This is a checklist I use to quickly come to a conclusion on a stock. I score a stock, each line getting a 1, 0, or -1. A stock that scored 1 on each line would be a perfect 10. Buy it!
Some of these items are quite subjective. For example how would I score Cash Flow? If a company’s cash flow is much lower than it’s reported earnings, that raises a flag and I would score it a -1. If there are more insiders buying than selling, I would score it a 1. If there are no apparent catalysts in the near future I would score it a 0 but on the other hand if there is a pending secondary that will put more stock out on the market, I would score it -1.
- CHART- know how to read charts. I firmly believe I can improve the price of buying or selling from an understanding of chart action. +1
- . ANALYSTS- read analyst reports but come to your own conclusions. 0
- . INSIDERS- if the people that know the company the best are not buying it, why should you? +1
- . MANAGEMENT DISCUSSION 10Q AND 10K- this is the only truthful thing you will read about a company. It’s composed by management, the auditors, and the firm’s lawyers. If all three of them can agree on the verbiage, it’s passed a big hurdle. Read it carefully. Pay particular attention to the Risks, Litigation, and Related Transaction sections. These are the things you will wish you had taken the time to read if something goes bad with your investment. Dept. of Justice inquiry into Company ENT business but not certain. The Department of Justice (“DOJ”) is investigating certain of our activities including past sales, accounting, and billing procedures primarily in relation to the operation of our Spine product sales. The DOJ is also reviewing our relationship with our DiscoCare subsidiary. We are cooperating with this investigation. At this stage of the investigation, we cannot predict the ultimate outcome and are unable to estimate any potential liability we may incur. See Citron research article from 2008 and this Palm Beach Post Article
- RELATIVE PERFORMANCE- If the stock has a superior relative performance to the market in the short term -1 has underperformed badly
- SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience 0
- CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated. 1 seems to be tracking and improving
- PEG RATIO- it’s good to find a company growing faster than it’s multiple. -1 ARTC is not growing but cash flow appears to be improving -1
- Catalyst: Satisfactory outcome of DOJ investigation +1
- Valuation + 1