🧑🏫 Analyze a stock in less than 5 minutes
Last week, you learned how to find interesting stocks using a stock screener.
We found 50 potentially interesting Quality Stocks.
But what should you do next?
We’ll use a simple framework to determine in less than 5 minutes whether a stock might be an interesting investment.
🧑🏫 Course: How to Analyze a Stock
This is the second article in the series How to Analyze a Stock.
In this course you’ll learn:
How to find attractive stocks
Where to find information about these companies
How to determine whether a company is an attractive investment
Find a reason to say ‘NO’ as soon as possible
In today’s world, there is an information overload.
There are only 24 hours in a day and I’m sure you don’t want to spend them all on researching stocks (unless you’re such a nerd as I am).
That’s why when you start looking into a company, you should try to find a reason to say ‘NO’ as soon as possible.
When you haven’t found a reason to say ‘NO’ within a few minutes, you might have found something interesting.
During this course, we’ll use an example to make everything more clear.
Via the Community, we asked all Partners which stock they would like to use as an example. Most Partners chose Mastercard.
As the wisdom of crowds is a beautiful thing, we’ll write a full investment case about Mastercard ($MA) from A to Z.
We’ll do this together so you learn step by step how you can do this yourself.
Now let’s show you how you can determine whether a stock might be interesting in a few minutes.
We’ll use Stratosphere to make sure that everyone can follow the steps explained in this article.
We’ll use this 6-step framework to determine whether a stock might be interesting:
Step 1: Look at the company profile
The first thing you need to do, is to look at the company profile of the business.
Make sure that you understand how the company makes money.
If you don’t understand the business model, you can stop looking at the company right away.
You can easily use Google to look at the company profile of Mastercard by searching for ‘Company Profile Mastercard’.
Here’s a snippet from Mastercard’s 10-K:
"Know your circle of competence, and stick within it. The size of that circle is not very important. Knowing its boundaries, however, is vital." - Warren Buffett
We understand the business model of Mastercard as we use its products daily.
Step 2: Profitability
You don’t want to invest in companies that aren’t profitable yet.
Instead, you want to invest in companies that are very profitable. These kind of companies earn money for you while you sleep.
“If you don't find a way to make money while you sleep, you will work until you die.” - Warren Buffett
You want to invest in companies with a high and consistent gross margin of at least 40% and a profit margin of at least 10%.
When a company has a high and robust Gross Margin, it’s a great indication that the company has pricing power as well as a sustainable competitive advantage.
That’s exactly what we’re looking for as a Quality Investor.
You can check this via Stratosphere as well.
Select the company you want and click on Ratios —> Margins.
You can click on a metric like the company’s Net Profit Margin to create a chart:
Mastercard has a Gross Margin of 76.3% and Net Profit Margin of 44.7%.
These profitability numbers are phenomenal and largely surpass the threshold of 40% (Gross Margin) and 10% (Profit Margin).
Step 3: Capital Allocation
Capital allocation is the most important task of management.
You want to invest in companies that put your capital to work at attractive rates of return.
That’s why the Return On Invested Capital (ROIC) is one of the most important metrics for quality investors.
Look for companies with a ROIC of more than 15%.
Via Stratosphere, you can take a look at the company’s ROIC by clicking on Ratios —> Capital Efficiency:
Mastercard’s ROIC is equal to 40.4%. A phenomenal figure.
Now let’s cover the next 3 steps and determine whether Mastercard might be an interesting investment for our Portfolio.