This post serves as a reminder to myself every time before I want to invest in any of potential stocks.
0. is it profitable?
1. where is the moat?
2. where is the growth?
3. is debt acceptable?
4. is it selling at a margin of safety price?
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0. PROFITABILITY
a few financial metrics that needs to be consistent:-
- ROE
- ROA
- ROIC
- net margin
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1. MOAT
Brand
- a product you are willing to pay more (coke, nike, mcd)
Secret
- patent or trade secret that makes direct competition illegal or very difficult (3M, Pfizer, Intel)
Toll
- exclusive control of a market (media companies, utilities, ad agency)
Switching
- product that's too much hassle/expensive that doesn't worth switching (msft, paycheck, )
Price
- product price is so low that no competitor can compete (walmart, Home Depot, bed bath beyond)
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2. GROWTH
determines where of the growth is coming from for the company.....
- gaining more market shares
- introducing new product (eg:- Apple)
- strong brand name thru rising price (eg:- coke)
- thru acquisition (eg:- Walmart )
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3. DEBT
make sure that the company is taking debt which is repayable within a few years.
a good rule of thumb is:-
long term debt / net income < 5 years
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4. MOS
- calculate the market value of the company using discounted FCF or EPS:- https://docs.google.com/spreadsheets/d/1-_63EUyhIF6QEenH_HRxkHTo-3RlxqDpQjb_pfi1q4Y/edit?usp=docslist_api
- buy only if it is trading at a price which gives an acceptable CAGR and MOS.
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