Building the Foundation: How I Approach Public Equity Analysis.

Before I build a model or estimate fair value, I want to answer a handful of basic questions. The goal is not to prove that a stock is attractive. it’s to quickly determine whether the business deserves deeper research. I dont want to waste my time. I’m not the fastest model builder.

I start with the most recent 10K then 10Q or quarterly presentation if we’re at year end. I want to compare the most recent annual results to the most recent quarterly results. I want to see the progress they’ve made during the previous quarter. If we’re seeing momentum in revenues, if they’ve introduced a new product or service, new management. (CANSLIM) WE should see growth in price.

The 5 questions I ask before building out a model are:

• How does the company make money?
• What is driving revenue growth?
• Are margins and returns on capital improving?
• Does management allocate capital intelligently?
• What expectations are already embedded in the stock price?

My trading style focuses on momentum names. I do not want to be in stocks that arent moving or have large, directionless volatility. I want to be in stocks that have institutional ownership and higher expected future sales.

I rarely position myself in anticipation of earnings surprises as I simply do not know what direction the stock is likely to go. To that end, I may build a quick income statement model with quarterly data, but my fully integrated models will be annual data. I may also post my quarterly earnings expectation on Estimize. I may even post an article to Seeking Alpha.