You should always have a checklist before you buy a stock
Do I want to spend a long time learning about this business
How do you evaluate this business if you were to become the CEO. You should research this business as if you will be the next CEO which will be taking over the business
Can you describe how the business operates in your own words
Each of the business segments
Distribution channels
Marketing strategies
Manufacturing activities
Regulatory requirements
Industry size and terns
Insight into the competitive environment
How does the business make money
How has the business evolved over time
Is success of business due to management brillance or is it
being at the right place at right time
In what foreign markets does the business operate and what are the risks in operating in these countries
Need to understand how committed the management is to invest in foreign countries
To build brand awareness, a business must invest long term in a foreign country
How long has the business being operating in the foreign country.
Is the business investing in R&D to adapt to specific tastes of the customers in foreign country
Has the company assigned a specific Regional manager to emerging markets
Is Revenue Growth translating into Profit growth
If a company does not provide adequate information ie: profits from certain regions
What are the risks to the companies foreign earnings Country risks Brazil complicated tax code China’s protectionism in wind turbine industry
Currency risks Mexico has a highly volatile currency Companies tend to reduce this risk by
investing the money back in the same country
Who is the core customer of the business
Is the customer base concentrated or diversified. Need to have a diversified customer base rather than one with a concentrated customer base. The loss of one customer should not affect the business. Check if the % a business have for one customer
Is the customer base concentrated or diversified. Need to have a diversified customer base rather than one with a concentrated customer base. The loss of one customer should not affect the business.Check if the % a business have for one customer
What is the customer retention rate for the business. Loyal customer base generates more predictable sales. Customer also serve as advocates for a business. Watch for declining loyalty program numbers as this is an indicator that the customer retention is declining. It is useful to interview sales staff to see if there is an incentive to retain existing customers.
What are the signs that the business is customer oriented. The more frequently the business interacts with its customers, the more the customers are happy. You can quickly return a defective t.v to Cotsco without asking any questions
Customers are not loyal to businesses with poor customer service
Find out if a business solves customer problems quickly and easily
Costco cuts its prices when commodity price falls
Southwest airlines doesn’t charge its customers for 2 bags
How does the management stay close to its customers
CEO personally reads all the customers emails
12 What pain does the business alleviate for the customer
A medical disposal company avoid potential liabilities that come from disposal of medical syringes
13 To what degree is the customer dependent on the product or services from the business
Need to have
Company which manufactureres heart pacemakers
Need to have but not immediately
Example：Car Maintenance
Need to have but not critical
Travel, New car, New house
14 If the business dissapeared tomorro, what impact would it have on the customer base
Ask what a custonmer will do if the busines dissapeared tomorrow
15 Does a business have a sustainable competitive advantage and what is its source
How easily can someone copy or replace this advantage
How quickly might they do it
A business with reinvestment opportunities inside the moat has much higher intrinsic value
than a business without competitive reinvestment opportunities
Cash from other businesses can be reinvested in the core business
Common source of competitive advantages
Network economics
Many people using it
Facebook
Timeshare exchange
Examples of an expanding advantage
Western union money transfer has been increasing locations all over the world
Examples of a deteriorating advantage
Diners Club stuck to a charge card whereas others offered free card offering credit
Diners Club ceased to become the market leader
Brand loyalty
Customers remain loyal to the brand
Business can charge a premium for the brand
Example:
Four seasons hotels can charge a higher rate for its hotels in return for an unrivaled service
Starbucks is best known for supplying premium coffee in an inviting atmosphere
Bad signs
Management cut development,marketing and promotion to save expenses
Mangement will discount the price of its products in order to sell excess inventory
Gucci discount price frequently
Louis Vuitton never offers discounts
Tommy Hilfiger diluted its brand by offering discounts
Patents
Patents are a source of protection because they legally protect the products, services of a business from its competitors
Need to understand the commercial value of the patent as evidenced by any product or licensing revenues
Pharmaceutical patents are easy to research and understand
Technology patents are difficult to research and understand
However Patents have a finite life and one needs to be cautious not to assign too much value to them
Regulatory licenses
Regulatory licenses and approvals can create an advantage by limiting competition
Western union money transfer benefits from laws inhibiting money laundering
If Regulatory entity controls the prices a business can charge to the customers, then the competitive advantage is weaker
Regional casino is regulated by each state in which they operate
Switching costs
The higher the switching costs, the less the chances the customers will switch to competitors
Bloombergs financial services and products requires a lot of training. Hence there is a lesser chance of switching to competitors
Cost advantages
Includes factors like Economies of Sales, Advantageous locations
Lowering costs by moving a call center to India
Obtain a Cost Advantage through Industry consolidation
Business which acquire other businesses to achieve economies of scale & thereby reducing the price of their products
LabCorp, Quest reduce the cost of their products by acquiring other businesses
Obtain a Cost Advantage through a good location
When a business has a location that competitors are unable to duplicate, this gives the business a cost advantage
Example: Cement plant in certain areas of USA
Expensive for competitors to build a new cement plant + also inefficient to ship over long distances because of its weight
Best kind of sustainable competitive advantage is Structural
When customers have limited choices in the products, services they can use, advantage is structural
Example: There are only 2 companies manufacturing Infant formuls (Enfamil, Similac are the only 2 products)
It is very hard to have a sustainable competitive advantage over a long period of time
Consumers are less loyal to products or brand names
Increased global competition has lowered the bar for new entrants in most industries such as manufacturing
Technological advances have shortened the lifecycle of many competitive advantages
Amazon benefitted from Technological changes. Barnes and Nobles suffered as a result of Technological changes.
Newspapers lost the classified advertisers to low cost internet sites
Beware of Businesses which were simply at the right place at the right time
When the prices of computers dropped, Dell was able to beat its competitors on price because it had the lowest cost structure
Most investment gains are made during the development phase, Not after
Best way to distinguish whether a business is building a competitive advantage is to monitor the number of customer it is serving
Look for companies which push products or services innovations by investing in R&D or wisely spending in Marketing to increase awareness of product
Example: Apple continued to spend on R&D even after its revenue dropped by 33%
What is a good sustainable competitive advantage
Good customer service, Quality product, Very Knowledgeable work force, returns calls within an hour is preferable, Strong employee culture, Efficient production process
Checklist is important