I have uploaded a new analysis for HAIO (FY17 Q1). There are two files in that post.
You can go through the report and understand how I make decision for an investment. You will see how I justify my investment thesis for a stock.
Structure of report:
- Synopsis (or Investment thesis)
- My investment decision, and what do I think the company/asset is really worth? We need a pricing imperfection to make money.
- The stock is priced imperfectly because of these 2-3 key factors. The market has not factored them in because…. But you believe they’ve been overlooked, and that there’s a chance to gain significantly by longing/shorting this stock. Or, on the flipside, the market has incorrectly factored in certain things that do not matter that much.
- Company Background
- What are its products and operations?
- Performance analysis based on the stock’s historical data
- Projection model
- For a long, you need to show that there’s a good chance that the stock is undervalued in some way (e.g., right now it’s trading at $25, but there’s a reasonable chance it’s worth $35-$40) by showing your public comps, precedent transactions, and DCF analyses; for a short or a hold, you do the opposite and show why the stock is overvalued.
- And certain key events in the next 6-12 months will cause the market to “realize” this pricing imperfection, resulting in a correction and the potential to make money. Key events might be new product launches, acquisitions, earnings announcements, competitors’ tactics changing, divestitures, positive clinical trial data, and financing activities such as share repurchases or issuing debt / equity.
- What are the main reasons why you might be wrong? And yes, everyone is wrong sometimes. You have to lay out the top 2-3 market and company-specific reasons why your investment thesis might be wrong, and then explain what you can do to hedge against these risks… even if you’re wrong, could you at least limit your losses? In many cases, the risk factors will be directly related to the catalysts you cited above.
In the excel file, you will see a new worksheet called “HAIO Value”. This worksheet contains projection model for Income Statement, Balance Sheet, Cash Flow, Key Ratios, DCF, Fair Value Estimation and Sensitivity.
Basically, the idea is
- You make projection for the business growth
- Links up 3 financial statements (yes, you need solid knowledge how 3 financial statements link together)
- Then you can easily get projection of EPS, DPS, BVPS and Free Cash Flow
- With the Free Cash Flow, you can DCF analysis on it.
- Then estimate fair values
- Then do sensitivity analysis
- We will verify whether the valuation is realistic or not.
- The good, bad and ugly scenario
So, this is the new format of my research report.