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.


* 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.


* 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.

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