My Investing Framework: How to Analyze a Company

Howdy folks, I work in long-only asset management in my firm's equity investments group. AM doesn't get quite the same love and attention as other finance verticals so I figured I'd try to get some discussion going and do a quick post to lay out my personal framework for evaluating potential investments. As always, nothing I say constitutes investing advice (yada yada all the standard disclosures) and I will not be able to discuss certain topics to retain my anonymity. Feel free to drop comments with any feedback or thoughts you may have, I'm always looking to learn and grow as an investor so bring on the discussion; I did throw this together on a whim so if clarification is needed, feel free to drop a comment.

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Surface Level Company Info

  • What sector/industry?
  • How do they make their money?
  • How long have they been in business?
  • How has the stock performed?

Market Structure

  • What is the structure of the market(s) they belong to?
    • Competitiveness, level of differentiation, etc. (oligopoly, monopolistic)
  • Are there any big picture themes that could influence the company’s outcome?
    • Secular trends, potential catalysts, what are the market/consensus expectations for factors surrounding the company’s business?
  • What is their market share?
    • Are there any extrinsic advantages/disadvantages (e.g. utilities, energy companies with government sanctioned local monopolization, etc.)
  • How do their products/services differ from their competitors, if at all?
    • Is there a “cash cow?” (high-margin profit driver with relatively low threat of competition)
  • Competitive positioning
    • How does the market see my target?
    • How do competitors see my target?
    • How do customers see my target?
  • Porter’s Five Forces
  1. Industry Competition
  2. Threat of New Competition
  3. Power of Suppliers
  4. Power of Customers
  5. Threat of Substitute Products

Mid-Depth Company Info

  • This is a good time to set up the skeleton of a model; lay out the historical statements and consolidate as needed in preparation for forecasts and modeling
  • Review Financial Statements of Company and Closest Competitors
    • What stands out?
    • Analyze margins, costs, take note of any patterns in fluctuations or outlier figures for core line items (operating)
  • How does their operating model differ from their competitors, if at all?
    • Compare statements and margins to peers and assess if there are any obvious/explicable differences in performance
    • Are they more capital efficient?
    • Do they have better margins?

Management and Governance Analysis

  • Compensation and incentives
    • Gain a basic level of understanding of how the company pays it’s executives
    • Does this align with my interests as a potential shareholder? Will the management team be motivated to pursue value-creating projects?
  • Listen to earnings calls and/or read transcripts
    • Focus on what management is both trying to highlight and trying to hide/downplay (think critically about the upside and dig deep into the potential downside)
    • How has this focus changed period to period?
    • Is management consistent with their goals and expectations? Do they have a record of achieving goals or overpromising and underdelivering?
    • What are the sell-siders focused on? (good way to identify what is priced into the stock at the time, think about where and why there may be inefficiencies or something the market is “missing” or mispricing)
  • Compare calls/transcripts to the results
    • Do the results on paper align with the management teams’ stated goals?
    • If no, why not?
    • If expectations/goals are missed, is it due to internal or external factors? (i.e. did management botch a project or did they get unlucky with a shift in macro conditions etc.)

Deep Company Info/Analysis

  • Full financial model
    • A complete model is NOT always necessary for certain companies, particularly depending on what the investment play is here (early-stage/growth companies usually)
  • Important to conduct valuations for the full range of reasonably expected outcomes
    • Value the company using assumptions reflecting both a bearish and bullish outcome (scenario analysis, or better)
    • Think about how different outcomes will affect different assumptions, multiples, etc. (e.g. use a lower multiple if an unfavorable outcome would significantly deteriorate the drivers of the multiple)
  • Similar to the last point, analyze how various multiples have changed over time
    • Try to connect notable changes to identifiable and/or quantifiable changes with the company (e.g. historic P/E has fallen by 20% due to loss of competitive advantage, P/B has increased as the company has improved margins or comped revenue at an exceptional rate etc.)

Catalysts​​​​​​

  • Do the deep dive to find these; if it’s readily available and/or an outcome widely accepted as being probable, it’s likely not an edge
    • Think outside the box is really all I can say here
  • What factor(s) is going to drive the expected outcome? (Is there a specific event or situation which will drive performance, or is it a long play without a material cause?)
  • Are the factors intrinsic or extrinsic to the company?
    • Secular trends? e.g. shifts in global economic conditions, disruptions to the status quo, geopolitical shifts (very difficult to argue as a bullish catalyst, more common as a risk factor to be aware of)
    • Intrinsic trends? e.g. margin improvements, significant change in product offerings, winning market share (industry consolidation, pushing competitors out), etc.
  • What is the likelihood of this happening?
    • Further, what is the likelihood of resulting in the expected outcome for the company?
 

Yeah I would say that it’s a pretty good framework that considers macro as an indicator within a deeply fundamental style. However, I would say to watch out for the macro and make sure that you are not listening to noise and actually be able to recognize real trends because half paying attention to the macro will eventually wipe you out.

I guess another problem I have is that it’s hard to gain an edge through this framework since so many analysts on both the sell side and buy side are focusing the same things with their research and covering the same companies. Unless you have a really unique view/analysis or dig really deep, it’s hard to gain alpha with this framework.

But I still think it’s a good framework overall.

 

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