Stocks In-depth
Checklist
- Company
- Management
- Stock
| 1. | Company | Yes | No |
| Do you really understand the business? | |||
| Does the company have a cost advantage? | |||
| Is the product superior — actual or perceived? | |||
| Are there barriers to entry in the industry? | |||
| Is the industry an oligopoly (only a few competitors)? | |||
| Are the company's advantages sustainable? | |||
| 2. | Management | Yes | No |
| Do the managers own a lot of stock? Are they buying more for themselves? (If they're selling, be wary) | |||
| Do they have a vision, and a strategy to realize that vision? | |||
| Are they paid fairly? | |||
| Has the stock outperformed its competitors during their tenure? | |||
| Is the Board of Directors predominantly comprised of independent, highly capable members? | |||
| Do you trust the management with your money? Are the managers focused on creating shareholder value? | |||
| 3. | Stock | Yes | No |
| Has the growth rate of earnings per share (eps) been stable or rising? (last 10 years vs. last 20) | |||
| Are eps estimates rising? | |||
| Is the free cash flow positive after deducting dividends? | |||
| Is the company repurchasing shares? | |||
| Is the stock out of favor on Wall Street? | |||
| Is the expected ROI attractive to you? | |||
| The answer to most of these questions should be “Yes”. The answer to the last question in each section must be “Yes”. | |||
Checklist — Advanced
- Company
- Management
- Stock
| 1. | Company | Yes | No |
| Is the pretax margin higher than its competitors? | |||
| Has the pretax margin been rising over time? | |||
| Has the R&D ratio been rising, as well? | |||
| Has the SG&A ratio been declining? | |||
| Is the interest coverage ratio below 3? | |||
| Have accounts receivable and inventories been rising less than or equal to sales growth? | |||
| Has sales growth been reasonably close to earnings growth (within 3 percentage points)? | |||
| Has sales and earnings growth come primarily from internal growth (rather than from acquisitions)? | |||
| Have “non-recurring” charges been few and far between? | |||
| 2. | Management | Yes | No |
| Has the compensation of the top five managers accounted for <10% of pretax income? | |||
| Have company options accounted for less than 10% of pretax income? Has the company avoided the questionable practice of repricing options when the stock price declined? | |||
| Is the Chairman of the Board an outside board member? | |||
| Have there been no disagreements with or changes of auditors? | |||
| 3. | Stock | Yes | No |
| Is the 10-year RORE greater than 20%? | |||
| Has the RORE been rising (5-yr > 10-yr)? | |||
| Is the operating free cash flow positive after dividends? | |||
| Is the operating discretionary cash flow significant? | |||
| Is the P-E (adjusted for goodwill) attractive to you? Relative to the average P-E of the S&P 500? | |||
| The answer to most of these questions should be “Yes”. The answer to the last question in each section must be “Yes”. | |||