That investing checklist focused on the company’s business while Part 2 will cover some of the qualitative aspects and share price movements of the stock.
6) What is the historic performance of the company’s stock price?
While long-term investors don’t need to be too concerned about the share price movements in the near term, it is important to look into the historic performance of the stock as it reflects how the market participants view the stocks that you invest in.
This will tell you a lot about the perception that market participants take of the company that you intend to buy.
Aside from that, you can also see how stocks react to different market environments. For example, by looking into historical share price performance, you will see how the company reacts towards economic downtrend periods, such as during the Global Financial Crisis (GFC) or the recent impact from the COVID-19 pandemic.
Here are some the indicators to look into when assessing the company’s share price movement historically.
How has the share price reacted towards the different economic cycles?
What are the all-time high and all-time low levels?
How does theshare price movement compare to the benchmark indices?
7) What is the valuation of the company’s stock?
There are multiple ways for investors to value the share price of a company. Depending on your preference and whether it fits the profile of your company, you can use various methods to value a company.
Valuation is an important part of your investing decisions, so it’s vital for you to understand some of the fundamental analysis.
This exercise of determining the “fair value”, or “intrinsic value”, of the company can help investors to find companies that are deemed “undervalued” and represent a buying opportunity.
Aside from that, investors will also see how the market is currently valuing the stocks by looking into the current valuation as compared to its historical valuation.
For example, if you use the price-to-earnings (PE) ratio to value stocks, you can compare its current PE against its historical PE and average PE over the last couple of years.
With this in mind, you can gauge if you are buying at a premium or discount to the average PE level.
It’s also important to ask why the market is valuing the company so differently if you notice a sharp deviation in its valuation from its historical average or in comparison with its industry peers.
It is also advisable to compare the deviation in the valuation with the industry average and the market to understand if such differences are due to macroeconomic changes or a company-specific event.
8) Who are the management of the company?
This is a very important aspect for me, personally, as I usually invest in companies that have shown a strong track record under their management.
I would like to know the person that is leading the company such as the Chief Executive Officer or the Managing Director of the company.
That’s because the leadership qualities of these key figures will play an important role in the success of the companies that I intend to invest in.
Of course, not everyone is Elon Musk, CEO of Tesla Inc (NASDAQ: TSLA), who is very engaging on Twitter Inc (NYSE: TWTR).
It might be harder to understand the leadership qualities of leaders that opt for a low-profile approach.
For me, I usually take the time to read the Annual Report, especially under the Management Discussion and Analysis (MDA) section.
From this, I can see if the management has managed to fulfil their plans in the past and if the direction going forward is something that I’m excited about.
Here are some of the questions to ask when looking at the management of the company:
Is the current management team the same as what it was in the last five years?
What is the track record in terms of financial performance under the current management team?
What is the future direction of the management team?
What are the leadership qualities of the leaders of the company?
What is the culture that the company is promoting under the current management team?
9) How strong is the brand of the company?
This is another aspect that focuses on a qualitative aspect of the company and the assessment could also be subjective to one’s preference.
One of the ways to keep your investment decisions strictly objective is by looking at surveys on brands.
With this, you can have a gauge of how strong the brand of the company is as compared to its peers.
This is usually more important for companies that are targeting the end-consumer business segment.
10) Why do you want the stock to be in your investment portfolio?
Investing is a personal journey and what works for me might not necessarily work for you.
However, the principle of investment decisions remains the same. This is why it’s important to understand why you think a certain company would fit into your investment portfolio.
Here are some of the reasons you should pay attention to:
Your asset allocation strategy. A new investor will not have this issue as the portfolio starts from fresh. However, for someone who has been investing a while, it’s important to see how much has been invested into a certain industry. For example, while technology-related stocks have been the biggest outperformers in recent times, an investor with an existing of 70% (or more) of technology-related stocks in their portfolio, might want to consider diversify into companies in other sectors.
Your foreign currency exposure. This will also come into play when it comes to investing in foreign stocks, such as those in the US. It will be important to understand the foreign currency risk that comes with overseas investments.
Your risk appetite and time horizon. You need to make sure that it fits into your risk appetite and the time that you intend to hold the company.
Making better investment choices
These are just a few of the investing points that will help you make better investment decision.
By practicing a structured method to conduct your research into a company that you potentially want to invest in, it helps you reduce the tendency to speculate in the stock market.
Investors can revisit some of these questions every now and then to see if the fundamentals of the company remain the same.
You can also add in other questions that you think are relevant to your investment thesis, such as the macroeconomic environment and other factors that influence the share price movement.
Finally, my hope is that through some of these questions, you’ll learn to allow your investment decisions to be driven by rational analysis, and not influenced by your emotions.
Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.