Company Analysis and Investment Guide

Checklists Keep Life In Order

I have a checklist for almost everything. I’m not a checklist needing psychopath though. Although it’s harder for me to keep up with things without a checklist, I can get by without one. I just try to create a checklist everywhere it can be useful. Checklists are useful to me for house chores, daily workouts, groceries, activities at work, vacation packing, etc. I created a checklist-style company analysis and investment guide for myself.

Many of the investors I follow swear by checklists. Mohnish Pabrai, Guy Spier and Phil Town are three gurus I’ve heard talk extensively about checklists. They also say their checklists are constantly changing as they learn more.

Using a written checklist for investing as mandated by the FAA for pilots reduces, by at least 30, the number of IQ points required for successful investing

Mohnish Pabrai

I haven’t found where Mohnish talks about the specific items on his checklist. He created his by reverse engineering the mistakes of other great investors. He has said he doesn’t talk about specific items, because his checklist is his competitive advantage.

Guy Spier has his checklist in his book The Education of a Value Investor. I can guarantee he has edited his checklist since his book though. In his The Education of a Value Investor podcast, he talks about how he thinks differently about some things since he got screwed by his investment in Horsehead Holdings.

Phil Town talks about his checklist on the InvestED Podcast.

Some of the Best Checklist Books

Three books I’ve came across, and you will too, while looking for the checklists of gurus are The Investment Checklist, The Checklist Manifesto and The Manual of Ideas. You will likely come across these books at some point just by researching value investing or books recommended by investors.

The Investment Checklist is on Mohnish’s Bookshelf, along with The Checklist Manifesto. You have to check out his Bookshelf. He has hundreds of books on different subjects with personal thoughts written on some. Phil Town also recommends this book.

The Checklist Manifesto is recommended by pretty much every investor along with professionals from many different fields of study. It was written by Atul Gawande, a medical doctor, and has since been heavily adopted by the investment community. It also has been recommended by Phil Town on his podcast multiple times.

The Manual of Ideas is one of Guy’s Favorite Books for Investing and Life. It too has been recommended by many other investors. You have to check out his list of recommended books also.

My Checklist

My checklist-style company analysis is a layout of questions for me to answer about a company before investing. By the time I answer all the questions on the layout, I will have made an analysis of the company for myself. I answer these questions by following along with my investment guide.

I created my checklist from following investors. In research, I have read that Mohnish’s checklist is over 100 questions and mine will be eventually, but right now it is around 50 questions. My checklist has questions about the company, the industry, guru ownership, the moat, the management, competitors, risk factors, an event that caused it to go on sale and valuation. To answer all of these questions, I simply follow my investment guide.

My investment guide was created by following investors also. Warren Buffett has talked many times about how anyone can have as much information about a company as he does. Over the years, he has told many of the ways to get the same information he gets. You can get all of the information about a company for free, but there are some subscription websites that make like easier. Phil also does a great job at showing you where to find information.

There’s nothing that I know about that product, or its distribution system, its finances, or anything that, really, hundreds of thousands–or millions–of people aren’t capable of.

Warren Buffett

How it’s Set Up

I have my investment guide split up into 5 sections. The sections are Before the first investment, second investment, third investment, fourth investment and after fully invested. I haven’t included anything about selling in the guide.

I have my investment guide set up this way, because I like to get into a company in four blocks. It will differ depending on the amount of years a company has been public. Four Blocks is my standard for a company that is at least 10 years old.

My Investment guide includes the reading of the 10K’s, 10Q’s, analyst reports, news articles, competitors 10K’s, earnings calls, shareholder letters and other things. I have a certain amount of reading I must complete before making each investment block. This gives me the confidence that I don’t go all in on a company that I don’t understand like I thought I did and get screwed. It also gives me the chance to buy a company at a lower and lower price if the price is dropping. Phil calls this “Stockpiling” and talks about it in his book Payback Time.

Company Analysis

The Company

Company name:

Stock symbol:

Today’s date:

The company is headquartered in:

How did I discover this company (Stock screener, Guru buying, media, website, etc.)?

Company overview/description (What it does, its subsidiaries, its products/brands, etc.):

Company history:

Some company statistics:

The Industry

What industry is the company in?

Do I think this industry will grow, shrink or stay the same over the next 10 years? Why?

Gurus

How many Gurus own the company?

Guru(s)	% of Portfolio(s)	Last Reported Price Paid

If a Guru doesn’t own the company, why do I think that is (Is the market cap too small, trading volume too low, price too high, etc.)?

Moat

Which Moat(s) does it have (Brand, Secrets, Price, Toll Bridge, Switching, Network)?

Explain the moat(s) (Why does it have a durable competitive advantage and why will this protect the company from competition for the next 10 years):

Has the company’s moat been attacked in the past? How did it respond?

The historical growth rates (Base these rates off the most recent “normal” year):

	10 Year	7 Year	5 Year	3 Year	1 Year	Average Growth Rate
BVPS Growth Rate
EPS Growth Rate
OCPS Growth Rate
Sales Growth Rate
Average of the Averages

What is the 5-year analyst consensus growth rate?

Is this company capable of growing at these rates (How big will it be in 10 years)?

What kind of growth is the company expecting (Growth rate specified, cash flow prediction, how many stores, states, countries, users, etc., and by when)?

Management

Who is the CEO?

Is the CEO a Founder, Long-time CEO, Recent CEO Promotion or Recent CEO Hire?

What is the CEO’s story (biography, past performance, the dirt)?

Does the CEO write letters to shareholders?

Does the CEO have a Big Audacious Goal or make accountability statements? If so, what?

What is the CEO’s compensation (Latest proxy statement)?

What percentage of the CEO’s net worth is in the company?

Is the CEO selling 30% or more of his shares (Insider Trading/gurufocus)? If so, Why?

Does the CEO seem trustworthy (Does he write letters to shareholders, make things easy to understand, expose the negative things, etc.)?

The average ROE:

	10 Year	7 Year	5 Year	3 Year	1 Year	Average ROE
ROE

The average ROIC:

	10 Year	7 Year	5 Year	3 Year	1 Year	Average ROIC
ROIC

Is ROE and ROIC increasing, remaining constant or decreasing?

What’s the current Debt/Earnings Ratio?

If debt is higher than 3 years or ROIC is low, why (what was the money borrowed for)? When will ROIC reflect that?

Is Long-Term Debt increasing, remaining constant or decreasing?

Competitors

Who are its top 3 competitors? (This company on first line, Rank as #1 through #4)

Company Symbol	Market Cap	Years to Pay Debt	Average ROIC
Rank

Competitor #1 description (Company overview, statistics, how do the numbers compare between these companies, etc.):

Competitor #2 description (Company overview, statistics, how do the numbers compare between these companies, etc.):

Competitor #3 description (Company overview, statistics, how do the numbers compare between these companies, etc.):

How is this company outperforming or differentiated from its competitors (Better moat, oligopoly, niche market, etc.)?

Risk Factors

What are at least the top 3 risk factors?

Why are these risks unlikely or manageable?

Event

If the numbers have taken a hit recently, why is it still a wonderful company (Last fiscal year was bad due to an event, it’s not growing as fast from its size, it’s changing the moat, etc.)?

Is there an event? If so, describe the event (What’s the impact? Did stores close, how will the numbers be affected):

Is the event company-specific, industry-specific or market-wide?

Will this event be resolved within 3 years? If so, explain why (Has the CEO explained it or did I have to look elsewhere in news articles and analyst reports):

Valuations

What “Normal” year am I using to use to value the company?

The current price is:

How many shares outstanding?

What 10-year future growth rate am I using for my calculations (The lowest growth rate between the company, analyst or mine)?

What is my future P/E Ratio (The lower of 2x future growth rate or historical high P/E ratio)?

Could I find the maintenance portion of capital expenditures or am I using 70% of total capital expenditures (In the 10K, 10Q’s, earnings calls or analyst reports)?

Ten Cap Valuation

Operating cash flow
Maintenance capital expenditures
Total income tax
Total owner earnings
Shares outstanding
Owner earnings per share
Ten Cap value

Margin of Safety Valuation

Normal year EPS
Future growth rate
EPS in 10 years
P/E ratio in 10 years
Value in 10 years
Minimum acceptable ROR	15%
Sticker price
Margin of safety price

Free Cash Flow

Year	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
Operating cash flow
Capital expenditures
Free cash flow
Diluted average shares
Free cash flow per share

Payback Time Valuation

	Normal Year	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8
Operating cash flow
Capital expenditures
Free cash flow
Future growth rate
Total cash flow received
Diluted average shares
8-year payback time price

What is my Buy Price (Highest or average of all valuation methods)?

Conclusion

Is the company on sale (Yes, no or within 20%)?

If there’s no event and the company is on sale, why do I think it’s on sale (Be very wary)?

Is it a buy, watchlist or too hard?

Story conclusion (Buy, watchlist, or too hard, how much am I allocating, etc.): Explain:

Investment Guide

Before 1^st Investment

• Read most recent 10K. Focus on “Business”, “Risk Factors” & “Management’s Discussions”.
• If available, read 4 short and 4 long analyst reports, along with comments.
• If available, read 12 news articles. One from each month for the trailing 12 months.
• Read most recent 10K’s of the top 3 competitors. Focus on “Business”, “Risk Factors” & “Management’s Discussions”.
• Read all 10Q’s released after the most recent 10K.
• Listen to all the earnings calls, while reading the transcripts, for the current year or listen to the latest earnings call, while reading its transcript.
• Read 2 article on the CEO. 1 negative and 1 positive article.
• Read most recent proxy statement (DEF 14A or DEFA14A) and look for executive compensation.
• If available, read the latest annual letter to shareholders.
• Create company analysis with what I have.
• If everything is good and the current price is at or below my buy price, buy the 1^st 25% block out of the total capital to allocate for this business. Otherwise, set an alert for my buy price and move on to the next company.
• Draw Fibonacci retracements and trend lines on the price chart to see what the price “should” do.
• Set up google alerts for news on the company.
• Set up email alerts on the company’s investor relations page.

Before 2^nd Investment

• Read 10K’s from 3 oldest years. Focus on “Business”, “Risk Factors” & “Management’s Discussions”. Start with oldest year and work towards today.
• Read 10Q’s from 3 oldest years. Start with oldest year and work towards today.
• Listen to all the earnings calls for the 3 oldest years, while reading the transcripts. Start with oldest year and work towards today.
• Listen to all the new earnings calls, while reading the transcripts.
• If available, read the annual letters to shareholders from 3 oldest years. Start with oldest year and work towards today.
• Read proxy statements (DEF 14A or DEFA14A) from 3 oldest years. Start with oldest year and work towards today.
• Read 3 short and 3 long analyst reports, along with comments, from oldest 3 years. This is 1 short and 1 long for each year. Start with oldest year and work towards today.
• If available, read any new analyst reports. 1 short and 1 long report.
• If available, read 2 more articles on the CEO. 1 negative and 1 positive.
• If available, read new news articles. 1 for each month since last investment.
• Update company analysis.
• If I have the funds available, sell a put option for the 2^nd 25% block. Continue selling the put option monthly until the 2^nd block is purchased, or as long as I can meet a 20% ARORC while still buying at a margin of safety.
• If I don’t have the funds available to sell a put option, buy the 2^nd 25% block if it’s still below my buy price.

Before 3^rd Investment

• Read 10K’s from years 5 through 7 or oldest 3 years I haven’t yet read. Focus on “Business”, “Risk Factors” & “Management’s Discussions”. Start with oldest year and work towards today.
• Read 10Q’s from years 5 through 7 or oldest 3 years I haven’t yet read. Start with oldest year and work towards today.
• Listen to all the earnings calls for years 5 through 7 or oldest 3 years I haven’t yet listened to, while reading the transcripts. Start with oldest year and work towards today.
• Listen to all the new earnings calls, while reading the transcripts.
• If available, read the annual letters to shareholders from years 5 through 7 or oldest 3 years I haven’t yet read. Start with oldest year and work towards today.
• Read proxy statements (DEF 14A or DEFA14A) from years 5 through 7 or oldest 3 years I haven’t yet read. Start with oldest year and work towards today.
• Read 3 short and 3 long analyst reports, along with comments, from years 5 through 7 or oldest 3 years I haven’t yet read. This is 1 short and 1 long for each year. Start with oldest year and work towards today.
• If available, read any new analyst reports. 1 short and 1 long report.
• If available, read 2 more articles on the CEO. 1 negative and 1 positive.
• If available, read new news articles. 1 for each month since last investment.
• Update company analysis.
• If I have the funds available, sell a put option for the 3^rd 25% block. Continue selling the put option monthly until the 3^rd block is purchased, or as long as I can meet a 20% ARORC while still buying at a margin of safety.
• If I don’t have the funds available to sell a put option, buy the 3^rd 25% block if it’s still below my buy price.

Before 4^th Investment

• Read 10K’s from years 2 through 4 or oldest 3 years I haven’t yet read. Focus on “Business”, “Risk Factors” & “Management’s Discussions”. Start with oldest year and work towards today.
• Read 10Q’s from years 2 through 4 or oldest 3 years I haven’t yet read. Start with oldest year and work towards today.
• Listen to all the earnings calls for years 2 through 4 or oldest 3 years I haven’t yet listened to, while reading the transcripts. Start with oldest year and work towards today.
• Listen to all the new earnings calls, while reading the transcripts.
• If available, read the annual letters to shareholders from years 2 through 4 or oldest 3 years I haven’t yet read. Start with oldest year and work towards today.
• Read proxy statements (DEF 14A or DEFA14A) from years 2 through 4 or oldest 3 years I haven’t yet read. Start with oldest year and work towards today.
• Read 3 short and 3 long analyst reports, along with comments, from years 2 through 4 or oldest 3 years I haven’t yet read. This is 1 short and 1 long for each year. Start with oldest year and work towards today.
• If available, read any new analyst reports. 1 short and 1 long report.
• If available, read 2 more articles on the CEO. 1 negative and 1 positive.
• If available, read new news articles. 1 for each month since last investment.
• Update company analysis.
• If I have the funds available, sell a put option for the 4^th 25% block. Continue selling the put option monthly until the 4^th block is purchased, or as long as I can meet a 20% ARORC while still buying at a margin of safety.
• If I don’t have the funds available to sell a put option, buy the 4^th 25% block if it’s still below my buy price.

After all investments are made

• Read new 10K’s as released. Focus on “Business”, “Risk Factors” & “Management’s Discussions”.
• Read new 10Q’s as released.
• Listen to new earnings calls as released, while reading transcripts.
• If available, read new annual letters to shareholders as released.
• Read proxy statements (DEF 14A or DEFA14A) as released.
• Read any new analyst reports as released.
• Read any new articles on the CEO as released.
• Read at least 1 news article per month if available.
• Update the company story as necessary.