Introduction & Disclaimers

• Video sponsored by Morning Brew newsletter
• Host: Richard Coffin, portfolio manager/investment analyst at The Plain Bagel
• Process requested frequently by viewers
• Key disclaimers:
  • Not recommending individual stock picking for most people
  • Most better served with passive investing or hiring professionals
  • Countless studies show difficulty beating market with stock picking
  • Focus on fundamental analysis (understanding underlying business)
  • Tilts toward value investing (great company at great price) but also holds growth companies
• Different analysis types: technical (past prices), quantitative (variable relationships), fundamental (business understanding)

Step 1: Screening for Ideas & Stock Selection

• Screening process:
  • Uses screener to filter stock universe by criteria
  • Keeps filters broad: revenue growth, profitability, debt within certain range
  • Not always formal - sometimes researches stocks due to interesting developments
• Initial evaluation:
  • Runs tickers through internal tool for one-page financial summary
  • Reviews: past financial performance, consensus estimates, debt levels
  • Quick health check before deep dive decision

Step 2: Understanding the Business

• Core philosophy: Investor as part business owner mindset
• Key areas to understand:
  • All company segments and revenue sources
  • Nature of revenues (contractual, recurring, seasonal)
  • Geographic operations, customers, suppliers, employees, regulators, management
  • Key Performance Indicators (KPIs) - sector specific for peer comparison
  • Requires industry background knowledge and circle of competence
• Information sources:
  • Annual report/10-K (US), quarterly reports
  • Edgar (US), SEDAR (Canada), company investor relations pages
  • Investor reports, recent 8-K filings
  • External analyst reports (paid research access)
  • Commercials, tutorials, customer reviews
• Note-taking approach:
  • Uses SWOT framework (Strengths, Weaknesses, Opportunities, Threats)
  • Internal factors: strengths/weaknesses
  • External factors: opportunities/threats
  • Maintains parking lot of questions for later research
• Goal: Find quality companies with competitive advantage, attractive business model, and "moat" (Warren Buffett concept)

Step 3: Understanding the Finances

• Requires accounting background for proper analysis
• Key focus areas:
  • Financial position: debt levels, solvency, capital structure, payment ability
  • Growth profile and profitability improvement areas
• Financial statements analysis:
  • Income statement: accounting earnings performance
  • Balance sheet: snapshot of assets and liabilities
  • Cash flow statement: actual cash movement vs accounting figures
• Analytical methods:
  • Calculates Compound Annual Growth Rates (CAGR) over 5, 10, 15 year periods
  • Common size financial statements (everything as percentage of key figures)
  • Income statement: percentage of revenue
  • Balance sheet: percentage of total assets
  • Tracks year-over-year cost changes relative to total money earned
• Metrics calculated:
  • Various margins and ratios for growth, profitability, operational efficiency
  • Solvency and liquidity measures
  • Peer analysis comparison within same sector using financial details and KPIs
• Red flags check (forensic analysis):
  • Related party transactions, management compensation, conflicts of interest
  • Accounting irregularities and "adjusted figures"
  • Management often highlights adjusted figures (modified accounting numbers)
  • Important to understand what's added/removed from adjusted figures
• Data sources:
  • Primarily paid data terminal (expensive, not accessible to most)
  • Free alternatives available with fewer features
  • Excel add-ins preferred for data pulling
  • Proprietary peer comparison scorecards by industry
  • Emphasizes understanding how data is pulled and any adjustments made

Step 4: Understanding the Strategy

• Forward-looking analysis beyond historical perspective
• Key components:
  • Management's strategic priorities and spending plans
  • Capital expenditure plans (found in cash flow statement)
  • Financing methods: debt, share issuance, hybrid instruments
• Evaluation criteria:
  • Plan feasibility and associated risks
  • Company's track record of executing promises
  • Experience in planned activities (e.g., serial acquirers with successful history)
  • Avoid companies doing unfamiliar activities
• Track record assessment:
  • 5, 10, 15 year averages of ROI figures
  • Return on Capital Employed, Return on Invested Capital, Return on Equity
  • Qualitative management review: experience, tenure
• Analyst tip: Build checklist of things to look for when researching companies
  • Example: Does company add value for all stakeholders or do some lose from operations?
• Information sources:
  • 10-K regulatory filings for high-level strategic objectives
  • Investor presentations
  • Earnings call transcripts (management Q&A about future expectations)
  • Conference transcripts from investor relations pages
  • Direct executive meetings/calls (through company access)
  • Industry news research for total addressable market data

Step 5: Stock Valuation

• Timing: Done later in process to avoid bias in earlier steps
• Valuation methods:
  • Relative valuation: Multiples comparison
    • Price-to-earnings, EV/EBITDA, free cash flow yield
    • Historical comparison and peer comparison within industry
  • Absolute valuation: Discounted Cash Flow (DCF)
    • Forecasts all financial statement line items
    • Projects future free cash flows discounted to present value
    • Variable sensitivity analysis for different scenarios
• Current events consideration:
  • Recent lawsuits, headlines, press releases
  • Understanding variables influencing current stock price
  • Recent events typically drive short-term price movements
• Technical aspects: Some consideration of technical factors and management buying activity
• Investment decision: If company and valuation attractive, likely to invest
• Challenge: Best companies (great growth, profitability, management) tend to be most expensive
• Watch list strategy: If not attractively valued, move to watch list for monitoring
  • Fundamental research complete, ready to act on price dips
  • Dollar cost averaging for really liked companies
  • Always maintain eye on valuation to avoid overpaying

Step 6: Review and Finalize Notes

• Final decision point: Buy now or wait determination
• Gap filling: Address research questions that arose during process
• Devil's advocate approach: Seek conflicting reports and opposing opinions for sanity check
• Team collaboration: Share with experienced team members for additional perspective
• Documentation:
  • Formal report writing
  • Organized notes with bullet points
  • Quick reference summary for future use
  • Follow-up points identification
• Importance of documentation:
  • Quick review capability for watch list stocks
  • Reference during tough times/negative developments
  • Helps distinguish fundamental changes from noise
  • Maintains focus on long-term business prospects
• Ongoing process: Continues after stock purchase with regular company monitoring

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