by Douglas Gerlach President, ICLUBcentral Inc. gerlach@iclub.com - PowerPoint PPT Presentation

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com by Douglas Gerlach President, ICLUBcentral Inc. gerlach@iclub.com October 2020 1 1 Page 1

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com  Demonstrate BetterInvesting’s time-tested, proven method of analyzing companies using fundamental, long-term oriented growth approach.  Consider 20 key factors affecting company as evaluated on BetterInvesting’s Stock Selection Guide, in 3 categories: ◦ Growth. ◦ Quality. ◦ Valuation. 2 2 Page 2

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com  NYSE: DG  Sector: Consumer Defensive  Industry: Discount Stores  Description: Operates national chain of discount stores selling food, snacks, health and beauty aids, cleaning supplies, basic apparel, housewares & seasonal items at everyday low prices in neighborhood locations. 3 3 Page 3

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Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com  Companies with consistent historical results: ◦ Suggest highly-functioning executive management, able to successfully tackle challenges. ◦ Are less likely to deliver erratic future results.  Companies with widely-varying results: ◦ May continue to be less consistent in future.  ADVANCED: R 2 (R-Squared) value measures straightness of plotted points, with 1.0 being a perfect line. This is useful when stock screening & ranking companies. 6 6 Page 6

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com 2. Are Sales & EPS Growth Strong? 7 7 Page 7

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com  Growth is tied to size of company & will slow as company gets larger.  For very largest companies, 7% sales growth is required in order to drive returns adequately.  For smaller companies, growth should be faster to generate higher returns that compensate for increased volatility. 8 8 Page 8

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com • DG growth should be faster than 7%, which it is., 9 9 Page 9

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com • Outliers should be removed for years “out of range.” • Recent growth is weighted more heavily. • All years appear in range for DG, 10 10 Page 10

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com • If weakness is evident, conduct research to understand if problems are short- or long- term. • DG’s recent quarterly results seem strong. 11 11 Page 11

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com What are the primary drivers of future growth  ( tailwinds ) & key obstacles to future growth that should be monitored ( headwinds )? ◦ New products, new locations, expanding market share? ◦ Does the company rely on acquisitions to boost growth? ◦ Are share buybacks inflating EPS?  TIP: Company investor relations presentations can be good source of research. 12 12 Page 12

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com  Has grown from 1 store in 1939 to 16,000+ in 44 states in 2020. ◦ None in WA, ID, MT, WY, AK, HI.  No acquisitions since 1985 ― profit growth is organic.  Note that shares decreased from 344.8M in 2009 to 258.0M in 2019, helping boost EPS faster than sales. 13 13 Page 13

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com  Review & incorporate: ◦ Expected drivers of future growth. ◦ Analysts estimates. ◦ Assessment of past growth. ◦ Company guidance (if offered)  ADVANCED: ◦ Trend of change in growth rate. ◦ Implied growth rate (AKA rate of return on retained earnings or sustainable growth rate). 14 14 Page 14

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com  Tailwinds: Increasing sales in consumables, growing average transactions, increasing customer traffic, expanding product lines (home goods, beauty supplies), defensive during economic downturns.  Headwinds: Competitive threats, declining margins, customer perception as source of fresh & frozen foods.  TIP: Company investor relations presentations can be good source of research. 15 15 Page 15

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com  Analysts see downturn in 2021 but long-term uptrend.  5-Year Analysts Consensus Estimate (ACE) of EPS: 14.79%.  Analysts think DG has good prospects for future growth. 16 16 Page 16

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com ◦ Historical EPS growth: 15.0%. ◦ Implied growth rate: 20.8%. ◦ 5-yr ACE EPS growth: 14.79%. ◦ IAS EPS projected growth rate: 10.0% ◦ Next 2 FY Analysts Consensus EPS:  FY 2020 (up 50% from FY 2019) $10.07  FY 2021 (up 45% from FY 2019) $9.66 ◦ No company guidance for 2020 due to COVID-19. ◦ ADVANCED: Projecting 3 years of 15% growth from FY 2021’s $9.66 results in 17.1% annualized growth rate from today. 17 17 Page 17

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Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com  If not, no matter how low price is or how high dividend is, stock may not be desirable.  Without growth of sales & EPS, how will future price growth be generated? 20 20 Page 20

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Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com  Pre-tax profit margin (% PTP to Sales) should be stable & strong. ◦ Review pre-tax margins to remove impact of changes from taxes or shares outstanding.  Shows how management manages all expenses. ◦ Aim should be to maximize long-term profitability. ◦ Companies that deliver consistent profitability will likely manage all other aspects of business well. 24 24 Page 23

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com  5-yr avg. : 8.4%  FY 2019: 7.9%  5-yr PTP trend: Down  Investigate down trends. CONCLUSION: DG is changing product mix to include lower-margin consumables. 25 25 Page 24

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com Company Avg 5Yr PTP/Sales Ollie's Bargain Outlet 11.3 Dollar General 8.4 Dollar Tree 5.8 CONCLUSION: Target 5.5 DG compares Big Lots 4.2 well to similar Revenue-Weighted Industry Average 3.9 discount stores. Walmart 3.7 Costco Wholesale 3.1 Source: StockCentral 2020-10-10 26 26 Page 25

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com What are primary drivers ( tailwinds ) & key  obstacles ( headwinds ) that should be understood & monitored? Research sources:  Company’s 10-Q, 10-K, 8-K SEC filings. ◦ Seeking Alpha conference call transcripts. ◦ News articles & commentary at Yahoo! Finance News ◦ Headlines for company. 27 27 Page 26

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com  Tailwinds: successful past product lineup which should continue, higher margins than peers allow for increased costs but can still remain competitive.  Headwinds: new lower-margin products are untested; energy, storage, distribution costs likely to increase; labor costs on long-term uptrend.  CONCLUSION: Even if headwinds are strong, company has room to manage increased costs & remain effective. 28 28 Page 27

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com  Do quality measures suggest this company is well- managed?  If not, no matter how high growth is or how low price is, low-quality company may not be desirable.  “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” - Warren Buffett 29 29 Page 28

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Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com  Identifying high-quality, well-managed, growing business is not enough…  Must buy when price is reasonable to deliver required annual return.  Measure valuation trends with Price/Earnings (P/E) Ratios. 33 33 Page 31

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com  CONCLUSION: No P/E ratios in last five years are outliers. 34 34 Page 32

Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com CONCLUSION: P/E Ratios have been trending up, while high & low P/E ratios remain in stable relationship. 35 35 Page 33