Investment checklist v 0.1 (beta)
One of my “secondary” goals for 2013 is trying to develop a more “formal” checklist especially for my “boring stock” strategy. As the “Boss Score” is only ment to be a starting point, I usually try to “quick check” certain points in order to find out if a deeper analysis makes sense.
One of the first thing one has to decide is: “what kind of stocks am I looking for” ? I don’t believe that a single check list for all kind of different stocks exists. So please keep in mind, the purpose of this checklist wil be to find stocks that:
– perform consistently well over time but not spectacularily so (no “wide moat” companies)
– have little fundamental downside (low debt, “hard” assets, stable sector)
– can be “left alone” if necessary for a long time because management is trustworthy (“low maintenance”)
– are nevertheless “mispriced” by the market
So far I have come up with the following list and the first 27 items (beta version):
1 . Market cap between 25-250 mn
“sweet spot”, large enough to invest, small enough to deter “large professional” investors
2. Less than 3 analysts following on Bloomberg or very bad sentiment
Unfollowed or “hated” stocks have larger potential to be mispriced
3. “low key” IR. E.g. no English annual reports, short quarterly updates etc., no share price on company homepage
Many investors skip such stocks
4. Potential special circumstances like Euro crisis, very diverse business activities, complex structure, Spin off etc.
increases chance of mispricing
5. Low historical beta /volatility
Good for my nerves, bad for any index oriented investors
6. Dividend yield > 3%
subjective criteria based on experience
7. P/E < 10
For some reasons I prefer “single digits” P/E
8. P/B < 1.2
Maybe anchoring effect, but in my opinion limtis downside risk
9. EV/EBITDA <= 6
in order to detect “special effects”
10. 10 Year mean reversion potential > 50%
Mean reversion potential based on P/E- net margin & EV/EBITDA, EBITDA margin
11. Positive 10 year FCF yield
no FCF generation normally indicates issues with capital allocation efficiency
12. Large acquisitions in the past or serial “acquirer” ?
might severly impact quality of reported numbers
13. Large share of intangible assets ?
again, quality of reported numbers
14. Significant pension liabilities, operating leases ?
Adjust for them accordingly to see if total leverage still acceptable
15. Low financial debt (net debt/equity <0.5)
again to minimize downside risk
16. Family owned / run
better chance for long term strategic management, best with founder still in charge and not too old
17. Treatment of shareholders in the past ?
Any indications of screwing shareholders in the past ?
18. Sharecount stable or decreasing ?
Does company dilute shareholders e.g. via options to management ?
19. Alignment of management and shareholders ?
Does management earn comparably much more than their shareholdings ? Outsized & unwarranted bonuses ?
20. Subjective impression of company management (pictures, speeches, comments)
Might sound stupid, but sometimes a picture says more than 500 pages …. Avoid jet set, sleazy looking guys
21. 10 Years of comparable history available ?
preferably companies with a long term track record as listed companies without major restructurings etc.
22. Industry in general decline
avoid value traps or make sure to understand whats going on
23. Positive/neutral short term (6m-1 year) price momentum ?
only catch the falling knife if you are very very sure
24. high quality investors as share holders ?
Preferable less known but good investors
25. Do I understand the business model ?
Why is the company succesful over the long run ?
26. Potential short/medium catalyst ?
i.e. sale of loss making division, change in shareholder structure etc.
27. 10 year sales growth above inflation
Don’t pay for growth, but if you get it cheap…also trade off with FCF
For each item I will give a score which is either:
+1 for a very positive answer
0 for a neutral position
-1 for a negative aspect
I will then add all the scores, the maximum is then logically the total number of checklist items. Anything which scores above 50% or more will be analysed deeper. In order to “callibrate” the list, I will also calculate scores for all my current holdings.
For a first test I calculated the “sores” for the following positions:
Total Produce: 16
AS Creation: 20
As with any checklist or other “Model”, I don’t think one should follow this like a slave. Rather it should help to look more structured at a stock and also being able to review such a stock periodically on a structured basis.
I would be highly interested if any of the readers has comparable checklists and suggestions for the list.