Stock Research Process And Valuation
After conducting an initial search or stock screen, we begin researching the positions that have been narrowed down. The starting universe of companies consists of 12,000–14,000 stocks, which we systematically filter down. By the end of this screening process, we typically have anywhere from fifty to a few hundred candidates, depending on market conditions. For example, in 2021, high valuations made it difficult to find attractive opportunities in the public markets.
Once we have a shortlist of potential stocks, we follow a structured research process:
Review the 10-K Business Section – Understand what the company does and how it generates revenue.
Analyze Management Discussion & Analysis (MD&A) – Gain insights into management’s perspective on operations, risks, and strategy.
Examine Financial Statements – Assess profitability, cash flow, and overall financial health.
Review Investor Presentations & Earnings Calls – Identify key themes, guidance, and any red flags.
These initial steps help the firm determine whether the company is worth further evaluation. If it is, we proceed with:
Competitor Analysis – Compare the company’s positioning, strengths, and weaknesses relative to peers.
Valuation Assessment – Conduct a discounted cash flow (DCF) analysis in Excel, cross-referencing valuations with industry peers.
Identify Key Stock Drivers – Determine what factors will influence price movements.
Final Decision & Risk Assessment – Decide whether to buy, wait, or pass, ensuring an adequate margin of safety.
This due diligence phase is time-intensive, but it’s essential for making informed investment decisions.
Below is a video describing in greater detail what the discounted cash flow analysis is. It is used every time for the companies we decide to add to your portfolio. We want to make sure the price we are paying will get us the return we require.
