1. One is Qualitative analysis spearheaded Phil Fischer who wrote the book Common Stocks UnCommon Profits.
2. Second one Quantitative Analysis spearheaded by Benjamin Graham who wrote the book Security analysis.
3. Timing your buys to coincide with some unforeseen event business is gone through.
Even though a lot of people believe that WarrenBuffet follows 85% Graham and 25% Fischer, I think they got it reverse Buffet believes in Qualitative analysis lot more than Quantitative one.
Quantitavive Analysis
1. Make Enterprise Value/Revenues is selling at a discount to its peers. So if a stock trades at ev/r=0.3 then we need to have its peer trading at 1. One of the most common mistakes is to buy a ev/r=0.3 for a commodity business if gross margin is 20% . If gross margin is 50% then ev/r=1 is fair value.
2. MAke sure you understand working capital of the company. If Working capital is half of marketcap then we are close to the bottom.
3. Dodd&Grham formula Fair value = 1*cash+0.8*A.R+0.66*inventory+0.1*fixed assets - 1 * Liabilities.
Qualitative Analysis
1. First totally understand the competition. Basically competetive structure will tell you lot about the whether to invest in a business.
2. Identify whether there are any competitive advantages for this business.
3. Timing
There could be lot of great businesses but buying it at the right time makes for great investment return. So basically wait for a bad news or a earnings miss and buy into the selloff.
Do you prefer any stock with any price?
Prefer stocks which are below $5 than ones which are highly priced. Obviously this is not a hard and fast rule because share price is nothing to do with its value. But more shares you have will improve your investment return. Also lot of investors donot like stocks under $5 so these stocks can be artificially depressed.
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