Stock Checklist- My Perfect 10

April 13, 2011
|In The Insider Report
|By Harvey Sax

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.

 

  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.  A good chart gets a 1, a bad one, -1 and inconclusive is 0
  2. ANALYSTS- read analyst reports but come to your own conclusions.  If the consensus is favorable, 1; if unfavorable -1, and mixed 0. If it is overwhelmingly favorable or negative, take the contrarian view
  3. INSIDERS- if the people that know the company the best are not buying it, why should you?
  4. 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.
  5. MARKET DIRECTION- 80% of stocks follow market direction in the short term.  This is your read on the market.  Don’t have an opinion, it’s a 0.
  6. SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience
  7. CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.
  8. PEG RATIO- it’s good to find a company growing faster than it’s multiple.
  9. VALUATION- contrary to popular opinion, valuation does matter.   Use a discounted cash flow analysis.  If the stock is trading for substantially less than its DCF, that’s a 1.
  10. CATALYST- what’s going to change the status quo?

 

 

Trading the markets is a humbling experience. I hope this handy checklist makes it less so.

 

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