December 18, 2007

My Game Plan for Value Analysis

A reader emailed me about how to research a business for investment. In this post I will share with you the steps I take to do so.

A lot of time I take few weeks and even more to research one company. Sometime it get boring just reading on one company, but I think it is worth the effort to understand the risk and rewards of the business. Many have said that value investors sleep tight at night, well it is true as I know precisely the risks involved with any particular investment I hold. That knowledge is critical to relate and analyze the slew of news and information that zip through the media and analyst recommendations. Therefore I do not panic when the stock price drops on news that will not undermine the business fundamental of the company.

So below is the steps i do to research a business and it is generally broken into two sections:
  1. Understanding the business, and
  2. Valuing the business

Objective

Task

Understand business

Read Annual Report current year

Understand business

Read Annual Report previous year

Understand business

Read Current quarter earning report

Understand business

Listen to current quarter earning call

Understand business

Industry analysis: read latest annual report and latest quarterly earning for chief competitors in the industry

Understand business

Read management presentations and competitions presentations plus any research on the industry.

Understand Management Ability

Research management resumes and review latest proxy statement

Understand Business

Determine and list industry and company economic drivers

Is the business a sound and have value potential? If yes then

Understand Business Value

Gather financial data for analysis

Understand Business Value

Reclassify financial if necessary

Understand Business Value

Perform common financial and ratio analysis

Document Reason for Investment

Answer questionnaire

Understand Business Value

Create Revenue forecast model

Understand Business Value

Value business and determine if the price is favorable to buy?

Is the business trading at a price below determined value? By how much?


You value seeking investor,
Sami

2 comments:

augustabound said...

"Document Reason for Investment
Answer questionnaire"

Is this a questionnaire that you've created?

Sami said...

yes. I put it together based on reading several books, experience and off course reading warren buffett letter to shareholders. you can find it here: http://myvalueidea.blogspot.com/2007/12/what-business-to-buy.html