How To Do A One-Hour Analysis

The purpose of a one-hour analysis is to quickly evaluate the positive and negative attributes of a company. The key question is how much more time do I want to spend on this company.  The job of a generalist is make quick decisions about when further investigation is warranted, and when it is best to move along.

It takes experience to develop this skill. Early on a one-hour analysis can easily take 3-4 hours.  After a while, it is often possible to dismiss a company in 15 minutes.  We have never seen this skill discussed in any other text or book about investment analysis.  The best way to learn is to start by actually doing some.

We like to start with a Value Line page. Most of what we look for is also present on Moringstar, Gurufocus, Google Finance and or Yahoo Finance. Here are some of the things we look for:

  1. Try to understand the history of the company.  When did it start? How has done over the past 20 years?  One of the biggest mistakes we see made by young analysts is not understanding a company’s history.
  2. Glance at the current valuation price/book, price earnings and cash flow, and price to sales.
  3. Try to judge how the valuation metrics have changed over time.
  4. Where is the stock price relative to its 10-year high and low?
  5. Check to see how the balance sheet has changed over time.  Check the current level of interest coverage.
  6. Look for significant changes in shares outstanding
  7. Check to see if insiders have ben buying or selling

Next read the 10-K and financial statement footnotes:

  1. Here you are looking for things that are unusual in the business description, risk section, and in the footnotes.  Its takes awhile to learn what is normal, and what is unusual.  This is why you have to look at many companies. Particularly the risk section is often boilerplate that adds little value.
  2. In the footnotes you are looking for anything that accelerates revenue or decelerates expense recognition.  Joint ventures and other balance sheet manipulations must be understood.  It is very important to keep the concept of materiality in mind.
  3. Look at the structure and type of debt being used.  How much financial flexibility does the company have?

Next check the Google or Yahoo Finance page:

  1. See what Wall Street’s opinion of the stock is
  2. Check to what the earnings estimates are for the next two years.
  3. Click on the bio of at least the Chairman, CEO, and CFO

Next check for reports on Seeking Alpha, Moringstar, SumZero or other Internet sources.

Finally, learn to come to a preliminary conclusion:

  1. maybe 5% of the time you will find something so great you will stop all other work and dive into this company.  Do not do this too often, but sometimes you find a diamond.
  2. Maybe 30% of the time you find a  stock that warrants more investigation of the key issues.
  3. Another 30% of the time you put the company on a list to observe, or wait for a significant price decline.
  4. As much as 35% of the time you find nothing that interest you, and make a mental note to never look at the company again.
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About Gregg Jahnke