The Stockpicker’s Checklist

There's been more than a few questions floating around WSO about the interview Stock Pitch.

How to do it?

What to look for?

Does it really matter?

Well, Mebane Faber of Cambria Investment Management has laid out an excellent basic guide on stock picking right here, taken off his notes from his security analysis class under Tiger Cub John Griffin, so I'm pretty sure this'll help more than a few monkeys on the first two questions.

As for the third, yes, it does. And besides, what do you have to lose being prepared?

Here's a few points from his overview...

Qualitative Analysis

Industry Study

* Is this a good business? What are the key success factors to superior performance in this industry? (Value Added Research "VAR")

* Who controls industry pricing? Does the company/sector have any pricing power?

* Define the market opportunity. How do competitive products address this opportunity?

*Do you understand this business? Test yourself and describe it to a ten year old. DO THIS!

Business Model

* What is the selling model: razor/blades? services? one-off contracts?

* What are the economics of the base business unit? How does it stack up against competitors?

  • Does the company have the moat Buffet's always looking for?
  • Is their growth/earnings/whatever sustainable?

WSO has a ton of great discussions on this topic; here's one of Google, while me and Midas opened a can of worms talking about Facebook's sustainability not too long ago.

Management

* What is their background, and what do their former colleagues, investors, classmates, say about them? Have they been successful in the past? (Very important)

* How are they compensated? Are their interests aligned with shareholders?

Refer to Eddie's post on Steve Jobs, arguably one of the best CEO's in history.

Or go read The Smartest Guys in the room for a take on the other side.

Risks

* What are the big unknowns? How much can the company control/influence these risks?

*What could cause this investment to be a total disaster? How bad could it be?

For example, has the high-cost producer you're looking at hedged properly against rising commodity prices? What would happen to them in a hyperinflation scenario?

Stress test your thesis.

Other (Timeline/timing issues)

* What are the catalysts (triggers) for the company's proper valuation to be realized?
  • Is the business cyclical?
  • Is there something on the horizon that will increase or decrease the demand or price of its products?

Consider Peter Thiel's long oil trade in '04.

And of course, do not forget to go as granular as you can on the 10-k.

There you have it, your uber basic checklist stock picking. Pretty sure there are a ton of points I've missed here and there though, so hit up the comments if you'd like to add something.

Either way, if you could answer all these questions in depth you're pretty much set with a solid stock pitch.

Enjoy your weekend WSO.

Don't you sick bastards have too much fun now.

Comments (16)

 
Jan 23, 2011 - 12:09pm

Any tips on where to get good industry information (such as trends, size, growth, revenue drivers, etc.)?

 
Jan 23, 2011 - 2:05pm

+1

Men are so simple and so much inclined to obey immediate needs that a deceiver will never lack victims for his deceptions. -Niccolo Machiavelli
 
Jan 23, 2011 - 5:30pm

Great post Jorge

"You stop being an asshole when it sucks to be you." -IlliniProgrammer "Your grammar made me wish I'd been aborted." -happypantsmcgee
 
Jan 31, 2011 - 5:38pm

wait a minute..a stock pitch is all strategic / qualitative? you don't need to know detailed company financials, ratios, stock performance, etc?

If so, it wouldn't be that hard for someone from industry right?

 
Best Response
Jun 27, 2011 - 11:08pm

Do you think this stock selection methodolgy will work? (Originally Posted: 04/28/2012)

So after reading a few books, and searching the web I think I may have come across the methodology I would like to use. Since I do not have any experience in ER, I was hoping I could get some input from those who are.

My plan is to select the top names from an industry, and do a comp analysis on them using the following numbers:

EV/EBITDA
P/E
P/FCF
P/Tang Book
Current Ratio
Div Yield
10 Yr Div Yield CAGR

From there I would calculate an industry average for each measure, and call it my average multiple. Then I would use it to calculate a suggested price. Finally, I would take an average of each suggested price and get my intrinsic value. If the stock is currently trading at a large discount to this value then I think it would be a pretty good investment as long as my qualitative research does not find anything negative.

I also might try to take into consideration the TREFIS price estimation as this might take into account catalysts.

Is this at all what people on wall street do? How can I change this to make better decisions?

 
Jun 27, 2011 - 11:09pm

Your comps should be more tailored...it is not just top companies, but similar companies in terms of geography, products, market cap, etcl

Same with comps..different industries use different multiples. FCF has no place on a spread of banks, while you might want some mentric like occupancy rates if valuing REITs.

Otherwise, good job. You will want to look at some additional measures, like margin expansion/contraction, historical multiples, the state of the industry, their balance sheet, and growth rates. Somrthing like a DCF could help.

Finally, Trefis is cool, but dont do a valuation based on it.

 
Jun 27, 2011 - 11:12pm

I would argue that you cannot truly price a company without understanding the cash flows. Running a multiple analysis tells you nothing. There are plenty of good reason why a stock, that is trading significantly below its long-term average multiple, now deserves a lower multiple. Think RIMM.

If you want to be insightful, do a deep dive into a company and write that up.

Can you explain the company's revenue growth model? How sustainable is this?
How will the company look in 10-years?
What drives its pricing power?
What drives margin expansion?
Etc...

Follow me on Twitter: https://twitter.com/_KarateBoy_
 
Jun 27, 2011 - 11:13pm
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