Final Checklist for Buying Stocks
Modified: 24-Nov-20
The current article is the summary of the key aspects of stocks analysis learned by us until now and puts them together in the form of a checklist for buying stocks. This article also provides further clarifications on the checklist by answering investors’ important queries like:
- What to do when no company/stock meets all the checklist parameters
- What weights to be given to different parameters in the checklist for buying stocks.
In previous articles, we have provided readers with key takeaways in form of crucial parameters that an investor should use while analyzing stocks. Articles on financial analysis, valuation analysis, business & industry analysis and management analysis contained summary checklists that can be very handy for any investor.
In the current article, we have compiled all the parameters that an investor should check each stock, before investing her hard-earned savings. This article can serve as a final checklist for buying stocks for any investor, which will become very useful while doing a detailed analysis of stocks.
The Final Checklist for Buying Stocks
Financial Analysis:
Valuation Analysis:
Read: 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
Business & Industry Analysis:
Management Analysis:
Other Business Parameters:
Margin of Safety:
Credit Rating Analysis:
We have conducted an in-depth fundamental analysis of many companies using the parameters from the above checklist on our website. You may read them to improve your stock analysis skills. These company analyses are available on the following link: Read In-depth Fundamental Analysis of Companies
Investors should always keep in mind that, no checklist for buying stocks could ever be complete for doing stocks analysis. However, the parameters in the above checklist test any company and its stock on some of the tough performance parameters. Hence, an investor can be reasonably certain that the stocks, which pass the above checklist for buying stocks, will have sound fundamentals and are available at reasonable valuations. If she diligently follows these parameters, invests only in stocks that promise good fundamentals and never overpays for them, then she can be reasonably certain of good returns from her portfolio over the long term.
Temporary periods of stock price fluctuations, business cycles where even good companies would not be able to maintain sales growth & profitability, would definitely come in between. However, the investor should keep her patience and not act on impulse and stay invested in a company until the time inherent business strength of the company is intact. She would reap great benefits of such investing behaviour.
No checklist for buying stocks is paramount. Hence, an investor should not restrict themselves to the parameters mentioned above. She should read further about investment analysis and add/remove parameters from the above list as per her understanding.
Monitoring stocks in an investor’s portfolio is also equally important. An investor should delineate her monitoring activities into ongoing activities, quarterly activities and annual activities. (Read: How to Monitor Stocks in Your Portfolio)
Let us now address the key queries asked by investors about the checklist for buying stocks, which are essential for further clarification on the use of the checklists.
How to decide about existing stocks in the portfolio: buy more/hold/sell?
I wanted to understand how to value a stock which is already in your portfolio and it has reached slightly stretched valuation – I am referring to Kajaria Ceramics Limited (KCL).
If you want, then I can share the detailed thesis on KCL, but that would be more from a “Buy” perspective, which I don’t intend to do. The gist is:
- It is the market leader.
- The tiles industry will continue to grow at a decent rate for the next 3-4 years.
- It has good distribution. It is spending a good amount of money on branding (60+ cr consistently for last 3 yrs.), which is more than the PAT of some of its listed peers and branding is kind of reflected in good numbers (improving ROC, NPM etc.).
- It is launching new designs. But I am not weighing that in.
Everyone knows it and the market has provided a high valuation for it. Although, when compared to some of its peers (NITCO, Somany, Bell, orient, Asian Granito), KCL does stand out in terms of business quality and financial with good able management running it. Unless they do something wrong or any irrational competitor comes into the market, KCL should continue to do better than the average market growth.
Now, my question is:
- How should I value a stock, which I already hold in the portfolio and for which I am hopeful that business will continue to do well but I am not sure how much of that is already priced in?
- Does it make sense for me to continue to own this business?
- Should my valuation of the business for buying and a new stock and holding an existing stock not be different?
- How should I go about doing a valuation for this and similar stocks?
Mr. Bakshi’s example on Asian Paints (AP) does provide some insight but for every AP there might be thousands of failures as well.
- What key things I should look to ensure that I am holding a high-quality business, which still has upside potential from a 5-year perspective at current valuations?
I have a conflict in my mind. I have a feeling that KCL is a good business but is it the right investment at a current valuation to continue to hold for 3-5 years?
If you can share your experience or a post on this, then it will be great. If you have come across any great book on this please do let me know.
Looking forward to enhancing my learning