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Page 1 Dougs 20-Point Stock Checklist by Doug Gerlach, - - PowerPoint PPT Presentation

Aug 23, 2022 200 likes •346 views

Dougs 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com Demonstrate BetterInvestings time-tested, proven method of analyzing companies using fundamental, long-term oriented growth approach. Consider 20 key factors

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Doug’s 20-Point Stock Checklist by Doug Gerlach, gerlach@iclub.com

by Douglas Gerlach President, ICLUBcentral Inc. gerlach@iclub.com October 2020

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 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.

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 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.

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 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: R2 (R-Squared) value measures straightness of plotted points,

with 1.0 being a perfect line. This is useful when stock screening & ranking companies.

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  • 2. Are Sales & EPS Growth Strong?

 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.

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  • DG growth should

be faster than 7%, which it is.,

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  • Outliers should be

removed for years “out of range.”

  • Recent growth is

weighted more heavily.

  • All years appear in

range for DG,

  • If weakness is evident,

conduct research to understand if problems are short- or long- term.

  • DG’s recent quarterly

results seem strong.

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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.

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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

  • rganic.

 Note that shares decreased from 344.8M in 2009 to

258.0M in 2019, helping boost EPS faster than sales.

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 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).

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 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.

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 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.

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  • 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.

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 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?

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 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.

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 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.

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Source: StockCentral 2020-10-10 26

Company Avg 5Yr PTP/Sales Ollie's Bargain Outlet 11.3 Dollar General 8.4 Dollar Tree 5.8 Target 5.5 Big Lots 4.2 Revenue-Weighted Industry Average 3.9 Walmart 3.7 Costco Wholesale 3.1

CONCLUSION: DG compares well to similar discount stores.

What are primary drivers (tailwinds) & key

  • bstacles (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.

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 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.

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 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

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 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.

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 CONCLUSION: No P/E ratios in last five years are outliers.

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CONCLUSION: P/E Ratios have been trending up, while high & low P/E ratios remain in stable relationship.

 Why is Current P/E 24.2, higher than 17.9 Avg P/E?

  • Bull market – “rising tide lifts all ships.”
  • TINA – “There Is No Alternative” to stocks.
  • Good company performance – investors appreciate consistent

profitability.

  • Economic downturn – discount stores industry is defensive.
  • Positive outlook – investors buy stocks because they perceive

good prospects.

 CONCLUSION: P/E is high, but for understandable

reasons.

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 Is company currently selling below or close to its

Average P/E Ratio (Relative Value <~100%)?

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CONCLUSION: At 135% RV, DG is pricey!

 Past P/Es guide likely future P/E ratios, but:

  • P/Es tend to decline with slowing EPS growth.
  • P/Es are affected by economic & market cycles.
  • P/E contraction trends may be difficult to break out of.
  • P/E expansion trends may be difficult to sustain.
  • Depressed P/E ratios may take years to recover after

company performance recovers.

  • Very high P/E ratios are not sustainable & will eventually

decline.

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 Carefully consider 5-year average P/Es.

  • Be conservative unless you have experience.

 If slower EPS growth expected, P/E Ratios may

decline.

 Set High P/E to no more than ~150% of EPS growth

rate.

  • “Blue chip” or other popular stocks are often exempted

from this rule.

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High P/E Low P/E 10-Year Averages 20.4 13.9 Adjusted 10-Year Averages 19.4 12.9 5-Year (Section 3) Averages 21.3 14.5 Adjusted 5-Year (Section 3) Averages 19.3 13.0 Median 19.9 14.1 TK6 Alt-M (Avg 5 lowest hi/Avg 5 lowest low) 19.2 12.6 1.5 x EPS Growth Rate (10.0%) 15.0

  • 1.5 x EPS Growth Rate (15.0%)

22.5

  • 1.5 x EPS Growth Rate (17.0%)

25.5

  • CONCLUSION:

Not a lot of variance in high & low

  • ptions!

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 First, set Low EPS to TTM EPS.  Then, select Low Price (usually low P/E x

low EPS is best choice). 39 40 41 42

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If Projected P/E is much greater than Avg P/E, upside may be limited.

 Should have more upside than downside from current price.  Our rule: minimum of 3:1 upside/downside ratio.  CONCLUSION: DG may have too much downside from

current price.

44  Goal of portfolio: 15% annual return over time.  Not every stock will achieve, but overweighting with

low total return candidates will reduce portfolio returns.

 CONCLUSION: DG may be below our TR threshold. 45

 Is stock in or near buy zone?  Are future potential returns acceptable?  Is risk level (downside) acceptable?  If applicable, are dividends attractive?

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 Will you jump in feet-first?

  • If your research & judgment is sound, making initial large

purchase is warranted.

 Will you wade in gradually?

  • Arrange purchases to build up position over months.
  • Avoid taking small position to “see what happens.”

 Will you buy at market or use limit order?  If not a buy now, will you add to watch list?

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Email me at gerlach@iclub.com.

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 Is this “core” holding or “bonus pick?”  Are you looking to replace current holding?  Would this purchase help or hinder diversification?

  • By company size (small, medium, large)?
  • By sector & industry?

 Would this stock improve average quality of portfolio?  Would this stock improve potential returns of portfolio?  Are you prepared for future economic & market

  • utcomes?

 Would this purchase suggest additional risk

management techniques such as TSLO?

53  If company pays dividends, is payout ratio stable &

sustainable?

 How does current & near-term economic climate affect this

company’s business?

  • Is company cyclical or adversely affected by economic slowdowns?

 How stable & competent is company’s board & management

team?

  • How long has key management been in place?
  • Are insiders buying or selling?
  • Is board diverse & independent?

 Are there poorly performing holdings that should be sold or

replaced in your portfolio?

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