I am trying to come with a string of questions that I would ask before I am comfortable investing in a company.
Following are the questions ...
1.What is the quality of management? Are they shareholder friendly? Is the company paying taxes? Do the promoters attend shareholder meetings?
2.Why is stock a pick? How did it become a value stock? Is it a special situation? Does it have huge growth potential in future? Does it have hidden value in terms of cash or cash equivalents?
3.What is the potential downside?
4.If it’s a special situation, is there a catalyst that would unlock the value? How much time would it take for the catalyst to unlock value? what happens in absence of the catalyst? Is there a sign of emerging catalyst?
5.If it’s a growth story, has Mr. Market factored in the growth potential already (by reflecting the optimism for future years in the current prices)? In other words does the stock has high PE multiple?
6.What can change the value proposition? Environmental changes? Regulatory changes? Competitive scenario?
7.If the equation might change, how can the company cope with it? What will be the new downside? Will the company still be a value play?
8.How long will the money be kept blocked? Can the money be freed in case of emergency before the stock appreciates to expected levels?
9.What is the expected return?
Right now I don’t have anything that considers competition, prevalent mood of Mr. Market, Interest rates, return from other avenues. I know there are other things also that I have missed.
Also the list is very big. I ideally want to have not more than 5 questions.
I will keep updating this list as and when I learn more. If someone reads this, please point flaws and omissions.