stock

investing
Checklist

A step-by-step
guide to finding
GREAT stocks
 Stock Investing Checklist

step 1
Brainstorm a list of stocks you want to look into
When you’re starting out, stick with companies that you know and
understand. Do NOT even think about investing in a company if you don’t
understand what it sells, how it makes money, and who its competitors are.

One useful exercise to come up with stock ideas is to start with your own
interests, skills, and experience. Fill in the chart below to pinpoint which
industries you should focus on for your stock search. The industries where
you have the most intersection is where you're most likely to find companies
that you understand well enough to invest in!

Your job or the industry

that you work in

Example: Healthcare

Industries where you Your hobbies and

spend a lot of money passions
Example:
Example:
Makeup
Travel,
Coffee

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 Stock Investing Checklist

Then look for stocks in your chosen industry with the Market Watch Stock
Screener.

Scroll all the way to the bottom section where it says "Exchange & Industry".
Check the box under "Active", and select an industry from the dropdown
menu. For example, in the previous exercise, one of the industries I know a
lot about is travel. There isn't an industry explicitly called "Travel", but during
my travels I stay in a lot of hotels, so I would select "Hotels" in the dropdown
menu:

Don't forget to check the box under "Active"

Sometimes the industry names aren't straightforward. For example, if I
wanted to find makeup & beauty companies, some of them are listed
under "Specialty Retail" and some are listed under "Consumer Goods". So
just keep looking around until you find companies that you recognize :)

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 Stock Investing Checklist

step 2
Shortlist the companies that have strong moats
A moat is a firm’s competitive advantage - or its ability to protect its profits
and market share from competitors. The term was coined by Warren Buffett,
one of the world’s most legendary investors. Always invest in companies
that have strong moats, because the secret to long-term investing success is
to choose PROFITABLE companies. And companies with strong moats are,
by definition, profitable! It comes down to this:

Moats = Long-Term Profitability = Higher Stock Prices.

Companies with durable moats stand the test of time. As long as they
continually protect and widen their moat, they will still be around tomorrow
and not get wiped out by competitors. Of course, even the best companies
experience ups and downs just like any other business, but a company with
a strong moat is resilient and often emerges stronger from recessions and
downturns.

There are several types of moats:

Brand
Toll bridge Network effects
Trade secrets Switching costs
Economies of scale Cost

Go through your list of companies and try to identify what type of moat(s)
each company has… if any. Cross off the companies that don’t have any
identifiable moat! This will leave you with just the great businesses that will
stand the test of time AND grow your wealth. You can read more about
moats here.

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 Stock Investing Checklist

step 3
Assess the company’s profitability
The next step is to look at your company's profitability metrics to make sure
it fits some basic screening criteria. Use a website like Morningstar, where
you can quickly see a company’s historical financials all on one page. Use
the following URL:

http://financials.morningstar.com/ratios/r.html?t=STOCKTICKER&region=usa&culture=en-US
For example, the stock ticker for Apple is AAPL, so the link would be:
http://financials.morningstar.com/ratios/r.html?t=AAPL&region=usa&culture=en-US

The page should look like this:

EPS
The first thing you want to
look for is strong,
consistently positive and
upward-trending EPS
numbers (highlighted to
the left).

EPS, or Earnings Per

Share, is the total net
income of the company
divided by the # of shares
outstanding.

Looking at earnings on a
per share basis makes it
much easier to read and
compare with other
companies.

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 Stock Investing Checklist

ROIC

Other than EPS, Return on Invested Capital, or ROIC, is the most important
measure of profitability. It's expressed as a percentage, and it shows how well
the company is utilizing its resources to generate returns.

Scroll all the way down to find ROIC for AAPL (highlighted above). ROIC is
calculated by dividing the total net income of the company by the total debt and
equity invested in the company. It's good to know how it's calculated, but you
rarely have to do it yourself since you can just refer to websites like Morningstar
:) You're looking for companies with ROIC of 10% or higher. The higher the
better!

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 Stock Investing Checklist

step 4
Assess the company’s financial health
The scariest thing to you as an investor of a company, is too much debt. A
company with lots of debt is very vulnerable to economic downturns, because
if it cannot make payments on its debt, its lenders can seize the company and
its assets. And since equity investors (anyone who owns stock) get paid only
after all the lenders get paid back, you want to make sure the company you
invest in has ample cash flow to service its debt.

Two metrics that say a lot about a company's debt load and overall financial
health, are the interest coverage ratio and the debt payback time:

Interest coverage ratio

This metric tells you how much operating income a company generates
relative to its interest expense. The formula is as follows:

Interest Coverage Ratio = Operating Income

________________________
Interest Expense

You can also get this directly from the Morningstar page. Scroll all the way to
the bottom and find "Interest Coverage" (highlighted below).

You want to see a ratio of 6 or higher, and the higher the better. As you can see, AAPL's
interest coverage is well beyond that, so as an investor in AAPL you wouldn't have to worry
too much about debt!

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 Stock Investing Checklist

Debt payback time

This metric tells you how long it would take for the company to pay off all its
debt. The formula is as follows:

Debt Payback Time = Long-Term Debt

______________________
Free Cash Flow

To get the inputs for this calculation, you'll have to go to a two different place
on the Morningstar page. First, find where it says Free Cash Flow (highlighted
below). You want to take the most recent reported number, so $59.830 billion.
This will be the denominator.

Then, toggle over to the Financials tab (highlighted below).

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 Stock Investing Checklist

Go to the Balance Sheet and scroll down to find the line item "Long-term
debt" (highlighted below).

Grab the most recent reported number. This will be your numerator. So for
AAPL, it's $93.735 billion.

AAPL's Debt Payback Time = ____________________

$93.735 billion = 1.567
$59.830 billion

This means it would take Apple 1.567 years to pay off ALL of its debt. Not
bad! A good rule of thumb is 3 years or less. What you don't want is to invest
in a company that has so much debt that it will take forever to get out of debt.
That's just bad business.

step 5
Is the stock trading at a reasonable price?

The last step is to determine whether the stock is a bargain right now. One
quick and easy way to determine this is with the PE Ratio, or Price-to-Earnings
ratio. The PE Ratio compares the stock's current trading price to its most
recently reported earnings per share. The formula is as follows:

PE Ratio = _____________________
Stock Price
Earnings Per Share

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 Stock Investing Checklist

This metric shows you how "cheap" or "expensive" the stock is. The lower the
PE Ratio, the cheaper the stock relative to the earnings its generates.

You can either calculate it yourself, or just toggle over to the Valuation tab
(highlighted below) and find AAPL's PE Ratio (also highlighted below).

A good rule of thumb is to

find stocks with PE ratios of
15 or less (although this
varies somewhat by
industry). The lower the PE
Ratio, the more of a
bargain you are getting!

step 6
Does your company pass all the criteria?
You made it! If your company meets the criteria for moat, EPS, ROIC,
interest coverage ratio, debt payback time, and PE ratio, then you've found
a good company! The last step is to determine a buy price, put it on your
watchlist, and buy the stock when it reaches your target price.

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 Stock Investing Checklist

I hope this checklist serves as a

valuable resource for you. It's a
great starting point for your
stock analysis. I also recommend
looking at the company's annual
reports (the "10-K", in financial
jargon). They're official fillings
available on the SEC Edgar
database and are a wealth of
information about the company.

If you want to delve into these

metrics and the art of stock
analysis even further, check out
this list of my absolute favorite
book recommendations on my
YouTube channel!

Be sure to also connect with me on Instagram @investingwithrose, where

you'll find even more actionable investing tips and mini-trainings!

Happy investing!

To your wealth,

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