Evaluating the Strengths and Weaknesses of a Business and Industry
Does the business have a sustainable competitive advantage and what is its source?
Does the business possess the ability to raise prices without losing customers?
Does the business operate in a good or bad industry?
How has the industry evolved over time?
What is the competitive landscape, and how intense is the competition?
What type of relationship does the business have with its suppliers?
Measuring the Operating and Financial Health of the Business
What are the fundamentals of the business?
What are the operating metrics of the business that you need to monitor?
What are the key risks the business faces?
How does inflation affect the business?
Is the business’s balance sheet strong or weak?
What is the return on invested capital for the business?
Evaluating the Distribution of Earnings (Cash Flows)
Are the accounting standards that management uses conservative or liberal?
Does the business generate revenues that are recurring or from one-off transactions?
To what degree is the business cyclical, countercyclical, or recession-resistant?
To what degree does operating leverage impact the earnings of the business?
How does working capital impact the cash flows of the business?
Does the business have high or low capital-expenditure requirements?
Assessing the Quality of Management—Background and Classification: Who Are They?
What type of manager is leading the company?
What are the effects on the business of bringing in outside management?
Is the manager a lion or a hyena?
How did the manager rise to lead the business?
How are senior managers compensated, and how did they gain their ownership interest?
Have the managers been buying or selling the stock?
Assessing the Quality of Management—Competence: How Management Operates the Business
Does the CEO manage the business to benefit all stakeholders?
Does the management team improve its operations day-to-day or does it use a strategic plan to conduct its business?
Do the CEO and CFO issue guidance regarding earnings?
Is the business managed in a centralized or decentralized way?
Does management value its employees?
Does the management team know how to hire well?
Does the management team focus on cutting unnecessary costs?
Are the CEO and CFO disciplined in making capital-allocation decisions?
Do the CEO and CFO buy back stock opportunistically?
Assessing the Quality of Management—Positive and Negative Traits
Does the CEO love the money or the business?
Can you identify a moment of integrity for the manager?
Are managers clear and consistent in their communications and actions with stakeholders?
Does management think independently and remain unswayed by what others in their industry are doing?
Is the CEO self-promoting?
Evaluating Growth Opportunities
Does the business grow through mergers and acquisitions, or does it grow organically?
What is the management team’s motivation to grow the business?
Has historical growth been profitable and will it continue?
What are the future growth prospects for the business?
Is the management team growing the business too quickly or at a steady pace?
Evaluating Mergers & Acquisitions
How does management make M&A decisions?
Have past acquisitions been successful?
About the Author
Michael Shearn founded Time Value of Money, LP, a private investment firm, in 1996 to devote his attention to selecting and researching stocks and private investments. He launched the Compound Money Fund, LP, a concentrated value fund, in 2007. Michael serves on the Investment Committee of Southwestern University, which oversees the school’s $270 million endowment. He is also a member of the Advisory Board for the University of Texas MBA Investment Fund. Shearn graduated from Southwestern University, a small liberal arts college in Georgetown, Texas, with a B.A. in Business, magna cum laude, with an emphasis in Accounting and Finance.
Index
10-K reports
10-Q reports
10b5-1 program
99 Cent Only Stores
A.C. Nielsen
accounting methods, changing
accounting standards
accounts receivable
acquired business, understanding
acquisitions
core competencies and
customer retention
employee retention
evaluating price paid
financing
history of
motivation for
risk of overpayment
Adamson, James
Adelphia Communications
advantage
expanding
structural
adversity, communication during
AIG. See American International Group
AIM Management Group, Inc.
airlines, metrics for
Akamai Technologies
alert services
Alfred Dunhill
Amazon.com
America Online
American Airlines
American Customer Satisfaction Index (ASCI)
American International Group (AIG)
American Woodmark
Anthropologie
Apollo Group
appearances, business versus
Apple
applicants
ASCI. See American Customer Satisfaction Index
associates
AutoZone
balance sheet
Baldor Electric Company
Bank One
banks, metrics for
Barnes & Noble
Baron, Ron
Barron’s
Bauer, Ted
Bausch and Lomb
Bed Bath & Beyond
benefits, managers versus employees
Berkshire Hathaway
Best Buy
Bezos, Jeff
Blockbuster
Bloomberg
Bloomberg, Michael
BML Capital Management, LLC
board members, selecting
Bobrowski, Paul
borrowing limits
Brabeck, Peter
brand loyalty
Brazil
break-even sales
Bright Horizons
Brin, Sergey
Bristol-Myers Squibb
Brookfield Asset Management
Brossart, Darcie
bubbles, spotting
Buffett, Warren
Build-A-Bear Workshop
business culture
business growth
due to secular trends
due to transformational products
mergers and acquisitions versus organic
motivation for
speed of
business models
business press
business
appearances versus
describing operations
evaluating
evolution
impact on customer base
learning about
making money
selling
versus loving the money
C.H. Robinson Worldwide
Cabela’s
Canadian oil sands
Cantalupo, Jack
capital allocation decisions
capital-expenditure requirements
capital, competing on
Carcelle, Yves
Carlino, Peter
Cartier
Carty, Don
Case, Steve
cash
cash conversion cycle
cash flows
from operations, compared to net income
impact of working capital on
cash, financing acquisitions
Caterpillar
CCC. See cash conversion cycle
CEMEX
centralized management, decentralized versus
Chambers, John
chief executive officer
salary
self-promoting
Child, Bill
China
Choice Hotels
balance sheet of
Christensen, Clayton
Cialdini, Robert
Cisco
closed-ended questions
Coach
The Coca-Cola Company
commodity resources
communications, consistent
Compagnie Financiére Richemont SA
comparisons, limitations on
Compass Minerals International
compensation consultants
compensation plans, long-term performance and
compensation system, setup
compensation, management
competition
amount of
fierceness of
intensity of
competitive advantage
deteriorating
expanding
finding business with
sources of
competitive landscape, understanding
competitors
competitors, failure of
concentrated customer base
conference call
conscious capitalism
Conseco
conservative accounting standards
Continental Bank
continuous improvement
contracts, employment
copying, competing on
core business model, changes to
core competencies, acquisitions and
core customer
cost advantages
cost synergies
Costco Wholesale
costs
cutting unnecessary
identifying
reducing
countercyclical
Country Risk Reports
country risks
Cover Girl
coverage ratios
credit card firms, metrics for
criteria
as investment filter
checklist
culture, business
currency risks
current liabilities
Custom House
customer base
business’ impact on
manager experience with
customer perspective
customer research
customer retention
acquisitions and
customer-orientation, signs of
customer-retention rates
customers
core
ease of purchase
foreign market taste differences
management closeness with
pain
cyclical
Daft, Douglas
Darling International
database, of interviews
DaVita
debt-maturity schedule
debt
ability to pay
advantages of low
financing acquisitions
interest rate
maturity
motivation for
off-balance sheet
recourse versus non-recourse
using conservatively
decentralized management, centralized versus
Dell
Dell, Michael
dependence on new products
deteriorating advantage
development phase, investment gains and
Dimon, Jamie
Discovery Communications
discretionary costs, manipulating
dissenters, hiring
diversified customer base
dividends, increasing
Dollar Financial
Dorsey, Pat
Dunlap, Albert
E&P. See exploration and production
earnings before interest and taxes (EBIT)
earnings guidance, issuing
earnings
manipulation by management
operating leverage impact on
Eastman Kodak
eBay
Ebbers, Bernard
EBIT. See earnings before interest and taxes
efficiency ratio
Eisenberg, Warren
Ellison, Larry
emerging markets, management for
employee relations
stock returns and
employee retention
acquisitions and
employee training, investing in
Employees First and Customers Second: Turning Conventional Management Upside Down
employees
as assets or liabilities
attracting
choosing
contributions
as dissenters
recruited by competitors
valued by management
employment contracts
Enrico, Roger
Enron
equity grants, to management
evaluating a business
evolution
of a business
of particular industry
excess earnings, reinvesting
Expeditors International
expenses, misstating
face-to-face assessments
FactSet Research Systems
fads, trends versus
Fannie Mae
Fastenal
FCF. See free cash flow
Federal Express
Feinstein, Leonard
Fertitta, Tilman
filter
criteria as
valuation as
finance area
financial goals, setting
financial strength, short-term
Financial Times
financing acquisitions
Firms of Endearment
First Data Corporation
First Manhattan
Fiserv
fixed costs
Choice Hotels
identifying
Southwest Airlines
Flatt, Bruce
Forbes
forced selling
Ford
foreign earnings, risks to
foreign markets
customer taste differences
length of operations in
Fortune
Four Seasons Hotels
Four Seasons: The Story of a Business Philosophy
Frazier, Kenneth
Freddie Mac
free cash flow (FCF)
Freedman, David
Fuji
fundamentals
GAAP. See generally accepted accounting principles
gains, timing of
Galanti, Richard
Galvin, Robert
gaming businesses, metrics for
General Electric
General Motors
generally accepted accounting principles
stock screens and
taxes and
Gerdin, Russel
Gilead Sciences
Gillette
Giverny Capital
Gold, Christina
Gold, Dave
Gold, Sherry
Goldman Sachs
good news, emphasizing
goods, high quality
Google
Graham, Bob
Graham, John
Grant, Hugh
Green, Todd
Greenberg, Jack
growth
historical
human capital and
infrastructure for
market share and
paying f
or
prospects
revenues versus
slowing
speed of
Grusky, Bob
Gucci
guidance, issuing
Häagen-Dazs
Hammergren, John
Harvey, Campbell
Hastings, Reed
HCL Technologies
headhunters
HealthSouth
Heartland Express
Heartland Payment Systems
hedge, natural
Hershey Corporation
Hewlett Packard
Hilbert, Stephen
hired hand manager
hiring, by management
historical growth
history
of acquisitions
of particular industry
Hoffman, Casey
holdings, tracking
Home Depot
hotels, metrics for
Hughes Communications
human capital, growth and
human resources
contacting
Hurd, Mark
hyenas
Iacocca, Lee
ideas, inventory of
IFRS. See International Financial Reporting Standards
Immelt, Jeffrey
Immucor
Imperial Capital
IMS Health
Inc. (magazine)
income-tax footnote
independent thinking, managers
industry analysis
industry conferences
industry consolidation, cost advantages via
industry insiders
industry primers
industry standard, setting
Industry Surveys
industry
change
evaluating as a whole
history of
metrics for a specific
inflation risks
inflation, effect of
infrastructure, growth and
initial public offerings (IPOs), researching
innovation
insider purchases, as indicators
integrity, manager and
interest rates
on debt
rising
International Financial Reporting Standards (IFRS)
internet firms, metrics for
internet search
interviews, database of
Intuit
inventory
investing opportunities, creating
investment bubbles, spotting
investment gains, development phase and
investment ideas, filtering
Investment Intelligence from Insider Trading
investment managers, following
investment portfolio, existing
investments, tracking
investor pessimist
iPhone
IPO. See initial public offering
Iron Mountain
J.C. Penney
J.D. Power and Associates
J.P. Morgan
Jobs, Steve
Johnson & Johnson
Jones Soda Company
Jong-Yong, Yun
Kelleher, Herb
key risks
Kierlin, Robert
Kinder Morgan Energy Partners
Kinzel, Dick
The Investment Checklist Page 41