How Smart Investors Build a Repeatable Stock Analysis Process

A repeatable stock analysis process provides investors with a consistent path to take – define the business, examine the numbers, test value, compare risk, and then make a clear buy, hold, or avoid call. If there is no method, a research endeavor can easily become a response to headlines, price movements, or single earnings reports. This research could be assisted by a practical tool like https://finbotica.com/stock-analysis/, which can help investors structure their research into a streamlined stock analysis. 

Start with the business 

The wise investor doesn't begin with the price of the stock. Price is the end of the story. The first page focuses on the company: What it sells, who pays, why customers stay, and what will destroy the model.

There is a stock analysis framework that can get rid of the randomness. One investor might be excited about a company upon its first earnings report and then forget about debt, dilution, or shrinking margins. A filter that passes all companies is called a framework. 

How smart investors start with the business model

Investors should draft a 2-sentence business summary prior to considering ratios. If you do, it could be too much to start out with.

Ask:

• What is the company's product?

• Is it the revenue or the income? (recurring, seasonal or cyclical?

• Which are the major purchasers?

• They wonder what could make them go away?

• In what ways will you grow – price, volume, new markets, or acquisitions?

It's useful for investors to have this: Company analysis. It's not appropriate to make the same assumptions about a retailer, a bank, a software company, and a chipmaker. If you're discussing software, a 20% margin is rather small; if you're discussing groceries, a 20% margin is very big. 

Building the stock analysis framework around numbers

The next step in the stock analysis process is to examine financial quality. At least three years of data should be considered. It can be a good fortune if it is one strong quarter. It is more difficult to fake a pattern. 

One good rule of thumb is to look at net income versus free cash flow. When a company makes $500 million in profit, but generates just $50 million in free cash flow over a number of years, the research should be slowed. The company may be spending a lot of money or profits may not be as high quality as they appear. 

A repeatable stock analysis process for valuation

But it's not the search for one magic number. It's all about creating a range. Although a stock may be a good company, avoid purchasing the stock if it has a high price assumption.

This is a quick sequence to follow:

• Evaluate the valuation based on the company's past.

• Carry out competitor analysis.

• Take a conservative approach to a base case of revenue, margin, and free cash flow.

• When making a decision, be safe.

• Record what would be evidence against the thesis.

This is one aspect of the investment research process that shields investors from the stories. The only reason to buy something that has to be better is the market will understand it later has to be better. 

How smart investors turn research into a decision

A stock analysis process that can be repeated will result in a written decision, not a feeling. The note should be short – thesis paragraph, risks paragraph, valuation paragraph, and action paragraph.

For example, a stock analysis framework might contain something like this: “The company has strong and persistent demand, improving profit margins, and low debt; however, the stock price is factored into rapid growth, and the stock needs to be re-categorized on the watchlist until valuation provides a better opportunity.” 

A Practical rule for better stock decisions

It is quite easy to come up with a good analysis of stocks; just the same process, but adapt it for each industry, adjusting the assumptions. This Stock Evaluation Checklist is not a risk elimination checklist. Helps to make the risk feel real before the decision to invest is made. This ability makes it easier for investor to compare on a level playing field, make an emotional investment decision, and improve their research process after each investment.