar, Textiles etc.) – Avoid.
23. Sectoral headwinds/tailwinds
24. How is the Receivables, debtor days, Cash conversion cycle?
25. Market size, opportunity size, demand trajectory, nature – cyclical vs steady

Fraud-Detection
26. Are Products real? (Fiberweb, Vakrangee)
27. Creative Accounting detected? (Vakrangee)
28. Is this a pump and dump stock? Are we certain we are in the pump part of the cycle? What’s the exit strategy? (Eg. HSCL, Cerebra qualified when they were under 20). Load up and wait if there are classic signs of manipulated price-action.
29. Shareholding Pattern -> Look last 5-7 years to see who major holders are and how it has increased/decreased and compare with prices during the time to detect pump and dump. (Eg. Vakrangee)
30. Has entity recently demerged? Then it’s mostly expensive (Lasa, Sintex Plastics)

Valuation
31. Valuation by DCF if applicable and valuation by P/E – Ignore for high growth
32. Check EV/EBITDA, Earnings Yield, Dividend Yield
33. List and compare with competitors
34. Has price risen up recently? Are you still sure you want to buy right away?
35. Where and how did you hear about it? Was it Moneycontrol/Porinju type source? Was it another renowned value investor? Exercise caution if it’s any of the above.
36. Technicals – Trading well above 20 DMA? Wait. Look at Weekly/Monthly charts for better entry over time over support zones – 20/50 DMA or support trendlines.
37. Stoploss/Trailing Stop necessary? Which?

Holding Term
Long-term -> Low rate of change, Simple products with longevity, Large market size, underpenetrated

Short-term -> Swing trading, sector rotation, asset plays, turnaround in uncertain beaten down sector, commodity plays

Selling
1.Rate of growth + Perception of growth. If rate of growth slows down, perception of growth comes down exponentially and caution has to be exercised before P/E rerating happens. (eg. Sun pharma)
2. Consider endowment effect when considering the price you want to sell


Hitesh portfolio
(mahabali3004) #41

One question - Do you take MF/institutional share holding into this account. If a MF/institutional holding sells all its stake QoQ ( eg. Vakrangee - Edelweiss Fund ) - Do you take it as a red flag?