Stock Buying Checklist

Stock Buying Checklist

Qualitative 

Goal: Will the company continue to prosper while maintaining durability of its business/earnings and is highly sustainable

Output: Goal behind is to ensure that in future: the company will continue to maintain the durability and be sustainable

Process/Questions To Ask/Checks to do:

1. What is the future of the company? do you see it to be thriving after 25 years?  
2. What will ensure the company is relevant in future? MOAT, is the company a Need or Want?
3. Is the company a good Capital Allocator
1. If acquisitions : how much are they paying for acquisition, <5x revenue, <5x assets VS market valuation of similar companies
2. acquisition in down years
   
4. Light Capital for incremental Sales or need substantial capital
1. preference is for light capital for incremental sale
2. differentiate between growth vs maintenance capital
3. Depreciation and Capex can be helpful indicator
5. Is the Company Eco System WIN WIN for its vendors, suppliers, customers, employees, shareholders
   

Quantitative 

Goal: Historical Durability and Sustainability

Use Historical Data to - Ensure the company has Durable and Sustainable Earnings, so we can easily see the future

Process/Questions To Ask/Checks to do:

1. Revenue double in 10 years 
1. exceptions: Financial companies like Banks Or Big Giants
   
2. Margins 
1. Profits growing at similar or better rate than Revenue
   
2. Stability of operating Profits/increasing specially in down years
3. if lower margins: asset turnover
   
3. Shares decreases through Stock Purchases
   
4. Return on capital >= 10%
5. Price to Book
6. Expenses Going down
7. Risk specially in terms of Receivables, Inventories
8. EB/EBIT
9. DEBT Cost and how long
10. SB comp(Stock based compensation) as an drag on Operating Income
11. Read Annual Report
1. Check if the company reports return on capital metric and provide longer term performance records like 3 years/ 5 years/10 years if financial data as opposed to previous years
   
2. Check segments and how revenues/profits across segments over time
3. Check geographical
4. Customer Density
5. Competition
6. make sure revenue is recurring VS one off
7. Repurchases of stock
   
12. Read Proxy report

Proxy Report checklist:

• Summary Compensation Table
• CEO Pay Ratio
• CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
• PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP BY MANAGEMENT
• Metric company is tracking for CEO pay
• Return on Capital
• Time based long term vesting
• No Options - instead RSU, PSU
• TSR return