Checklist I go through before I buy any stock

Lessons from Mr Market
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"
22

Hi,

The checklist is not openning please share the updated checklist.

23

The attached Xls are not openning

24

Could not open the attachments.

25

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

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

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26

Hi Anil,

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

Regards
Raja

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

28

you can download Tasty bites mindmap as example from here


and xmind format from here

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29

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

Regards
Raja

30

sorry for delay Raj… Try this link

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31

Thanks Anil for your kindness. Very obliged :smile:

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)

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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.
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35

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

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.

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

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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?

42

The checklist uploaded on the original post is no longer available. How can we get that again?

1 Like
43

A few weeks back I read the book called “The Motley Fool investment guide” written by two charismatic brothers, David, and Tom Gardner. They are also co-founders of the Motley Fool, which offers financial investment and planning services.

Each of them has their own style of investing and they differ quite a bit from each other. Tom’s style leans more towards “traditional” approach, like large caps, companies with a long history which have survived multiple business cycles. Whereas David’s style is more tuned towards growth stocks which have small market caps.

Here are some key take aways and checklists from the book:

Foolish investment process (Tom’s investment style):

Tom looks at the company’s Culture, Business Strategy, Financials, Safety and Valuation (in that order).

Culture :

Following are some ways to understand company’s culture:

  • Company’s rank in Fortune best companies to work for list
  • Ehisphere most ethical companies list
  • Glass-door reviews
  • The founder is the CEO
  • Employee retention rate

Strategy:

  • Are you(the investor) using the product? Will you pay more for the same product/service? (Pricing power)
  • Recurring revenue. Products that consumers will have to buy every 30 days
  • Growing total addressable market
  • Capital allocation: growing gross margins

Financials:

  • Sales growth
  • Higher profit margins
  • Healthy return on equity ( around 15-20%)
  • Healthy balance of cash and long term debt
  • Acceleration in owner earnings

Safety:

  • Founder-led company and if there is a plan of succession in place
  • The company is aware of disruptive threats and reinvesting to make sure they neutralize it
  • Diversification in clients – one client should not be more than 10% of revenue source
  • The company is not getting too big to grow – law of large numbers

Valuation:

  • A high growth rate of owners earnings
  • Expected growth rate higher than market
  • Expected long term growth rate should match historic growth rates
  • 5 year minimum holding period

The following is David’s investment style. He calls it “Rule Breaker Investing”. He even has a weekly podcast with the same name.

6 sign of a rule breaker:

  1. Top dog and first mover: dominant market share, highest market cap, first mover, creates its own niche
  2. Sustainable advantage: business momentum, patent protection, visionary leadership, inept competitors
  3. Past price appreciation: market recognizes the winner, Newton’s law of inertia
  4. Good management: listen to conference calls and interviews, are they smart? visionary? Inspiring? Look at their track record
  5. Strong consumer appeal: strong brand, rarely needs to advertise, their brand is associated with “experience”, a consumer doesn’t need to know what to buy or when to buy, the company can increase prices by 5-10% without losing market share
  6. Overvalued , according to media

Great stock takes not two minutes, but one sentence to explain

Companies usually go through a hype cycle. hype cycle can be described as the following phases:

  1. Technology trigger
  2. Peak of inflated expectation
  3. Trough of disillusionment
  4. Slope of enlightenment
  5. Plateau of productivity

We need to identify companies that are between 1 and 2.

Following the the screener that can be used to narrow down the universe of companies. Foolish Eight:

  1. Company sales: 500 million or less (to avoid big stable companies)
  2. Average daily dollar volume(average daily volume * stock price): from $1 million to $25 million (for liquidity purposes)
  3. A minimum share price of $7 (less than that falls into illiquid junk)
  4. Net profit margin of at least 7% (net margin relates to the quality of company)
  5. Earnings and sales growth of 25% or greater YoY
  6. Insider holdings 10% or more
  7. Cash flow from operations is a positive number
  8. Relative strength: strong price appreciation

Some misc points

Things to look in income statement:

  1. Margin rise at best and stay steady at worst
  2. Make sure the company is continuing to invest in R&D
  3. Make sure the company is paying full income taxes
  4. Shares count not increasing a lot

Things to look in balance sheet:

  1. High cash and cash equivalents
  2. Avoid too much debt
  3. Make sure growth in accounts receivable and inventory approximates sales growth
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44

Hi Anil,

I am unable to access the checklist for some reason. Would you be able to re-share it? I understand the post is over a decade old, but I’m still trying my luck.

Thank you!