Company Analysis and Investment Guide

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 Year7 Year5 Year3 Year1 YearAverage 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 Year7 Year5 Year3 Year1 YearAverage ROE
ROE

The average ROIC:

10 Year7 Year5 Year3 Year1 YearAverage 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 SymbolMarket CapYears to Pay DebtAverage 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 ROR15%
Sticker price
Margin of safety price

Free Cash Flow

Year20102011201220132014201520162017201820192020
Operating cash flow
Capital expenditures
Free cash flow
Diluted average shares
Free cash flow per share

Payback Time Valuation

Normal YearYear 1Year 2Year 3Year 4Year 5Year 6Year 7Year 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 1st 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 1st 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 2nd 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 2nd 25% block. Continue selling the put option monthly until the 2nd 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 2nd 25% block if it’s still below my buy price.

Before 3rd 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 3rd 25% block. Continue selling the put option monthly until the 3rd 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 3rd 25% block if it’s still below my buy price.

Before 4th 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 4th 25% block. Continue selling the put option monthly until the 4th 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 4th 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.

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Quarter 1 2021 Guru Buys

Quarter 1 2021 guru buys

I don’t Like Being Screwed

I want to have the best chance at being successful and limit my chances of getting screwed. I also want to have the best chance at finding wonderful companies on sale. Looking at the quarter 1 2021 guru buys is a great way to do this. This the list of companies traded in the American stock exchanges that were purchased by my gurus this past quarter.

I am a shameless cloner as Mohnish Pabrai says. Cloning the ideas of the greatest investors in the world is simply the best way to do it. They have to be ideas I can understand though.

I’m a shameless copycat, everything in my life is cloned…. I have no original ideas

Mohnish Pabrai

How I Found the Buys

I used Dataroma to see what companies were purchased by the Superinvestors in quarter 1, 2021. I went to the “Grand Portfolio” page and selected “Qtr buys”. Then I sorted the list of companies by most buys to least buys by selecting the “Buys” tab. I recorded the companies on my “Quarterly Guru Buys” excel document to keep track of my findings.

For my first filter, I went through the list of 1075 companies and looked at Return on Invested Capital of the companies purchased by gurus that I follow. I want ROIC to be consistently above or around 10% over the last 10 years or since IPO. ROIC also needs to be above or around 10% over a 7 year, 5 year, 3 year and 1 year period.

I used the Rule 1 Toolbox on the Rule 1 website to quickly look at ROIC. The toolbox prevents me from having to input all the numbers into my excel document. I had to use my excel calculator for the companies that weren’t on the toolbox by getting the information from the financial statements in my TD Ameritrade account.

You can actually do this very quickly just using the toolbox. You can use a screener to filter the companies that gurus own with a good ROIC. A problem is that the website is delayed and at the time of writing this, it still only has the quarter 4 information. Another problem is that the companies that aren’t available on the website won’t show and I’ll miss them. This is why I used Dataroma.

This filter gave me 59 companies.

Ways to Help

I’m not perfect and there are probably flaws in the calculator that I haven’t found yet. I’m also not an expert in Microsoft Excel. I literally had to research how to create everything in the calculator and it took up no less than 20 hours of my weekend. You are welcome use this calculator if you’d like. If you find it beneficial, feel free to make a donation and support me on my path.

If you don’t already have a TD Ameritrade account and you’d like for me to receive $50 for referring you, shoot me an email with your first name, last name and email address, and we can do the “Refer A Friend” program. The qualifications are: you must be of legal age in your state of residence and you must fund your account with at least $3,000 within 90 days. If you don’t/can’t meet the qualifications or you just don’t want to help me out, then just click this TD Ameritrade link.

Checking Out the Financial Statements

For my second filter, I checked each company’s complete history of Book Value Per Share, Earnings Per Share, Sales Per Share, Operating Cash Flow Per Share, Return on Equity, Return on Invested Capital and the Long-Term Debt to Earnings ratio.

I was looking to see if I could make sense enough of the numbers to place a value on the company. If the numbers were all over the place, I passed on that company. All the numbers growing consistently year over year is awesome. Most of the companies had a down year or two, but rebounded back to normal.

I didn’t look to see what the growth rates of any of these numbers were. I would prefer a company that’s growing at over 10% per year, but it’s difficult to find that wonderful of a company on sale in this market. Warren Buffett has said you are sometimes better off buying a company that’s growing slowly or not growing at all than buying a fast grower. This is especially true if the company is taking on a lot of debt to fund the growth.

I believe in buying $1 of value for 50 cents no matter what kind of growth rate the company has. Mr. Market isn’t afraid for long and when he realizes he’s offering up a bargain, he raises the price. This price rise can allow you to make high percentage returns on slow growing companies.

This filter gave me 39 companies. Out of the 1,075 companies purchased by gurus, there are only 39 that I believe I could possibly understand and make a reasonable prediction on. I understand these companies on the surface of their financial statements. I still need to dig deep into the annual reports, quarterly reports, news articles, etc. This process is just a filter for me to find companies to begin researching.

This Could be A Lot Easier

Gurufocus could make my life so much easier and I will have a subscription when I save the money to buy one. It allows you to select the gurus that you want to follow and shows you the portfolios and activity from your gurus. This would cut the amount of companies I look at each quarter in half, because the gurus I follow usually purchase less than 500 companies combined each quarter.

On my quarterly guru buys list, I put the companies into categories of: “Less than 3 years of debt”, “3-5 years of debt” and “5+ years of debt”. I sorted the companies in these categories by “Number of Guru Purchases” and “Largest Portfolio Position”.

The Company Killer

I will start by researching the companies with the least debt. The reason I’m starting with the companies with the least debt is because debt kills. Warren Buffett once said “You never know who’s swimming naked until the tide goes out”. When a company leverages itself (takes on debt) and things don’t go as expected (The tide goes out), that’s when problems occur from the obligation to pay that debt (You find out who’s swimming naked).

You never know who’s swimming naked until the tide goes out

Warren Buffett

In the inevitable market crashes, the overleveraged companies are the most likely to go bankrupt. When public companies go bankrupt, the holders of common stock get screwed. Obviously. I believe a company with less than 3 years of debt is less likely to be caught swimming naked.

Debt makes a company fragile. “Antifragile” companies, as Nassim Taleb explains in his book Antifragile, emerge from tough times stronger. Companies with low debt and high cash flow are likely the most “Antifragile”. When the market takes a crash, they can buy competitors or buy their way into new markets when everything is selling for below value. When the market rebounds, it is a much stronger company thanks to the crash.

This is what Buffett has to say about a market crash, “I feel like an oversexed man in a harem. This is the time to start investing.” This is why the greatest investors in the world and greatest businesses in the world love a market crash. It’s when wealth is made.

I feel like an oversexed man in a harem. This is the time to start investing

Warren Buffett

Quick “Wrong” Valuations

The toolbox has a quick valuation calculator. I made a prediction just based on the historical numbers of what the intrinsic valuations could be. These valuations are 100% wrong and I do not stand behind the valuations at all. I have done no research into these companies, so I have no idea what the future prospects for each company look like.

For the companies not available on the toolbox, I had to use my excel valuation calculator.

Once again, I’m not perfect and there are probably flaws in the calculator that I haven’t found yet. I’m also not an expert in Microsoft Excel. I again had to research how to create everything in this calculator and it took up an entire weekend. You are welcome use this calculator if you’d like. If you find it beneficial, feel free to make a donation and support me on my path.

I Might be Making a Mistake

I am probably making a mistake just by doing quick valuations. It could persuade me into thinking a company is worth more than it really is. I am just trying to better my chances at starting my research with companies really selling at a discount right now.

I have a full-time job where I work 40+ hours per week, so I have to use my free time wisely until I’m able to turn investing into my full-time job. Investing wouldn’t really be considered a “job” to me though, because I’d be doing something I love. So, the companies that appear to “possibly” be selling at a discount are the first companies I will research.

The Problem Gurus Face

The reason I say I want to find the companies “Really” on sale is because some of the gurus face the problem of having their investors breathing down the back of their necks. This pressure from their investors causes them to buy companies at higher prices than they would like. Most people think if their fund manager isn’t constantly active, he/she isn’t doing a good enough job.

You, me and the investors in the funds of my gurus are constantly being fed “investing” news that makes us feel like if we don’t act now, we’re going to miss out. This “You better act now” news has created short-term thinking by most investors. 90+% of fund managers have a short-term investing method. They might say they’re long-term, but the reality is they rarely hold a stock longer than 1 year.

Charlie Munger says you make money when you wait. Some of the gurus know they should wait on a company to have a more depressed price before buying, but they buy with a smaller margin of safety to please their investors.

Look at those hedge funds – you think they can wait? They don’t know how to wait! I have sat for years at a time with $10 to $12 million in treasuries or municipals, just waiting, waiting…As Jesse Livermore said, ‘The big money is not in the buying and selling…but in the waiting

Charlie Munger

The Wizard of Wall Street

Julian Robertson, the founder of Tiger funds, is considered one of the greatest hedge fund managers of all time, if not the best. From 1980 to 2000, Tiger funds had a compound rate of return after all fees of 31.7%. Nobody had a better record, and yet people started pulling their money away from him. There is a book about him. It is called Julian Robertson: A Tiger in the Land of Bulls and Bears.

These people pulled their money away from possibly the greatest hedge fund manager of all time with a better record than everyone because they wanted momentum and potential short-term gains in highly speculative stocks.

As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much

Julian Robertson

My Advantage Over my Gurus

I don’t have investors breathing down my neck. I can wait until a company gives me a 50% margin of safety. Of these 40 companies, I am hoping for at least 1 that I can understand that is selling at a great margin of safety right now.

I will research the companies in the order of least debt, most guru purchases and highest percentage of a guru’s portfolio.

Here’s my Quarterly Guru Buys list of companies. I also have my list for quarter 4, 2020 in this document. These lists work with one another by showing what the gurus did with the quarter 4 purchases during quarter 1. If gurus are continuously purchasing certain companies quarter after quarter, that tells me to pay extra attention to those companies.

If you’d like to have a little more of an overview of the way I think about investing, check out one of my previous posts, This is an Overview of My Investment Style.

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Risky Business in My Portfolio

Risky Business

I got tired of reading Alibaba’s analyst report after seeing that Charlie Munger is buying in. I decided do something more exciting by looking for businesses to add to my “Risky Business” portion of my portfolio. I wanted to start with recent IPO’s. I just googled “all recent IPOs” and I found the Stock Analysis website. It has all the IPO’s of 2021, 2020 & 2019. I went through the list in reverse order from most recent IPO to the first IPO of January 2019.

My 1st Filter

For my first filter, I searched the “symbol” on Datorama. If a “Superinvestor” that I follow didn’t own it, I moved on to the next IPO until I found a company that is owned by a Superinvestor. I also didn’t want one that was being sold the previous quarter. Once I found one, I took note of how many gurus owned it, the “Reported Price” each Superinvestor paid, the “% of portfolio” of each Superinvestor and what quarter/year they were buying. Then I added the current price.

There are so many good ideas around. You don’t need to create your own ideas – you can clone them

Mohnish Pabrai

I created an Excel document and called it “Research List to keep track of my findings. I also created a “Watch List” document for companies I want to buy after performing further research on each company.

I know there has to be a better way of doing this instead of going through every IPO in 2-1/4 years. I found what could possibly be a great screener on Gurufocus, but I’m not prepared to spend $500+ at this moment. I will a little later on. I believe it’s worth it.

Once I have a proven track record and start managing money as a profession/lifestyle, I’ll have all the subscriptions to make life easier. Until then, I’ll just have to put in the hard work. Looking through 1,163 IPOs took some time. Especially to only have 22 possible companies that will go on to my next filter.

What I Look For in A Guru’s Portfolio

All the Superinvestors on Dataroma are…well, Super. I do not follow all of them though. I’m personally not smart enough to keep up with 100+ companies. The investment style that makes the most sense to me is Buffett/Munger style. You can learn more about this in my post “This is An Overview of My Investment Style“.

I like to see that a “Guru” or “Superinvestor” isn’t afraid to put most of their eggs in the one or a few “right” baskets. I like to see gurus with less than 100 companies in their portfolio or 60% of their portfolio in the top 10 companies. Unless you’re Warren Buffett with a $270 billion portfolio.

As a result of overdiversification, their (active managers) returns get watered down. Diversification covers up ignorance. Active managers haven’t done enough research into any of their companies. If managers have 200 positions, do you think they know what’s going on at any one of those companies at this moment?

Bill Ackman

His portfolio says it consists of 47 companies as I’m writing this, but I know from research that he owns over 100 companies, public & private. That being said, 85% of his public portfolio is in his top 10 holdings.

My 2nd Filter

For my second filter, I checked each company on the Rule 1 Toolbox to view the complete history of Book Value Per Share, Earnings Per Share, Sales Per Share, Operating Cash Flow Per Share, Return on Equity, Return on Invested Capital and the Long Term Debt to Earnings ratio. I checked it on the toolbox instead of using my Excel Calculator so that I didn’t have to plug in all the numbers myself.

If the numbers were all negative, I immediately passed on that company. I’m not good enough yet to value a company operating in the negative as short as its history is. This filter left me with 13 possible companies.

All of the companies were not available on the toolbox. The companies that have not yet been added to the toolbox, possibly because it has barely been 1 quarter since IPO on some, were put on my “Research List” along with the companies that passed this filter. I will have to use my excel calculator for these companies. This was to remember to find the information from the financial statements in my TD Ameritrade account.

Ways To Help

I’m not perfect and there are probably flaws in the calculator that I haven’t found yet. I’m also not an expert in Microsoft Excel. I literally had to research how to create everything in the calculator and it took up no less than 20 hours of my weekend. You are welcome use this calculator if you’d like. If you find it beneficial, feel free to make a donation and support me on my path.

If you don’t already have a TD Ameritrade account and you’d like for me to receive $50 for referring you, shoot me an email with your first name, last name and email address, and we can do the “Refer A Friend” program. The qualifications are: you must be of legal age in your state of residence and you must fund your account with at least $3,000 within 90 days. If you don’t/can’t meet the qualifications or you just don’t want to help me out, then just click this TD Ameritrade link.

My 3rd Filter

For my third filter, I checked where each company is headquartered. I only want companies headquartered in the United States. If it is headquartered in another country, it gets taken off the list.

I have nothing against investing in companies outside the United States, but I am wary. They aren’t required to follow the same SEC regulations as American companies and it can be a headache trying to find some information. Personally, I might not even be comfortable investing a large percentage (+10%) of my portfolio into a foreign company that has been public for more than 10 years. I’m especially uncomfortable investing in a foreign company that’s less than 2 years old. I will eventually learn more about foreign markets to ease my comfort level.

This left me with 8 companies. Yeah, 8 possible companies out of 1,163. There was definitely a better way of doing this.

These are just the companies that passed my first 3 filters. I haven’t put them through my investment checklist, nor have I researched any into these companies yet. They just look good on the surface to me. They don’t have the track record to prove they have a durable competitive advantage.

The “Possible” List

This is the list I came up with. The order I am going to start researching these companies in is based on the highest number of guru holdings, highest percentage of their portfolios and the ones currently selling below the guru purchase price. The order in which I plan to research these companies will probably go like this:

SymbolCompany# of Gurus% of PortfoliosPurchase ActivityPurchase PriceCurrent Price
DASHDoorDash Inc.51.17 – 0.22%Q4 2020$143$137.37
AVTRAvantor Inc.32.39 – 0.42% Q4 2020 $29$31.17
UPSTUpstart Holdings Inc.14.01% Q4 2020 $39$153.85
FUBOfuboTV Inc.12.08% Q4 2020 $28$20.29
LESLLeslie’s Inc.10.96% Q4 2020 $28$28.22
WPFFoley Trasimene Acquisition Corp.10.58% Q4 2020 $16$10.39
WISHContextLogic Inc.10.52% Q4 2020 $18$9.32
MNRLBrigham Minerals Inc.10.31% Q3 2020 $11$17.87

I know these are not the exact prices that gurus purchased the companies at, but it is pretty much impossible to know the exact price. This is not a recommendation or investment advice in any way. This is just how I went about finding recent IPO’s with the resources available to me at this moment.

Follow Others, But Think For Yourself

The companies I choose after deep research into each one will go into my “Risky Business” portion of my portfolio. The risky business portion of my portfolio will consist of no more than 10% of my total portfolio. There will also be no more than 10 companies in my risky business portfolio.

We have to have a price that makes sense and gives a margin of safety considering the normal vicissitudes of life

Charlie Munger

I guarantee my ideas and ways of doing things will change. My main focus is on established companies that have been public for at least 10 years. 10 years is enough time for a company to face the “vicissitudes of life” as Charlie says and to “find out if they were swimming naked when the tide went out” as Warren Buffett says.

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Gurus, Numbers and Excel Calculators

Gurus, numbers and Excel Calculators

I am going to talk about some gurus, numbers and excel calculators. Everything you read is my opinion and some things I’ve learned.

A Great Teacher

Phil town is a bit of a guru that I follow. He is a “bit” of a guru because he isn’t required to file a 13F filing. He is great at teaching beginners how to invest. A few books of his are Rule 1, Payback Time and Invested. He also has the Rule 1 website, Rule 1 Finance Blog, InvestED podcast and the Rule 1 Youtube Channel.

His teachings are basic and you can definitely find more elaborate valuation models in other books like Margin of Safety or Security Analysis. I tried starting out with Security Analysis,  because it is considered one of the best books ever written on business valuation. That was a mistake. In my opinion, it is too complex of a book to start out with. At least it was for me.

After further research, I stumbled upon Phil. I haven’t found anyone yet that is as good at explaining complicated investing topics to people looking to learn about investing, but don’t know where to start. Although Warren Buffett simply gives out the best investing education you will find anywhere, he’s so smart that it can still be somewhat intimidating to a beginner.

The Art of Business Valuation

Margin of Safety by Seth Klarman is super expensive because he only had 5,000 copies printed. There is a PDF version of Margin of Safety floating around the internet. He doesn’t really care to print more books. Probably because he doesn’t need the money. Warren even suggested that Seth is the most impressive investment professional and that he could be considered the next Warren Buffett.

The single greatest edge an investor can have is a long-term orientation

Seth Klarman

Business valuation isn’t an exact science though. It’s more of an art. From my experience, Phil’s methods are awesome at finding wonderful companies. His valuation methods also do a pretty good job at reaching an intrinsic value somewhere in the same ball park as the gurus.

What I Look For in A Business

Phil teaches that when finding a company with a moat, to look at the growth rates for Book Value Per Share, Earnings Per Share, Sales Per Share and Operating Cash Flow Per Share. These rates growing greater than or equal to 10% signifies a historic moat.

He teaches that Return on Invested Capital and the Debt to Earnings ratio is great for determining how management has historically performed. A ROIC greater than or equal to 10% signifies that management is doing a good job at allocating capital. The least amount of debt compared to earnings is best, because you are less likely to get screwed from a company filing for bankruptcy. A company with a Debt to Earnings ratio of less than 3 is good, between 3-5 is alright and 6+ is not so good.

Only when the tide goes out do you discover who’s been swimming naked

Warren Buffett

He also teaches to look at the growth rates and ROIC on a 10 year, 7 year, 5 year, 3 year and 1 year basis. Looking at the numbers over these various time periods will show you if they are shrinking, remaining constant or growing. Whatever it is that the growth rates are doing, you have to keep that in mind when choosing a “Windage” growth rate for company valuations.

The Toolbox

I am subscribed to the Rule #1 Toolbox. I have learned a lot from reading Phil’s 3 books, watching his youtube channel, listening to his & Danielle’s podcast and reading his blog. Later, I am going to do this with all the guru investors that I follow. This is so that I can install into my brain the way they think. Phil just simplifies it better than anyone I’ve found so far.

Not only do I subscribe to his Toolbox as a way of giving back for everything I’ve learned, but I’ve found it to be a great tool for finding companies. It turns out that most of the “wonderful” companies that gurus pile into are usually some of the top ranked companies on the Toolbox. It also has 10 years of data, calculators, growth rates, regulatory filings, news, insider trading and analyst ratings. I believe it is worth the monthly subscription.

The only flaw I’ve found so far is in the growth rates. This flaw is that the growth rates are calculated from numbers of the most recent year. If the company is going through a temporary “event” that produces bad numbers or magnificent numbers for this most recent year, the growth rates will be flawed. If the event doesn’t really affect the numbers or there’s no event, then the growth rates work great. To combat this flaw, I created my own Microsoft Excel calculator.

The Calculator

With this calculator, I am able to go back to whatever year was “Normal” and see what the growth rates were leading up to that year before the event. I created a calculator for all the growth rates: BVPS, EPS, SPS and OCPS. I also added Return on Invested Capital and the Debt to Earnings ratio.

Phil has an Excel Formulas PDF Document on how to calculate the growth rates in Excel using the “Rate” function. It is on the Resources Page of his website. I think you have to put in your email to receive it though. I just took his quick instructions and applied it to every year that can be calculated with all previous years for 10 years of data. This allows me to see what the numbers looked like without an event.

The other reason I created the Excel calculator is because I don’t want to be dependent upon a website. With my calculator, I can go directly to the annual reports filed by a company and record the data I need. As I start filling in this data, other parts of the calculator will automatically be filled and calculated for me.

The Usefulness of My Calculator

Let’s take Texas Roadhouse (TXRH) as an example. TXRH is in the restaurant industry and was forced to shut down their business for some time in 2020. This obviously affected earnings in a negative way big time. Earnings Per Share grew from $0.84 in 2010 to $2.50 in 2019. Then it went from $2.50 in 2019 to $0.45 in 2020. This is what a negative event looks like in the numbers.

That Makes the EPS Growth Rate 12.9% for 9 years, 13.7% for 7 years, 14.9% for 5 years, 14.6% for 3 years and 10.1% for 1 year at the time of this writing. I have all 10 years on my calculator, but just chose these for the example. If I were to base my growth calculations off the most recent year, 2020, the growth rates would have been -6.1% for 10 years, -12.5% for 7 years, -20.2% for 5 years, -38% for 3 years and -82% for 1 year. This is because of the event Texas Roadhouse experienced in 2020. The event was Covid-19.

We can take Alpha Pro Tech Ltd. (APT) as another example. APT is in the business of disposable protective apparel, building supply and infection control products. As you can guess, their earnings were affected in a positive way from the same event.

EPS went from $0.27 in 2018 and $0.22 in 2019 to $2.01 in 2020. Earnings per share grew from $0.10 in 2010 to $0.27 in 2018. That makes the EPS Growth Rate 13.2% for 8 years, 12.5% for 5 years and 8.3% for 2 years. If I were to base my growth calculations off the most recent year, 2020, the growth rates would have been 52.1% for 8 years, 90.6% for 5 years and 172.8% for 2 years.

Why The Calculator is Useful

If I were to choose a windage growth rate for my business valuations based on the numbers from the most recent year, my valuations would be flawed. The valuation for TXRH would be way too low and the valuation for APT would be way too high.

The event for both companies was the Coronavirus pandemic. It affected Texas Roadhouse negatively, because they were forced to close their restaurants temporarily. It affected Alpha Pro Tech positively, because they make infection control products. I consider 2019 the most recent “Normal” year for TXRH and 2018 the most recent “Normal” year for APT. I will use these “Normal” years for all my valuation calculations.

A cheap price alone is not sufficient reason to invest. If something is forever cheap, then it has no recognized value, and its stock may very well remain a worthless piece of paper. For a bargain to soar in price, there has to be a catalyst, and from an investment perspective, that catalyst is change

Jim Rogers

The reason I am comfortable going back a couple years to make a valuation on a business is because I know the event is temporary. As soon as this Coronavirus is in the past, I’m confident the numbers will go back to the level they were at before the event.

Use It If You’d Like

I’m not perfect and there are probably flaws in the calculator that I haven’t found yet. I’m also not an expert in Microsoft Excel. I literally had to research how to create everything in the calculator and it took up no less than 20 hours of my weekend. You are welcome use this calculator if you’d like. If you find it beneficial, feel free to make a donation and support me on my path.

This is a quick overview of some of the more detailed numbers I look for in a company. I will get more detailed later. If you’d like a broader view of my investment style, check out my previous post “This is an Overview of My Investment Style”.

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