Monday, March 26, 2012

Investment Analysis: The Process

My analyses currently involve 12 financial statement constructs.  Four are value indicators, two are growth indicators and six help me determine the quality of earnings.  The four value indicators give me an idea of whether the stock is under or over priced.  For the growth indicators, I use growth in cash flow from operations as my main indicator, but I'm also curious to see how this compares to growth in earnings. If they diverge too much it's a red flag.  The quality of earnings indicators give me a sense of confidence (or not) in the financial statements themselves.

Once I have one or two or three candidates, I look at the management and directors.  I look for intelligence, experience and track record obviously, but I also look for diversity in the management team and independence on the board.  I'm not interested in investing in a company that is over-paying their managers, or has an illogical or harmful (to my interests as a shareholder) compensation policy.

As I proceed through various analyses, I'll get into more detail about each factor and how I make a decision when so many factors are coming into play.  I should also mention that none of my factors are set in stone.  If one factor stops offering useful guidance or another appears to be more promising I will make a change.  I am happy to discover more efficient and effective paths to understanding.  I am always interested in new ideas and new research.

Without quantitative analysis software, it would take at least a full day to complete the analysis on one stock, let alone looking at a whole industry, sector, or sub-sector.  Clearly not a viable strategy.  Verdasis was designed to take the pain out of analysis - to make gathering the data, keeping it fresh and constructing ratios, regressions and equations a lot easier, but the necessity to exert some mental effort by thinking about the results that emerge still exists.

My first analysis will be in the energy sector, integrated oil and gas.

Thanks for reading and I'll be back to you early next week (first week of April, 2012).



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