Doing the "One Hour Analysis"
Here is a brief overview on how I do a “one hour analysis”. This is roughly what I do when I look at a company for the first time. In reality it can sometimes take 15 minutes, and sometimes takes 8 hours. One hour is the median.
I am trying to decide:
do I want to do more work, because maybe the stock can become and “A” idea, or at least a B+
should I put the stock on my “must watch” and hope for a lower price
do I find enough negatives that I just want to move on
Doing this takes experience and judgement, but you just cannot take 8 hours with every new name. You have to learn to “cut and run”. However when you find something interesting you have to be willing to slow down and look further. This is a very important skill that you must practice and learn. Some detail oriented people have a very hard time with this skill.
When you are watching a ball game or old TV program, have that computer near by and just glance at a few companies.
My friend grew up in the house next to Warren Buffett in Omaha. He used to play softball with Buffett’s kids. They would go into Warren’s basement early in the morning to get softball equipment. He would be sitting in the basement with a stack of annual reports maybe 20 to 30 deep. When the equipment was returned before dinner the stack was gone. Buffet was doing some form of “one hour analysis”
Many years later my same friend taught in the business school at Creighton (in Omaha), and Buffett came to give a lecture. A student asked, “what should I do to become an analyst”?
Mr. Buffett’s response was: “there are 5000 public companies in the US, start with the A’s”
Buffett’s responce implies:
***** Look at lots of companies
Here are some of the things I am looking at when I review a new company:
Has the stock under-performed either recently, or over the last five years? Stocks that have out-performed are a special case we will evaluate later in a separate post. I usually use Seeking Alpha’s momentum tab.
I will glance at valuation PE, price/book and EV/sales. If valuations are high, I will need to find some great fundamentals, if valuations are below average I am looking for any positive signs. I use the SA valuation tab.
It is critical to understand the company’s history. Often this is simple, but it can be complex.
Sometimes I can get a decent history from a SA report. Sometimes Morningstar will cover the larger companies. SA reports always a mixed bag. 60% are useless 30% are OK and 10% are very good. Look for the diamonds.
I try to find a company presentation. SA takes me to a company website, and usually a company has something under a events/presentations tab. Other times the only presentations is part of the quarterly call. Sometimes no presentations are available, this is a special case. One could write a book about what to look for in these presentations. Be skeptical, but look for something that maybe the general public does not understand. If I do not find anything interesting I might stop right here.
I look carefully on SA at the number of buy recommendations, compared to the number of hold/sell recommendations. I consider hold and sell as the same thing since many Wall Street firms seldom write sell recommendations. A hold is the same as a sell. Again, the fewer buys the better. I want low expectations. If Wall Street has too many buys, the story has to be very special. There is lots of judgement here, and no fixed rules. Some companies get buy recommendations because they generate investment banking business.
Check the balance sheet. I like the interest coverage number on Guru Focus, but others can be used. In general over 8 is good, around 6 is marginal, and around 4 is problem. Anything under 6 requires a more careful look at the term and structure of the debt.
I use Guru Focus to look at the earnings pattern for the last 15 years. This is the subject for an entire book.
If I am still positive, I will use Guru Focus to evaluate who owns the stock. Inside ownership is nice, but not necessary. I really want to find at least one smart value guy that owns the stock.
I will glance at the dividend yield, but this is NEVER an important factor. Yield is nice to have, but it only a minor consideration.
I prefer share buyback to dividends. I use Guru Focus to look at the change in shares outstanding over the last 10+ years.
I will glance at ROE breakdowns. I prefer low ROE’s because they tend to rise, and worry about high ROE’s because they can often fall to average, Many ROE’s are badly distorted by buybacks, so be very careful with these numbers
I am trying to estimate, but not calculate, a future growth rate. Is this company a slow but steady 5% grower, or maybe an average 8% grower, or can it be a magical 10-12% grower. Often earnings are just too volatile to estimate a growth rate. Then all you can do is look at the next years EPS number.
If I am still positive I will skim the last quarterly call. If I am really interested in the stock at this point, I might listen to the call.
I want to understand which years the company is providing guidance for, and how that guidance has changed.
Again if I am still interested, I will skim the last 2 years of new stories on SA
I will review the last 10+ years of cap ex, acquisitions, and divestitures on Guru focus
I will glance at the short interest number on SA, and only be concerned if it is over 8%
I will read the CEO and CFO bio’s. I prefer financial folks over marketing guys.
I want to consider which companies are good comparisons. The SA peers tab is only a start.
I mix all the above factors into a magical stew.
Sometimes I will do more work, other times I will add the stock to a list to monitor, very often I will just move along to the next idea.
Rather than write a book about this process, let’s actually do it with live ammunition.