Almost any heightened euphoric report about some “fantastic” equity stock position tends to raise my total sceptic alarm system. Yes, it’s probably an over cynical reaction, but that’s the training of investment professionals worldwide who are fiducially required to analyse (not chase) the underlying performance of the company (or even a cryptocurrency) that issued the security.

Here are some financial components used to review an individual stock that an individual investor may be interested in owning for a long-term portfolio. Note, this is a plain vanilla grouping to get a beginning investor started. Once you become more familiar with research information, you can make up your own list of criteria.

Our choice: Facebook. We will use free Yahoo Finance US for our tracking/review. The website is also easily accessible to many other countries with their domestic security markets, such as the UK, Canada, Europe, Australia, Brazil, etc, for those connected internationally.

Note, momentum investors (remember the GameStop and related value surges beyond any reasoning) won’t be interested as their strategy is based primarily on stock volatility, quick buys and sells in a liquid exchange, risk in timing of trades, access to immediate market information, and significant time attention (daily, even minutes to hourly) to every market movement. In fact, they won’t even bother with this type of an article, since their style of investing is challenging, impractical for most individuals, and let’s humbly face it, readers, above my down-to-earth expertise or patience level.

Yahoo Finance criteria columns list an amazing amount of financial and company knowledge “data:”

• Summary – everything at a glance: volume trading, beta (risk to market), price/earnings ratio, earnings per share, current price and performance outlook

• Company outlook – paid premium commentary

• Stock performance charts, FB better than compared to the Dow Jones Industrial Average, S&P 500 and Nasdaq indexes and almost in line with Alphabet, the parent company of Google, as at Thursday, September 23, 2021

• Conversation commentary, 100,000 + cumulative postings from interested investors

• Statistical profit, financial performance, management effectiveness, and valuation comparisons: year end 2020 profit margin 37.18 per cent

• Historical data, share price at June 1, 2012 - $28.89 per share; at September 1, 2021 - $379.59, this is an example of pure appreciation in nine years!

• Profile of the company and its executives, 63,404 employees, ages – mostly a younger company. Salaries at the top - Mark Zuckerberg, founder and chief executive officer, earns $25.29 million annually

• Financial statements, annually

Download PDF File

Stock selection checklist

• Analysts reviews and recommendations, still a strong buy and regular buy, price targets, etc.

• List of options prices that are placed on the stock, daily

• Top institutional and mutual fund holders by largest security positions: Vanguard, Blackrock, FMR, Price, State Street, Capital International Investors, etc.

• One of the most interesting sustainability reference to the new standard of ESG environmental, social, and governance risk scores. Company is placed in 52nd percentile with total score of 28. The controversy level on a 1-5 level was rated four – higher risk.

Readers, also realise that current numbers are not clad in stone, they will fluctuate from day to day, as the business itself buys, produces, sells, and receives income and investors react.

There are some additional criteria that I use when reviewing – on a quick basis - any company relative to its stock valuation.

Statement of cash flows: indicates how much free cash flow at the end of the year after deducting for capital expenditures, repayment of debt, repurchase of capital stock, etc. This is – in a way – generally, showing additions and subtractions under the accrual method of accounting to end at actual real cash. Positive, consistent free cash flow is an important component of a company’s operations. Little or negative cash flow on a longer-term basis indicates a company may be borrowing more than earning.

Total assets compared to total debt: are the total assets owned sufficient – on a liquidity needs basis – to manage short-term, long-term and /or total debt payments?

Repurchase of capital stock: comparing the cost of shares repurchased from capital markets compared to the expenditures on capital infrastructure and innovation, an interesting bit of information.

Profit margin consistency: one good year can negate numerous loss years – when computing an average profit margin, but year-by-year tracking can reveal a different story.

Dividend track record: consistency in dividend payments is considered a plus for some stock analysts – where some companies have historically paid a dividend for 25-50 years. T

Dividend payout ratio: the dividend payout ratio – which is the amount of cash authorised by the company board of directors to be paid from current retained earnings to shareholders as dividends is also an indicative sign of a company’s free cash flow and operational management planning. Excessive payout ratios in excess of 100 per cent, meaning current retained earnings are depleted are confusing to say the least. Some companies, rather than using retained earnings, have borrowed to fund dividends (and repurchases) instead - for example, Apple.

Products, kinds of market appeal and innovation, against competitors. This requires more reading, but analysts, generally, will address this topical issue because they also assess forward projections of a company’s success.

The pure numbers in a multinational company are mind-boggling, and certainly, one wonders what is the verification process of how accurately legitimate they are.

This is where the vaunted reputations of the professional Certified Public Accountant auditor profession comes to the fore. Every US company with publicly-traded stock must undergo an annual extensive audit of their operations – with further quarterly financial reports filed with the US Securities and Exchange Commission. Generally, this is a global requirement for publicly traded companies in every jurisdiction. There are restrictive timeline regulations where failure to comply can incur not only heavy non-filing penalties, but also having capital markets react negatively to the uncertainty of the results.

Every publicly traded company under audit wants to receive unqualified opinion from an independent auditor, reflecting their judgment that a company's financial statements are fairly and appropriately presented, without any identified exceptions, and in compliance with generally accepted accounting principles (GAAP).

This is the “the gold seal of approval!”

So that’s it for this Investment Week. Time for you to try your hand at a stock review. Pick one of your favourites or a company’s product that you love: try NKE, TM, NFLX, NTB (bet you know that one), one of the Dow 30 or the S&P 500 Index. See what you can find!

See my Individual Stock Valuation Checklist under the Related Media heading on this webpage.

References

Investopedia: Introduction to Momentum Trading, by Adam Barone

Yahoo Finance. https://finance.yahoo.com/

• Martha Harris Myron, CPA JSM, a native Bermudian, is the author of The Bermuda Islander Financial Planning Primers, international financial consultant to the Olderhood Group Bermuda, and financial columnist to The Royal Gazette. All proceeds from these articles are donated by the Royal Gazette to the Salvation Army, Bermuda. Contact: martha@pondstraddler.com