HAMISH’S STOCK ANALYSIS CHECKLIST

This checklist is designed to provide a guideline and structured approach for assessing
the quality and value of a publicly traded business.

Some items are a simple yes/no checkpoint, while others are reminders of areas to
consider.

Full examples of this checklist being applied to real U.S, UK and AUS companies are
available to The Investor Community + members.

https://www.hamishhodder.com/

Circle of Competence
The first key component of stock analysis is to only invest in businesses that are within
your circle of competence. This means choosing businesses that hold meaning to
you, have values aligned with yours, and operate in an area which you completely
understand.

The level of your understanding is the biggest factor in the accuracy of your intrinsic
value calculations. You need to understand how a business and its industry change
over time, so you can recalculate intrinsic value and make rational decisions about
your investments on an ongoing basis.

This section will help you gauge whether a business is within your circle of
competence.

Business Economics
➔ How does the business generate revenue?
◆ What products/services do they sell?
◆ What types of revenue is generated?
◆ How many customers/clients do they have?
◆ How many units/subscriptions do they sell?
◆ Average price per unit/subscription/ticket?
➔ Product Sourcing & Distribution
◆ Are products/services manufactured in-house or externally
◆ How are products/services delivered to customers/clients?
➔ What are the company’s fixed and variable costs?
◆ Cost per unit
◆ Labour expenses
◆ Advertising & Marketing
◆ Which costs are most significant?
◆ How do these costs trend over time? In different economic conditions?
➔ Capital Requirements
 ◆ What fixed assets do they have/ require?
◆ Replacement cost of assets (maintenance capital expenditure)
◆ Capital requirements for growth (cost to expand)
➔ Management’s Growth Strategy
◆ Where is capital being reinvested?
◆ Where does management expect the company to be in the future?
◆ What steps has management outlined to get there?
◆ Opportunity for new product lines or growth in existing ones?

Key Business Indicators

➔ Industry Measurements
◆ What industry metrics measure business performance?
◆ i.e Same-Stores Sales Growth, Active Customers, Revenue per
Subscriber

Industry Analysis
➔ Size & Scope
◆ Which broad sector does the business operate in?
◆ Which industry does the business operate in?
◆ Which industry segment does the business operate in?
◆ Which regions does the business operate in?
◆ Revenue/size of each of the above categories
➔ Historical & Projected Growth
◆ Historical growth of categories above. Across various economic
conditions
◆ Projected growth from multiple research firms / sources
◆ Management’s projection for industry growth
◆ Competing management’s projection for industry growth

Competition Analysis
➔ Who, What, Where, Why, How?
◆ Who are the key competing businesses
◆ What is the market share of competitors (globally + regions)
◆ Where are other businesses operating (regions, states)
◆ Is the industry fragmented, monopoly, duopoly, oligopoly. WHY
◆ How do businesses differentiate themselves (product/service,
distribution, region)
Risk Factors
➔ Business risk factors
◆ Is the business exposed to a small number of
customers/clients/suppliers?
◆ Other ‘important, but unknowable’ risks
➔ Short-term External Factors
◆ What economic, political or industry factors could temporarily impact
the business
 ➔ Long-term External Factors
◆ What economic, political or industry factors could permanently impact
the business

Economic Moat
An economic moat is a long term competitive advantage that a company has over
its competition. The analogy is that a castle with a wide and deep moat around it is
protected from invasion for longer than castles with no intrinsic layers of protection.

Economic moats need to be assessed in a qualitative and quantitative sense, and

can only be effectively identified by a person with deep understanding of the
industry in which a business operates.

First, we need to qualitatively analyse the company, by looking at the business and
its competitors to see if we can identify powerful intrinsic characteristics. Following
that we want to quantitatively analyse the business’s past performance to confirm
that our hypothesis is supported by strong company fundamentals.

Qualitative Analysis
➔ Key Economic Moats
◆ Brand Power
◆ Intangible Assets / Cornered Resource
◆ Networking Effect
◆ Counter-positioning
◆ Scale Economies
◆ Scale Economies Shares
◆ Systems / Processes
◆ Switching Costs
➔ Benefit
◆ What about the unique characteristic that allows the business to
generate higher returns on capital than other businesses?
◆ ‘The conditions created by the power must materially augment cash
flow, through a combination of increased prices, reduced costs,
and/or lessened investment needs.’
➔ Barrier
◆ What about the unique characteristic that prevents other businesses
from receiving the benefit for themselves?
◆ ‘There must be some aspect of the power conditions which prevents
existing and potential competitors, both direct and functional, from
engaging in [value-destroying arbitrage.]’

Quantitative Analysis
➔ Fundamental Analysis
◆ Consistent growth: Revenue, EPS, Equity, Cash Flow For Owners
◆ Is the company profitable through all economic conditions?
 ◆ Stable or improving margins (Except for Scale Economies Shared)
◆ Growth primarily driven by organically?
➔ Shares Outstanding
◆ Declining or stable number of shares outstanding
➔ Key Business Indicators
◆ Which KBIs best demonstrate market power (a competitive
advantage)?
◆ KBI relative to industry and key competitors
◆ i.e Same-Store Sales Growth relative to restaurant industry average

Management
When we invest in a business we are allowing a team of executives to make capital
allocation and investment decisions on behalf of our company. The effectiveness of
management’s investments and other business decisions will impact the amount of
cash that will be returned to us over time.

For this reason, we need to assess management under two lenses: their integrity to
the shareholders, and their competence as decision makers. In assessing the viability
of an investment, we need to know about risks and challenges as they arise, and
that is dependent on transparent communication from management. We also want
to maximise the cash flow we will receive from the business over time, and that
requires a highly skillful and competent management with a track record of high
return on capital and effective debt management.

Honesty & Integrity

➔ Who are they?
◆ Current Executive Team
◆ Current board of directors
◆ Historical executive team
◆ Founder or long-time executive on the team?
➔ Past Performance
◆ Does management follow through on goals and promises?
◆ Does management hide problems from investors?
◆ How does management answer analysts questions
◆ How long has the management team been there?
◆ Have others questioned their integrity before?

Value Alignment
➔ Management stock ownership
◆ Do they have a significant portion of their wealth invested?
◆ Will they earn more from growing the business than from
compensation?
◆ Do they acquire stock during short-term declines
➔ Management Compensation
 ◆ Primarily paid in long-term, performance-based stock awards?
◆ Limited stock options?
◆ Variable compensation based on KBIs, profitability and ROIC
measures?
◆ Limited or no use of relative shareholder return
◆ Note: compensation for the CEO matters little if they are (a) The
Founder and (b) Their wealth is almost entirely invested in the company

Capital Allocation
➔ Return On Invested Capital
◆ Does management generate consistent and strong (10%+) returns on
invested capital?
◆ What capital structure is management using?
➔ Acquisition Analysis
◆ Does ROIC return to 10%+ in the few years after a large acquisition?
➔ Reinvestment & Distribution
◆ Over the past decade, how much of Cash Flow For Owners was
reinvested back into the business
◆ How much was distributed as share repurchases and dividends
◆ Was debt or equity capital used to amplify either reinvestment or
distributions?
◆ Why is management doing distributions? Permanent or temporary
inability to allocate all capital within the business?
➔ Share Repurchases
◆ Are repurchases done strategically or at any price?

Financial Health
➔ Debt Ratios
◆ Current Ratio above 1.0?
◆ Debt To Equity Ratio below 1.0?
◆ Can the business survive a prolonged period of weak economic
conditions?
➔ Exceptions & Considerations
◆ Nature of lease liabilities
◆ Nature of deferred revenue
◆ Nature of goodwill and other intangible assets
◆ Maturity and interest rate of long-term debt

Intrinsic Valuation
The final component of our analysis is to estimate intrinsic value, and only invest
when the price of an investment is far below its intrinsic value. Intrinsic value can be
defined as the total amount of cash that can be taken out of a business over its
remaining life, discounted at an appropriate rate.
Since we do not know how a business will perform in the future, we can only come
to an estimation of what a company is worth. To avoid overestimation and poor
investment decisions, we err on the side of conservatism when making cash flow
estimations, and come to a range in which intrinsic value would likely fall, rather than
concluding a single specific value.

To further err on the side of conservatism, we only make investments when the price
of an asset is far below its intrinsic value. Only investing with a significant margin of
safety ensures that even if intrinsic value is poorly estimated, we still make a
satisfactory return on investment.

Modelling Cash Flow Growth

➔ Valuation Disclaimer
◆ Has the business passed the previous 3 sections?
➔ Cash Flow For Owners
◆ Cash Flow From Operations - Maintenance Capital Expenditure
◆ Estimate maintenance capital expenditure
◆ Currently in abnormal conditions? Use 5 or 10 year average as starting
point
➔ Top Line Modelling
◆ Project a range of highly likely growth for revenue based on KBIs, in 10
years
◆ Can penetration in one market be expected in other markets
➔ Bottom Line Modelling
◆ What are the key expenses and will they grow, shrink or remain a stable
percentage of revenue over time?
◆ Reach an estimated CF4O/Revenue margin in 10 years time
➔ CAGR
◆ Use the projected range of CF4O in 10 years to calculate expected
compounded annual growth rates.
➔ Rationalisation
◆ Use an alternative approach to rationalise the projection
◆ i.e. Estimated market share given growth projected above
➔ Cash & Debt
◆ Calculate Net Debt to be subtracted from Present Value of Cash Flows

Interpreting Valuation
➔ Inputs
◆ Fixed 10-15% discount rate
◆ 30-50% Margin of Safety
◆ Terminal Growth Rate <3%
◆ Check shares outstanding
➔ Expected Return
◆ Set Margin of Safety to 0%
◆ Adjust discount rate until buy price equals current stock price to find
the current expected return