🔎 Analyze a stock in less than 5 minutes

Step-by-step approach to investigate whether a stock might be interesting

Finding time to analyze stocks is a problem we all have.

In this article, we will show you how you can check whether a stock might be worth researching in less than 5 minutes.

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Find a reason to say ‘no’ as soon as possible

When I analyze a stock, I try to find a reason to say ‘no’ as soon as possible. When you haven’t found a reason within a few minutes, you found a potentially interesting stock.

We will teach you how to do this in 6 steps via Morningstar’s website. We take Quality Company Adobe ($ADBE) as an example.

Step 1: Look at the company profile

Go to www.morningstar.com and take a look at the company profile of the firm you are looking at.

Make sure that you understand how the company makes money. If you don’t understand the business model, you can stop looking at the stock right away.

You want a company that is active in a strongly growing end market.

Step 2: Invest in very profitable companies

Go to the tab ‘Operating Performance’ and look at the profitability.

You want to invest in companies with a consistent gross margin of at least 50% and a profit margin of at least 15%.

When a company has a high and robust gross margin, it is a great indication that the business has a competitive advantage.

Step 3: Look at the capital allocation

Still on the ‘Operating Performance’ tab of Morningstar, look at the capital allocation metrics of the company.

You want a high and consistent ROIC. Look for companies with a ROIC of more than 20%. Adobe ticks this box.

Step 4: Only invest in winners

As a Quality Investor, you only want to invest in winners.

Via the tab trailing returns you can look at the annual stock price performance over the past 15 years. You want a stock that managed to compound with at least 10% per year over the past decade (the return we are targeting as a quality investor).

Furthermore, you are looking for a stock that managed to outperform their industry as well as the index. This clearly is the case for Adobe.

Step 5: Structural growth is essential

Go to the tab ‘valuation’ and scroll down to the key statistics. Click on ‘growth’ there.

Buy companies who managed to grow their revenue with at least 10% per year over the past 3 years and their EPS with at least 15%.

Adobe managed to grow its revenue with 20.5% over the past 3 years (!).

Step 6: Don’t overpay

Look at the valuation of the company (you can do this via the ‘Valuation’ tab on Morningstar).

You don’t want to pay too much for Quality Stocks. Compare the current price/cash flow ratio with the average price/cash flow ratio of the company over the past 5 years.

You want a company that is currently trading at a discount compared to its average valuation of the past 5 years.

This is the case for Adobe as they are trading at a price/cash flow of 24.5 while the average price/cash flow over the past 5 years was 36.2.

Potential quality stock

You didn’t find anything that turned you off in these 6 steps? Good! You have found a potential Quality Stock. Now you can put the company on your watchlist and analyze the company more thoroughly.

In a deeper analysis, you should look at the moat, the integrity of management, the capital intensity, expected growth, and so on.

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About the author

Compounding Quality is a professional investor which manages a worldwide equity fund with more than $150 million in Assets Under Management. We have read over 500 investment books and spend more than 50 hours per week researching stocks.