Let's say I wanted to begin a systematic approach to studying/researching/analyzing a subset of companies, particularly small caps between 50M and 300M.

Would it be better to:

1. Start at A and read every annual report? or,

2. Quickly check the financials and screen out any companies that are clearly losing money, and only set aside companies that appear to be profitable?

Warren Buffett basically says to start at A, but his advantage was that he had the Value Line book in front of him so he could just flip pages.

I find the "starting from A" to be overwhelming given that I don't really know if I would know a good company if I saw one based on their business.

I've always had the idea that the financials are probably the most important thing when it comes to finding great companies given that you need to find companies with positive cash flow and other strong financial statements.

So that's why I think I could just skim financial statements quickly and set aside the companies that appear to look good on the surface.

I could read/skim a lot of annual reports, but if I get to the financial statements and they are clearly losing money or are just unprofitable, then I could have bypassed them in the beginning.

Is there something inherently wrong with bypassing those companies that are unprofitable? Am I passing up good opportunities?

How do I systematically find those value opportunities where, as they say, are out of favor or have something going on with them that causes the general public to disregard them due to a recent poor performance or general bad outlook?

I would definitely not start reading through a list of companies from "A".

I would set a few parameters to create a manageable list of companies and then, as you suggest, spot check their financials and business situation to see if there are any I want to rule out immediately and then take a closer look at the ones that are left.

For example, I have some cash sitting in my account. I have to decide what to do with it, and I'm leaning toward finding a food company to invest in. Given my preferences, I will likely use a stock screener something like this to create a list:

Annual revenue: >2 billion
Market cap: 2-30 billion
Sector: food/beverage
Dividend: >1%

I'd also want to see P/E numbers although I would not screen companies out based on it (but if a midcap food company had a P/E of 30 or something, there would have to be a good reason why for me to consider buying its stock).

Then I'd start looking through that list starting with companies I recognize and then to companies whose dividend or P/E catches my attention and then to the remaining companies. I'd hopefully get a short list of only a few companies to look into in more detail.

If one of your parameters is "must be profitable now", then you can set that as a requirement, but looking at smaller companies you could miss opportunities as what really matters is not how profitable the company is today but how profitable it will be tomorrow.

I would be more interested in knowing "why aren't they profitable now, what are they doing to increase revenue and/or cut costs, and what are the chances of them succeeding?"

Like I said, last night I started sifting through companies by their financial statements. I have a general idea of what looks good and what looks nasty, just by following what others have mentioned in this thread and by looking at the financial statements of the companies that the top investors are buying. It's a quick and painless way to screen out some of the worst companies

I prefer to stick to smaller market caps just because I think the valuations tend to have more upside potential.

Admittedly, a couple weeks ago I bought my first stock in a long time based on a very quick analysis and by piggybacking off of a new, up and coming investor. I didn't spend a lot of time on research, although I went back and read up more on it. I was sort of worried about the price getting away from me.

The company is in the small cap stage, the CEO of the company has a controlling interest, and he has a reputation of taking small companies and growing them towards 1B valuations.

I figure there is a lot of potential to grow and if there is opportunity to triple over the next few years, I'm probably getting in at a good time.

I'm looking at a small cap company. Financials look really good, not much debt, they have positive cash flow, and they are steadily gaining revenue, profit margins, and net income, and they have a good chunk of cash. There isn't anything that jumps out at me as suspicious. They seem conservatively managed.

The CEO of the company holds 11% of the shares.

There is concern in the Risk Factors about that buyers of their product could potentially look overseas for lower costs, but I don't know how to determine if that is really an issue or not.

The last 10 years have showed steady gains, nothing wild that would cause concern for volatility. It's a very steady growth in earnings. Book Value has also been steadily growing.

I ran a quick intrinsic value calculation that is based on book value and it's showing $38. An article I found in doing research is stating $30.

The company is currently trading at $19, so it's at a potential ~36-50% discount right now, if those numbers hold.

I hate to think I can rely strictly on the financial statements. Two things that concern me are that their top 10 customers represented 27% of their revenue. If anything happened to those top 10, the company may not be able to collect payments. Is that really something to be worried about?

Also, there is possibility that their customers could start looking overseas for lower costs. I have no idea if that is a real threat, but I guess the idea is always there. How do I really judge that? Like I said, the company is steadily growing so it's not like there are wild swings.

I'm having a hard time judging the downside risk, but that is just because I really don't know how to judge it. Should I be going off of good financials and possibility of a good margin of safety? Or should I be more worried about the prospects of the industry and the fact that there doesn't really seem to be a huge catalyst that is going to unlock value?

EDIT: I find as I sit here trying to figure out more about the company, and that the stock price is down today, that I'm getting anxious about missing out on getting in at a lower price. I'm trying to fight that urge and do nothing, to get over the "I missed it" feeling.

what is your reasoning for being vague?

Impossible to really speculate without knowing the industry and the products/services involved.

Other relevant factors would be the cost differential between the company and offshore competitors and what a typical customer spends per year.

KMX was down 7% today but I couldn't see any news and then it battled back to only being down 2% for the day. Seems volatile lately.

I knew that would be asked. Other than the stock being partially illiquid, no real reason. I guess i worry that if i post the stock then others jump in and push the price up. The stock is UFPT.

This made me lol. And I'd never invest in Ultimate Full Paradise Tilt after everything they've put customers through. Next time remain vague.

https://www.google.com/finance?q=mus...ci6OJDCwAOhngE

The food supplement industry is blowing up. In my home town 3-4 years ago there was 1 good and 1 ****ty gym, now there is more then 5 nice ones. Their revenue basicly exploded several 100% in a few years, they have their name attached to MMA (branding is huge in that industry) and they won several awards for their products. But they are still losing money for 2 reasons, they invested alot in expanding and marketing and they are not making alot of the products inhouse.

Im not sure if they will make it inhouse and what the impact on the quality of the product will be. But producing it inhouse will make the company much more profitable, plus if they keep growing like this they will really quickly make money and be worth much more then the current 30 milllion imo.

its risky, but they are operating in a market that is not at its limit yet, and they offer some really good products and branding. They do seem to have alot of potential to become one of the top guys in that market, especially with MMA's growing popularity.

I supose it should be easy to figure out how soon they will change up their production ways. Thoughts?

oh btw, there is also some big money guy involved with the company, so despite them losing money still they are not insolvent or anything.

@ italian: how do you get a 30$ book value. I get one much lower actually and the stock seems overpriced atm. little over 10 million earnings, and a net book value of 75 million, lower if you are actually conservative.

It's not a book value of $30. It was an intrinsic valuation that some guy found through whatever formula he used.

And the $38 valuation came from an online intrinsic value calculator that I found that is based around the growth in book value over 10 years.

I'm surprised you think it's overpriced, though. The more I read about valuation and strength of companies the more I think I'm not as confident in the long-term future of the company. Not that it's probably not a good investment at some point, but I think there are a few things about the company that are less than ideal for investment.

I'm struggling with the idea of finding an underpriced company. I get the idea of what everyone is saying, but that is still too vague to know it when I see it.

10 years seems kinda risky for a business like this. I rather take somethign that cant be wiped out by china or bangladesh or soemthing. And getting 5% expected return on penny stocks seems not teh way to go. you want 30-50% in a year with this. With a huge margin of safety. Better look for some big dividend paying stock imo.

Was considering dumping AAPL if Naj's thesis didn't play out by March of next year, but:

http://www.foxbusiness.com/business-...-his-mouth-is/

That is interesting.

It actually is NOT that interesting at all. If you take your advice by what CEO's do in regards to compensation, then you are in big trouble. A huge percentage of the time it is done as a way to manipulate the public into thinking that they have confidence.

You are basically getting led around in circles by the media. The CEO has hundreds and hundreds of millions of dollars (high hundreds, actually). Unless he is willing to put it all on the line and start with close to nothing if he is wrong, then any type of statements or actions he makes regarding stock price is worth no more than toilet paper.

weeee. This is a reason to sell tech stocks. If someone is making 1/3 of his salary on options, that means he is not receiving very many options as it is unlikely he is being paid over $1 million a year so his toal salary might be $2 million a year. However if over 2/3 of your salary is options you might be get $500,000 a year and $100 million in stock options. Article spin.

Employee stock options have generally been a disaster. I highly doubt the tech industry taken as a whole over the last 20 years has beaten gold or the SP500. Thus these bastards get 10 year options that generally double due to inflation. They get the $100 million paycheck, the small investor gets to pay capital gains on the inflation. Priced in gold the sp500 has not moved since 1957.

What would be a better idea, is force CEOs to buy stock before they get the job. The ceo is suppose to represent shareholders and how can they represent shareholders if they have no skin in the game. Free stock options is not skin in the game. It is more looting especially if you consider all the backdating scams.

30 years ago the average ceo pay was less than 50 times the average workers pay. 10 years before that it was 1/2 that or lower. Stock options ruined many of these companies as most are broke.

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bought CSE and hlf call options.

So many things are factually incorrect here. The S&P has trounced gold since 1957 (you did not factor in reinvested dividends).

I don't want to generalize about stock options in the tech sector, but stock options are not a reason to avoid the tech sector in general. Sure there are plenty of companies that dilute their shareholders too much and many execs have options that are too generous. Companies in all sectors will use options to attract the best and brightest talent. The largest impact for these companies (re: executives ) is generally not the compensation -- but performance. I'd much much rather be invested in a company where the CEO does a great job and is grossly overpaid rather than a company with a crappy ceo that works for free. The real risk investing in the tech sector over the longer term is that visibility is so limited.

"Dr. Siegel also conducted an exhaustive study of stock market returns from 1871 through 2003. He showed that this simple approach to investing produced “97% of the total after-inflation accumulation from stocks… while only 3% comes from capital gains.”"

Stock options don't consider dividends they only consider capital gains. The typical bull**** employee stock option is 10 years at the current price. Thus over 10 year all the gains are generally inflation. The government gets their 45% corporate tax, the CEOs and employees get theirs the inflation, and the investors gets to pay the capital gains tax on the inflation. The stock market has not beat inflation since 2000. The NASDAQ 100 was about 4000 January 1st, 2000, it is 2940 today. In the mean time inflation has probably doubled. Gasoline was $1.75 a gallon in California today it is $4.00. The average dividend during that time was 1%. High option stocks don't like to pay dividends to boost their capital gains. The U.S. is still the best stock market in the world, due the history before the employee stock option existed.

It is very simple, the large shareholders have the power to hire the CEO for best interests of the shareholders. You don't need stock options. Here is a lecture by Carl Icahn on corporate culture. "The best and brightest don't get to get at the top of the ladder". "The CEO makes 400x the average workers pay and he is simply not worth it."

https://www.youtube.com/watch?v=HlfgQ4_7EYA

The CEO position is worth about $500,000 maybe less. That is to run the conference calls, to write the annual reports and quarterly reports, run the meetings, fire employees, and make the decisions. Many pink sheet stocks CEOs have the same duties for far less.

Now you want CEOS with skin in the game, to get those guys out of retirement. If they don't seem good to the large investors or activist investors you get rid of them.

You don't want to get a CEO with massive stock options as their only goal is to keep it afloat with no dividends to cash in on the inflation. However, if all they got is shares they they either paid for or got at a discount, they will have to improve the fundamentals of the stock to beat inflation, they also get the dividends. you can also have phantom stock where the CEO gets only the dividends of an imaginary amount of shares.

Double check your math. It happens to be incorrect. It would be correct if we had consistent 7.2% inflation.

That doesn't go far enough. This should be required for all employees.

Many CEOs do not even collect options, income, or bonuses. They are paid nothing. It could be a requirement. The standard employee has no stake in the company is hired for lowest cost out of the labor pool. Take your Walmart employee for example. To get a major promotion, you could require they purchase stock before they get it.

The money supply M2 was less than $5 trillion in 2000. Today it is $10.5 trillion. Money supply doubled and you saw the price inflation taken up by productivity and low cost imports in certain areas.

Employees stock options are even worse they are issued annually. Thus millions can be made off the volatility of stocks. Options issued in 2009 are more valuable than those of 2007. Even stocks losing value can make the options holders $50+ million if they got the options in March of 2009 and if they sold today.

Companies that issue large amount of stock options generally show they do not care about investors and should be avoided.

I care about my stock's results. I don't mind if someone else gets rich along side of me.

There is no getting rich alongside, they get rich and you pay the capital gains on the inflation for a loss. Hedge funds can't even beat the SP500 since 1995 (http://www.youtube.com/watch?v=uvFvArULZKY min 13:41). The stock market is down especially for the high option non-dividend paying pussy yuppie stocks. Zynga, Webvan, pets.com what a move. Just investing in sp500 stocks that pay a dividend you beat the market by 3%. Many of these so call option and pay plans put a significant dent in earnings. To say get rich alongside means you make the same as the CEO from the stock, I highly doubt that. You should get paid for the duties of the job. If you don't do the job, you get fired.

Too bget thread back online looking at CACI, CCMO

god steelhouse is a brilliant troll

Possibly. I actually think he is serious, but Poe's Law applies.