There are many ways to analyze a stock story. But, at the core, one needs to pay attention to the following.
- Business model
- Sources and Quality of growth
- Risk/Bear Case
- Management
- Profitability
- Financial Health
- Valuation
- Moat
- Opportunity Size
Some of these are subjective, while others are more objective and they can be derived easily from financial statements. In any case, one needs to go through annual reports of many years to get these details right. One should also be aware of the various happenings in the company and keep a track of all the news available about the company. One important aspect is not to miss any of these details while analyzing the stock story. For that, one needs to keep a template and try to fill it for every business that one is analyzing. The template listed below is the one that I use. It has been created based on Pat Dorsey's "The Five Rules for successful stock investing".
What does the company do aka Business
Sources of Growth
- Selling more goods or services?
- Raising prices?
- Selling new goods or services?
- Buying another company?
Quality Of Growth
- Is there a big difference between growth rate of net income, operating income and cash flow from operations?
- What is the tax Rate? Has it changed recently? Why has it changed?
- Are there one time gains?
- What is the equity Dilution over a period of time?
The Bear Case
- List all the potential negatives
- What could go wrong with my investment thesis?
- Why will someone sell this company?
Management
- Does the management have a reputation of cheating minority shareholders?
- Does the management have a political connection or involved in political deal making?
- Is management conservative in its guidance and projection or over aggressive?
- Has management been candid in telling about impending slowdown earlier?
- How is management compensation relative to company profit?
- Were executives given loans that were subsequently forgiven?
- Does the company rank and file get the stock options or it is given only to top management?
- What percent of company's equity is given as stock option every year?
- What percentage and kind of transactions are related party transactions?
- What is the attrition rate in the company?
Profitability
- ROE
- Free Cash Flow = Cash From Operations-Capital Expenditure
Financial Health
- D/E Ratio
- Number of years of Net Profit(FCF) needed to pay off complete debt
Moat
- Does the company have superior technology or provides better features?
- Does the company have a trusted brand?
- Does the company run its operation far better than others(superior process)?
- Does the company have locked in customers?
- Can the company lock out competitors by creating creating high entry barriers?
- How long will the moat last? Short, Long, Very Long?
- Does the industry generally have companies with high ROE or is the company unique? If industry itself has high ROE, Moat is more sustainable.
Valuation
- P/E
- PEG
- P/B
- P/S
- IV
Opportunity Size
- What is the overall size of opportunity? How long the company can continue growing with high rate?
