The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market by Pat Dorsey

Author:Pat Dorsey [Dorsey, Pat]
Language: eng
Format: epub
Tags: Non-Fiction, Business & Money, Investing
ISBN: 978-1-118-04562-6
Publisher: Wiley
Published: 2011-01-03T16:00:00+00:00

Beyond the 10 Minutes

If the firm does pass these tests and it looks as though it’s worth a detailed examination, here’s how to proceed. This research process will take much longer than 10 minutes, but it’s worth the effort for an idea that passes the initial hurdles:• Look over the 10-year summary balance sheet, income statement, and statement of cash flows on Morningstar.com or another Web site. Look for trends, and make notes of anything that raises an eyebrow and deserves further investigation. This process should give you an initial road map for investigation.

• Read the most recent 10-K filing front to back. Pay special attention to the sections that describe the company and its industry, the sections about risks and competition, any mention of legal issues (sometimes labeled “commitments and contingencies”), and the “management’s discussion and analysis” section. The latter is where the firm explains, in reasonably plain English, why the most recent year’s financial results were what they were. Write down anything you don’t understand or which you want to investigate further. You don’t necessarily need to read every page of the 10-K—sometimes firms include scores of pages of mind-numbing detail about leases, for example—but you should at least skim every page to make sure there’s nothing buried in the text that you do need to know. Be on the watch for any sections that describe loans, guarantees, contractual obligations, or the like. If the firm is going to owe someone a large amount of money in a few years, you need to know about it.

• Read the two most recent proxies (form DEF-14A, in the SEC’s jargon). Look for reasonable compensation that varies with corporate financial performance and a reasonable options-granting policy. Check to make sure the board of directors isn’t packed with individuals with close ties to management.

• Read the most recent annual report, as well as the past two years’ reports, if possible, to get a feel for the company. Is the letter to shareholders candid and frank, or does management gloss over problems with jargon? Ignoring problems won’t make them go away, after all. In addition, does the firm present industry information to give you context for evaluating it? Does the report look as though the firm spent way too much money on it?

• Look at the two most recent quarterly earnings reports and 10-Q filings to see whether anything has changed recently. Look for signs that business is getting better—or worse—as well as for anything major that has changed since the last 10-K. If it’s still available, listen to the most recent quarterly conference call. (Companies often archive these on their Web sites for some time after the quarter is over.) Does management get defensive or evasive when analysts ask tough questions, or does it respond with straightforward answers?

• Start valuing the stock. Look at the stock’s valuation multiples relative to the market, the industry, and the stock’s historical valuation ranges. If the firm has low reinvestment needs, low risk, high returns on capital, or a high growth rate, be prepared to accept a higher price-to-earnings ratio.

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