‘Normal’ Portfolio Buy Checklist - ’Quality at a fair Price’ Buffett Stock

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I realised that just one Checklist for the ‘WD40’ would not actually suit my needs - because I Invest in a range of Investment ‘Styles’ to ensure more Diversification. On this basis, I have decided to produce the following Checklists:

• Buy Checklist for an Income Stock
• Buy Checklist for a Growth Stock
• Buy Checklist for a Value or Recovery Stock
• Buy Checklist for a ‘Quality at a fair Price’ Buffett Stock.

This is the Final Checklist and you can find the other ones at these Links:

http://wheeliedealer.weebly.com/educational-blogs/income-portfolio-buy-checklist

http://wheeliedealer.weebly.com/educational-blogs/normal-portfolio-buy-checklist-growth-stock

http://wheeliedealer.weebly.com/educational-blogs/normal-portfolio-buy-checklist-value-or-recovery-stock

Whilst scribbling this final Checklist it has occurred to me that a Stock could move from one Checklist Category to another. For example, it is not hard to envisage a Value or Recovery Stock becoming an Income Stock or even a Buffett Stock over time, or perhaps a Growth Stock could mature and become a Buffett or Income Stock in time (hopefully it won’t become a Value or Recovery Stock !!!).

Again this is just pointing out that flexibility in approach and interpretation of these Checklists is preferable and the Checklists should not be treated as a ‘Black & White’ strict set of Rules that must always be 100% adhered to. As always, an ability to be flexible when it comes to dealing with Markets is useful.

General Points for the Checklists

• The Checklist is assessed in terms of ‘Yes’ or ‘No’ to a number of Questions and ‘Yes‘ means it passes. Ideally a Potential Stock for Buying will satisfy all the Criteria but it is possible that a Stock could fail on maybe a few Items but still be acceptable to Buy. In this event I would need to document a reason for over-riding the Criteria. For example, the Criteria for minimum Market Cap might be relaxed a bit for a particularly good Stock that scores well on the other Criteria. It seems appropriate that Checklists are an aid to Stock Selection but they should not be rigidly applied if it means something very good cannot be bought - at least they force me to think about each Criteria and if I do over-ride it, that is a conscious well thought through decision.
• Some of the points are a bit subjective but other ones are more numerical based and absolute - this introduces an element of inaccuracy around the subjective ones but I am not sure this is really avoidable. It just means a lot of care and thought must be applied when filling out the Checklist. I am not a Robot, however logical and rational I attempt to be.
• There are several Parameters throughout the Checklist - these should be revised as necessary over time but it is probably best to do this on a Yearly Review basis or similar. In fact, the whole Checklist should be amended when it is found to be lacking in some respect.

The Questions

• Is the Dividend Yield acceptable? (around 2% minimum)     Y/N
• Does Stock have at least 5 years of growing or at least maintaining the Dividend?                                Y/N
• Does Stock have a history of growing the Dividend and is the Dividend forecasted to rise?                            Y/N
• Is the Dividend Payment sufficiently covered by Earnings? (minimum 1.5 times Cover for boring Utility type stock)            Y/N
• Is Debt manageable? (maximum 3 x Pretax Profit)        Y/N
• Does the Stock convert Earnings into Cash? (minimum 70%) Y/N
• Is the Stock larger than £100m Market Cap?            Y/N
• Is Revenue growing at an acceptable rate?            Y/N
• Is Profit Before Tax forecasted to grow?                Y/N
• Is Growth of Revenue and Profit at a realistic Rate which is likely to be maintained over time?                        Y/N
• Does the Stock enhance the Diversification of the Portfolio? Y/N
• Is the Stock Low or Medium Risk? (High Risk not ideal for Buffett Stock nor Cyclical)                                Y/N
• Has the Stock shown an ability to endure? Has it existed for 10 Years or more?                                    Y/N
• Ideally a Buffett Stock should have been around perhaps 20 Years as a minimum - if less than this, does it score well on other Factors?  Y/N
• Is the Stock likely to still be around in 10 years time?        Y/N
• Is it in an enduring Sector? (or are there obvious challenges?)                                                                 Y/N
• Is the Stock/Sector facing low Regulatory Risk?            Y/N
• Does the Regulatory Environment give the Business a Sustainable Competitive Edge?                            Y/N
• Does the Stock represent Value? (subjective but highest acceptable fwd P/E 18)                                Y/N
• If NAV is a more appropriate way to value, does the Premium or Discount allow for potential Upside?                Y/N
• Can the Management be trusted?                Y/N
• Do you understand exactly what the Business does?        Y/N
• Is the Track Record impressive?                    Y/N
• Is the Stock Number 1 or 2 in its Sector?                 Y/N
• Does the Business have a Moat? (a Competitive Edge - a key Buffett factor)                                    Y/N
• Could the Stock be a Takeover Target?                Y/N
• Is the Business investing for the future?                Y/N
• Would the Stock be relatively resilient in a Bear Market?    Y/N
• Has the Stock demonstrated an ability to perform in an acceptable fashion across the Economic Cycle of Boom & Bust?        Y/N
• Would the Dividend Payment be maintained in a Recession? Y/N
• Is it a ‘Buy and Forget’ Stock?                    Y/N
• Would it be the sort of Stock you could safely buy more of on a Big Pullback (assuming no Trading problems)?            Y/N
• Has recent Trading been good?                    Y/N
• Is the Stock free of ‘Accounting Concerns’?            Y/N
• Does the Chart suggest this is a good time to Buy?        Y/N
• Is this a ‘Connoisseur’ Stock/Company?                Y/N

Final Questions

• What areas does it fail Test on and why?
• Would Warren Buffett buy this Stock?                Y/N
• Does this Stock deserve a place in the WD40 Portfolio as a ‘Quality at a Fair Price‘ Buffett Stock?                          Y/N

That’s the Buy Checklist Blogs finally completed (yes, like you I was beginning to think that would never happen !!) and hopefully Readers will find them a help with their own Stock Picking and of course it makes sense to steal bits from these you like and disregard what you don’t - I am not at all precious and I think there are many ways to create a System and this is just yet another element of the Jigsaw Puzzle (if would help if I could find the Lid with the Picture on it !!).

Cheers, WD.