Stock Buy Checklist – AIM ‘Blue-Sky’ Story Stocks

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A few months ago I produced a series of Checklists to be used when Buying particular kinds of Stocks and then some while later it hit me that I ought to produce one for those very high risk, often loss-making, start-up type businesses on AIM that I avoid on the whole but occasionally I will buy into one. Before getting stuck into this particular one, here are Links to the other ones I produced – in fact this is the final one but it has Links to the others:

http://wheeliedealer.weebly.com/educational-blogs/normal-portfolio-buy-checklist-quality-at-a-fair-price-buffett-stock

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.
• 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.

 
The Questions

• Is the Company actually selling stuff and generating meaningful Revenue?     Y/N
• Is the Company making a Profit or very near to making it and with growing Revenues to make it very likely?
• Does the Company have sufficient Cash resources to enable it to get to the point where it is generating Cash and will not need to go to Shareholders with a Placing and the subsequent dilution of existing holders?   Y/N
• Is the Company adding to its Cash Pile and/or reducing its Debt? Y/N
• Is any Debt small and manageable?  Y/N
• Do Earnings Forecasts for future years show a strong rate of Revenue and Profit growth?  Y/N
• Have you seen at least one Broker Note and do the Forecasts within it pass the realism test and are likely to be achieved?  Y/N
• Is the Company talking about an intention to start paying Dividends in perhaps a couple of years?  Y/N
• Is the Business winning Sales Orders on a regular and frequent basis?  Y/N
• Does the Business have more than just one Product and are there plans to extend the Range of Offerings?  Y/N
• Does the Business have more than just a few Customers?  Y/N
• Is the Product something that is likely to have Recurring Revenue and/or ongoing Repeat Sales and/or opportunities for Enhancements?  Y/N
• Is there clear and quantifiable Demand for the Company’s Products?  Y/N
• Is the Business likely to have a strong Competitive Moat or can they easily be copied?  Y/N
• Does the Business have a clear Niche Market it is targeting or are there already loads of stiff Competitors?  Y/N
• If the Business is a ‘Disruptor’ in an existing and highly competitive Market, is it really credible that they can take on existing firms and grow rapidly?  Y/N
• Is the Business likely to have Pricing Power or will it just have to accept a Market Price (this is a big problem for Resources Companies)?  Y/N
• Is the Business addressing a ‘Hot’ Sector or one where the Demand is likely to be strong?  Y/N
• Is the Business likely to get enduring Sales or is the Product really a fad?
• If the Product is in Tech in particular, will it have an ongoing lifespan or it is likely to be superseded by a new Technology?  Y/N
• Does the Product meet high standards and consistency in manufacture/delivery or is there a potential problem here?  Y/N
• Does the Company have the necessary Intellectual Property Rights (IPR) to protect its Products?  Y/N
• Does the Company have the necessary Licences to carry out its Business legally?  Y/N
• Does the Company operate in ‘safe’ Countries with low levels of Corruption?  Y/N
• Can you trust the Directors?   Y/N
• Can you trust the Accounts?   Y/N
• Do the Directors have ‘Skin in the Game’ with significant Shareholdings?  Y/N
• Do the Directors have a Dynamic and Entrepreneurial attitude?  Y/N
• Are the Directors ‘young’ and hungry for success?    Y/N
• Do the Directors have a Track Record of success in similar Companies and/or appropriate knowledge of the relevant Sector?   Y/N
• Is Corporate Governance at the Company sufficiently robust?  Y/N
• Is the level of Directors’ Remuneration acceptable?  Y/N
• Are the Directors prepared to engage with Shareholders in a professional way but not too ‘rampy’ and on Twitter all the time?  Y/N
• Does the Company’s NOMAD and its Broker(s) have a Reputation for honesty and objective communications?   Y/N
• Has the Company been listed on AIM because of genuine access to Growth Capital or is it because no Venture Capital Investors would touch it with a Barge Pole or because Founding Shareholders or a Private Equity type institution is trying to dump it on you?  Y/N
• Can you Buy and Sell Stock in sufficient size to make it worth doing?  Y/N
• Is the Spread between the Buy and Sell Price acceptable?  Y/N
• Are you thinking of Buying at a time when the Price has pulled back or are you making the amateur error of Buying at the top of a Spike up when everyone has got all excited?  Y/N
• Is the Bulletin Board on ADVFN calm and polite and objective or is it fully of Nutters ramping and deramping and talking complete drivel?  Y/N
• Is the Stock ‘Off the Radar’ of most Investors/Traders and not being the subject of a concerted Ramp to push the Stock higher artificially?   Y/N
• Is it likely you can buy more of the Stock in sensible amounts if the Story plays out as you would like and you want to increase your Exposure?  Y/N
• Have you sought the opinion of other sensible and successful Investors you know and taken their comments on board?   Y/N
• Do you have an Exit Plan in case the Story does not play out as you would like (what would make you sell?)  Y/N
• Have you carefully considered all the Risks and made a List of them?  Y/N
• Do you have a realistic and achievable Target Price?  Y/N
• Have you considered other Stocks and is this the most attractive one you can find?   Y/N
• Do you have the right balance between different types of Stocks within your Portfolio or do you just hold very High Risk Story Stocks like this one?  Y/N
• Could the Company realistically be a Takeover Target?  Y/N

 
Final Questions

• What areas does it fail Test on and why?
• Have you considered your own Psychological Biases or is there a danger you are falling in love with this exciting Blue-Sky Stock?   Y/N
• Are you being Calm and Objective or are you rushing a Buy Decision because you have lost your mind?  Y/N
• Have you come to a Buy Decision after many weeks of careful Research and consideration?  Y/N
• Have you decided on an appropriate Position Size mindful of the High Risk nature of such Stocks?  Y/N
• If you intend to use a Stoploss, have you thought carefully about where you will place this so that you are saved from trouble but not Stopped out on mere wiggles or Spikes down?  Y/N
• Does this Stock deserve a place in the WD40 Portfolio as an ‘AIM Story Stock‘?    Y/N

 
Obviously on all the Stock Buy Checklists I have produced the precise Questions have different weightings in terms of which are more important and which are much less so. When using such a Checklist you must take care to try to remain objective and not to just over-ride a ‘Rule’ because you have fallen in love with the Stock already and you are going to Buy it whatever the Checklist throws up. This is a big danger and sadly hard to avoid but at least we are trying to address this.
 
I am sure that is all the relevant Checklists covered now but I am not guaranteeing that I won’t think up another one to create at some point in the future !!
 
In fact, halfway through writing a Draft of this one I have thought of another but I am not telling you what it is !!
 
Cheers, WD.