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Stocks

Checklist
by WealthEffect Staff

 
 

Company
 
  Management  
  Stock  
 
1.

Company

Yes

No
 
 

Do you really understand the business?


 
  Does the company have a cost advantage?  
  Is the product superior — actual or perceived?  
  Are there barriers to entry in the industry?  
  Is the industry an oligopoly (only a few competitors)?  
  Are the company's advantages sustainable?  
 
2.

Management

Yes

No
 
 

Do the managers own a lot of stock? Are they buying more for themselves? (If they're selling, be wary)


 
  Do they have a vision, and a strategy to realize that vision?  
  Are they paid fairly?  
  Has the stock outperformed its competitors during their tenure?  
  Is the Board of Directors predominantly comprised of independent, highly capable members?  
  Do you trust the management with your money? Are the managers focused on creating shareholder value?  
 
3.

Stock

Yes

No
 
 

Has the growth rate of earnings per share (eps) been stable or rising? (last 10 years vs. last 20)


 
  Are eps estimates rising?  
  Is the free cash flow positive after deducting dividends?  
  Is the company repurchasing shares?  
  Is the stock out of favor on Wall Street?  
  Is the expected ROI attractive to you?  
 
The answer to most of these questions should be "Yes". The answer to the last question in each section must be "Yes".

Suggestion: Go to Decision or continue to Checklist — Advanced

 

Checklist — Advanced
by WealthEffect Staff
 
 

Company
 
  Management  
  Stock  
 
1.

Company

Yes

No
 
 

Is the pretax margin higher than its competitors?


 
  Has the pretax margin been rising over time?  
  Has the R&D ratio been rising, as well?  
  Has the SG&A ratio been declining?  
  Is the interest coverage ratio below 3?  
  Have accounts receivable and inventories been rising less than or equal to sales growth?  
  Has sales growth been reasonably close to earnings growth (within 3 percentage points)?  
  Has sales and earnings growth come primarily from internal growth (rather than from acquisitions)?  
  Have "non-recurring" charges been few and far between?  
 
2.

Management

Yes

No
 
 

Has the compensation of the top five managers accounted for < 10% of pretax income?


 
  Have company options accounted for less than 10% of pretax income? Has the company avoided the questionable practice of repricing options when the stock price declined?  
  Is the Chairman of the Board an outside board member?  
  Have there been no disagreements with or changes of auditors?  
 
3.

Stock

Yes

No
 
 

Is the 10-year RORE greater than 20%?


 
  Has the RORE been rising (5-yr > 10-yr)?  
  Is the operating free cash flow positive after dividends?  
  Is the operating discretionary cash flow significant?  
  Is the P-E (adjusted for goodwill) attractive to you? Relative to the average P-E of the S&P 500?  
 
The answer to most of these questions should be "Yes". The answer to the last question in each section must be "Yes".

Suggestion: Go to Decision