Cheat-Sheet with preset for various Trading Scenarious

Generic recommendations for trading scenarious as example for Average Volume, Market Cap, Price and Age/IPO.

Generic Recommendations

  • Average Volume > 100,000 (> 1,000,000 for Options)
    The average daily traded shares over the past 3 months should be larger than 100,000. This lowers the spread and makes it easier to find a seller/buyer in time.
  • Market Cap > $500 million (> $1000 million for Options)
    Nano cap stocks should be excluded to make sure that the share price cant be manipulated with pump and dump schemes.
  • Price > $7
    Penny stocks should be excluded due to possible information issues and manipulation of these stocks.
  • Age > 2 years
    At least two fiscal years or 8 quarters of fundamental data (balance-, income- and cash-flow sheets) should be available for research.

True Value / Questions

  • ROIC > 15%
  • Profit Margin > 10%
     
  • Revenue growth > 5%
  • Profit growth > 7%
  • 5y EPS growth > 8%
     
  • FCF / earnings > 80%
  • Net debt / EBITDA < 2
  • Net debt / FCFF < 5
  • Debt / Equity < 80%
  • RoIC > WACC
  • How (this) company could loose? (make money by not loosing: take the opposite position and evaluate the risks, not just the chances)

How to identify a Compounding Machine in the earning sheets?

Business
  • Low volatility of margins
    (todo)
  • Pricing power
    (todo>
  • Low Capital Intensity
    CAPEX/Sales < 5% and CAPEX/Operational Cash Flow < 15%
  • Cash Flow Returns on investment (CFROI)
    (todo)
Ownership
  • Skin in the Game
    Owner & Family > 20% of shares

How to identify a Compounding Machine, if its not in the earning sheets?

Business
  • Moat
    Sustainable, high Return on Invested Capital (ROIC > WACC)
    by recurring revenues, high gross margins and low capital intensity
  • Pricing Power
    Best CAPEX/Sales in Peer-Group
Reinvestments
  • Pattern of disciplined Reinvestments
  • Extensive opportunities to reinvest
    Reinvest for organic growth (ROIC > 20%)
    Acquisitions (M&A)
    Share buybacks
    Dividends (in the absence of value creating alternatives)

How to analyze a stock

Understand the product
  • Annual Reports
  • Investor Presentations, Shareholder Letters
Revenue split
  • In which different segments does the company make money
  • How does the geographical split look like
Skin in the game
  • Which Insiders are buying their own stock
Moat
  • Check ROIC curve of the last 10 Years
Capital intensity
  • CAPEX/Sales < 5%
  • CAPEX/Operating Cash Flow < 15%
Financial health
  • Interest Coverage Ratio (EBIT/Interest payments) > 10
  • Net Debt / Free Cash Flow < 4
Profitability
  • Gross margin > 30
  • FCF margin > 20
Historical growth
  • Yearly revenue growth > 5%
  • Yearly earnings growth > 7%
Outlook
  • Secular trend (urbanization, aging, cybersecurity, obesity, digital payments, …)

Position Sizing