Friday, August 29, 2014

Stocks DD Opines: An investment methodology


Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article
Disclosure: I am NOT a registered investment advisor. Investing in stocks is very risky. Please consult your RIA and read all the disclaimer here.

Invest in quality stocks
1. Invest in Strong businesses (high barriers to entry and historically less competition) 
2. Invest in Management with excellent track record for shareholder value creation. 
3. Invest at undervalued prices

Invest in special situations 
1. Firms in temporary Distress 
2. Drug development firms, with an asymmetric reward/risk...where you have strong conviction on an event (Eg: Clinical event). For example, reward could change valuation by 6 times and risk could shave it by 50%. 
3. Firms with huge growth potential but growth is not factored in the price today. (Eg: MMYT 2 years ago)

Where to scout for ideas ?
1. Look for the stocks that the best Funds (that have a good 10-15 year return history) have recently increased position and is in their Top 5 of their portfolio. You can see this in whalewisdom
  • Pershing Square
  • Carl Icahn
  • Baupost
  • Perceptive Advisors
  • Baker Brothers
  • Greenhorn
  • Orbimed
2. If fundamentals have not changed since these funds took their huge positions, research their stock thesis, if publicly available. Activist funds generally publish their thesis. (Avoid shorting as it entails limitless risk)
3. Read the stock coverage in Seeking Alpha including comments
4. Listen to 2 years of Conference calls from Management to get a sense of business and management. Does management sound and act honest and accountable to shareholders and are they dedicated to shareholders.
5. Go over their last 2-3 years of 10-K's and 10-Q's (esp Business, Management outlook, Risk Factors)
6. Look at stock chart to understand how it has reacted to news/business fundamentals
7. Try to develop the bull thesis. Make sure it is not value trap (look for business trends, governance risk, dilution risk, etc) before buying.
8. Sell purely based on valuation, or if a better investment comes along. Good businesses with management having a track record for shareholder value creation can remain in the portfolio even if they are fairly valued.
9. Have a concentrated portfolio
10. Frequently engage with management of the stocks you own. Ask them, "how they plan to improve shareholder value?" Provide ideas or solutions to improve shareholders value. Compliment them, if they have done a good job for shareholders

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