Curating an Investment Thesis
David J. Waldron
Contributing editor and author of Quality Value Investing | Helping readers achieve their career and financial goals since 2013 | Join 1200+ Subscribers of the QVI Newsletter on LinkedIn and Substack
Summary:
Welcome to the seventh segment of the serialization of my next book, Quality Value Investing: How to Pick the Winning Stocks of Enduring Enterprises (working title and subtitle). I am writing the book on LinkedIn as part of the QVI Newsletter and look forward to subscribers’ support and feedback as we produce the manuscript in real time.
Book Segment #7?revisits the?checklist-based approach to equity analysis using a bottom-up strategy focused on the company’s current wealth and the stock’s present value.?Based on the weighted research and analysis, the resulting investment thesis summarizes why?the covered company and its representative shares?are rated a buy, hold, or sell.
How to Curate the Investment Thesis
An investment thesis summarizes why the company and stock have rated a buy (bullish or accumulate), hold (neutral or watch), or sell (bearish or avoid) based on the stock picker’s most recent research and analysis. In addition, selected equities should meet the parameters of our portfolio objectives. Then, we write a final thesis after completing the research checklist.
In curating the investment thesis, we’ll discover how to exercise a bottom-up research approach that acknowledges and accounts for stakeholders in the company, including the board of directors and senior management. In addition, it treats the market as a stakeholder, if only for a contradictory confirmation of the investment thesis.
Once a quality business is recognized, we’ll place a value on the stock and share price downside risks to ensure we are paying a fair price for an investment with a high probability of protecting our invested capital.
Current Wealth and Present Value Checklist
In its Primary Ticker Research Reports, QVI puts the targeted company and its common shares through a proprietary, data-driven investment research checklist of the value proposition, returns on management, shareholder yields, valuation multiples, and downside risks.
By focusing our?investment research on the fact-based current wealth of the company and the present value of the representative shares instead of unreliable predictive analysis and speculative growth,?Quality Value Investing (QVI) ’s 46 combined stock picks have collectively outperformed the broader market by an average 7,138 basis points [bps] or 71.38 percentage points average per holding from June 2009 through the intraday US market on May 16, 2024.
The investment thesis combines the principles, strategies, and practices of quality-driven value investing to build potential market-beating, well-allocated, low-cost, common stock portfolios.
By focusing research on fantastic companies with ethical management generating consistent, organic revenue growth, sustained profitability, adequate free cash flow, and high returns on investable capital, alpha-achieving portfolios are possible for motivated, retail-level investors.
In other words, strategically analyze select areas of a company and its common shares with simplified research methodologies. Then, rule out businesses that present as lacking in these targeted traits.
A quality-driven value investing mission includes learning how to uncover, buy, hold, and occasionally sell the value-priced common shares of great businesses producing quality products and services and generating long-term, total returns in capital appreciation and income for shareholders.
Here is a review of the bottom-up, quality-driven, current wealth and present value approach to researching a publicly traded company and its common shares toward curating an investment thesis with market-beating potential.?
Begin with the Value Proposition in Mind
Define the enterprise’s value proposition as presented in Book Segment #2:
Value Proposition Checklist
Start the investment thesis with a brief synopsis of the company’s business biography, major exchange listing, stock symbol, market capitalization, and dividend-paying status.
Understanding the products or services and the competitive advantages of the targeted company is paramount to thriving retail investors. To own a slice of a business, we must acquaint ourselves with the enterprise generating the equity analysis facts and figures. Unfortunately, the crowd pays less attention to the value proposition and instead focuses on overanalyzing mostly useless metrics such as technical charts, news, and quarterly earnings.
The more investors know about the companies they invest in, the higher the potential for their portfolio to achieve alpha.?Own select companies whose products or services are understood in principle, whether we use any of those marketed goods.
Quality-driven investors begin their research by attempting to define the value proposition. Suppose they cannot explain it via an elevator pitch or suspect a lack of clear and concise competitive advantages. In that case, they practice the art of patience and save their precious time and dry powder for a better opportunity.
Determine a weighted value proposition rating of bullish, neutral, or bearish.
Screen for High-Quality Business Models
Measure the company’s fundamentals or returns on management as discussed in Book Segment #3:
Quality Business Model Checklist
The fundamentals or returns on management research measures the performance strength and the management effectiveness of the company’s senior executives.
Measuring actual returns on management instead of predicting future outcomes compels quality-driven value investors to limit precious capital to the stocks of enduring operators held for the long term to profit from the compounding returns courtesy of superior capital allocators.
Rate the company’s returns on management as bullish, neutral, or bearish.
Calculate Shareholder Yields
Quantify the stock’s equity bond rate of shareholder yields and owners’ earnings as discussed in book segment #4:
Shareholder Yields and Owners’ Earnings Checklist
Quality-driven investors quantify shareholder yields beyond the more conventional dividend payout. Nonetheless, as shareholders, we deserve a compounding return or yield from each leg of the earnings vertical, dividends included.
If the shareholder yields are underperforming the ten-year government bond benchmark, consider the company unworthy of taking an ownership slice because of the higher equity risk. In other words, investors should be confident that a targeted common stock has the potential to be more valuable than a conventional government bond over a long-term holding period.
The resulting shareholder yields rating, or equity bond rate, is bullish if well above the Ten-Year Treasury rate, neutral if in the same range, or bearish if below the rate based on the stock’s average total yields.
Valuate Quality Enterprise Share Prices
Weigh the stock price’s valuation multiples as offered in Book Segment #5:
Valuation Multiples Checklist
A simplified but telling research report’s valuation section uses select multiples to estimate the intrinsic value of the targeted enterprise’s stock price. It weighs the market sentiment on the share price relative to the company’s financial vertical of sales, earnings, cash flow, and enterprise value.
The lesson remains: Own slices of companies with high-quality business models purchased when their stock prices appear reasonable, if not trading at temporary bargain prices, after being shunned by the near-sighted crowd.
Assign a bullish, neutral, or bearish valuation rating in your investment thesis.
Uncover Enterprise and Stock Downside Risks
Assess the business’s and common shares’ downside risks as discussed in Book Segment #6:
Enterprise Downside Risks Checklist
Share Price Downside Risks Checklist
A quality-driven research report downside risks section uncovers and rates the margin of safety of the targeted company and its common shares by assessing debt, volatility, sentiment, and performance.
Uncovering downside risks is paramount to the ultimate success of the investor. Remember to manage the downside and let the upside take care of itself.
Assign a downside risk rating to the company and its stock price of high, above average, average, below average, or low. Quality-driven value investors are biased toward below-average and low-risk profiles.
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Write the Investment Thesis
Now, write the investment thesis, including a rating and potential catalysts.
Review and curate the company and stock rating in each current wealth and present value category.
Company Current Wealth
Stock Price Present Value
Assign an Overall Rating to the Company and Stock
Conclusively, weigh and assign an overall rating of a buy, hold, or sell to the company and stock as one investment. Answer the question, “Why should interested investors buy, add, hold, reduce, sell, or avoid this equity?”
The curated investment thesis or current view of buy, hold, or sell reflects the call for the targeted stock based on a review of select research indicators weighted towards the key attributes that define the value proposition, returns on management, shareholder yields, valuation multiples, and enterprise and share price downside risks.
Potential Catalysts to the Investment Thesis
Consider potential catalysts that would confirm or contradict your thesis.
Although quality-driven investors are skeptical of predictive analysis’s arbitrary and unreliable practices, they consider conceivable events that would affirm or counter the overall investment thesis.
Catalysts involve anticipated or surprise events that could accelerate or decelerate our buy, hold, or sell rating. Essentially, catalysts are what the bulls and bears say, which can be verifications or repudiations of our investment thesis.
Popular sources of catalysts are Seeking Alpha, Wall Street analysts, and Morningstar. Remember that catalysts are typically short-sighted, stock price-oriented opinions and predictive analyses instead of the more desirable long-view analysis and subsequent thesis of the strength of the company’s current financial wealth, the competitiveness of its products or services, and the share price’s present value.
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About the Author
David J. Waldron is the founder and contributing editor of Quality Value Investing and author of the international-selling book Build Wealth with Common Stocks. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. He previously enjoyed a 25-year career as a post-secondary education administrator. David received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed?The Practice of Management Program?at Brown University.
Disclosure: David J. Waldron’s Quality Value Investing newsletter posts, book segments, course modules, research reports, and real-time stock picks are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in independent research and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.
Copyright 2024 by David J. Waldron. All rights reserved worldwide.