Stock Selection Process

Here is the general process I use to evaluate a stock.

1. Are their products/services in a growing or stable industry?
-for me this would exclude companies such as newspapers, tobacco etc. Basically, I look for companies that I think will still be around in 50 years.

2. Do they have a competitive advantage or are there large barriers to entry?
-for example companies like TRP and CNR have huge barriers to entry. Other than the billions of dollars that would be required to build the infrastructure it would takes year and years to get the proper approvals.

3. Do they have a history of returning value to shareholders?
-for example, JNJ has raised their dividend for the last 44 years. MMM has paid a dividend since 1916. A history of share buy backs would also be a plus.

4. Are they trading at a reasonable price?
- I use my fair value calculation when appropriate.

To calculate fair value I use a modified discounted cash flow model. Basically, I calculate the present value of the future dividend income and the present value of the future estimated EPS (multiplied by the PE ratio that I think the company SHOULD be trading at) and the sum of those two numbers is the fair value

My stock selection process has evolved over the years and I find it effective to select companies for my particular investing style. However, for other strategies or investing styles my selection process would be very ineffective. I’d also just like to note that the formula I use to calculate fair market value is not valid for all types of companies. For example, it’s not effective for many REIT’s or resource companies as their share prices are generally based on NAV, FFO, or reserves which are not included in my formula.

25 Stocks to Avoid

In November I remember reading this article by Jon Markman over at MSN Money Central. In his article he explains his rational for avoiding the following 25 stocks. I just wanted to say nice call Jon.

To read the entire article please click here.

25 COMPANYS JON MARKMAN SAYS TO AVOID

1. Merrill Lynch (MER, news, msgs)
2. Lehman Bros. (LEH)
3. Bear Stearns (BSC)
4. Bank of America (BAC)
5. Citigroup (C)
6. Washington Mutual (WM)
7. KeyCorp (KEY)
8. Wachovia (WB)
9. Moody's (MCO)
10. McGraw-Hill (MHP)
11. YRC Worldwide (YRCW)
12. JB Hunt Transport Services (JBHT)
13. Con-Way (CNW)
14. Knight Transportation (KNX)
15. Old Dominion Freight Line (ODFL)
16. McClatchy (MNI, news, msgs)
17. The New York Times (NYT)
18. Gannett (GCI)
19. Arctic Cat (ACAT)
20. Bed Bath and Beyond (BBBY)
21. Williams-Sonoma (WSM)
22. La-Z-Boy (LZB)
23. Stanley Furniture (STLY)
24. Bassett Furniture Industries (BSET)
25. News Corp. (NWS)