This is a checklist I use to quickly come to a conclusion on a stock. I score a stock, each line getting a 1, 0, or -1. A stock that scored 1 on each line would be a perfect 10. Buy it!
Some of these items are quite subjective. For example how would I score Cash Flow? If a company's cash flow is much lower than it's reported earnings, that raises a flag and I would score it a -1. If there are more insiders buying than selling, I would score it a 1. If there are no apparent catalysts in the near future I would score it a 0 but on the other hand if there is a pending secondary that will put more stock out on the market, I would score it -1.
CHART- know how to read charts. I firmly believe I can improve the price of buying or selling from an understanding of chart action. Apple stock is showing bullish divergence at $509. Already it has run a quick 45 points from this low and has pulled back a bit to $542.10 on January 3rd, 2013. +1
[Related -Apple (AAPL) Stock Exhibiting Persistent Price Dynamics]
ANALYSTS- read analyst reports but come to your own conclusions. There are 21 strong buys, 28 buys, 6 holds, 2 underperform, and 1 sell. It's a negative when opinion is so lopsided in the buy camp. You have to ask yourself, who's left to buy Apple when just about every analyst on Wall St. is recommending it. I'd give this a minus one except today on CNBC, I heard a roundtable of talking heads giving their best tech idea and they were almost loathe to give Apple credit. I have to give that a +1
[Related -Apple Inc. (NASDAQ:AAPL): What Does A Potential China Mobile Deal Means For Apple?]
INSIDERS- if the people that know the company the best are not buying it, why should you? A director, Bob Iger, bought 19,000 shares on November 19th. After that two long time Apple employees sold substantial holdings. I'm not sure what to make of this, as 2012 was an extraordinary year of tax change anticipation. I'm going to score this a zero. I believe though until Eddie Cue and Bob Mansfield unloaded stock at the end of the year, this could have been a plus one two. Instead it's a 0
MANAGEMENT DISCUSSION 10Q AND 10K- this is the only truthful thing you will read about a company. It's composed by management, the auditors, and the firm's lawyers. If all three of them can agree on the verbiage, it's passed a big hurdle. Read it carefully. Pay particular attention to the Risks, Litigation, and Related Transaction sections. These are the things you will wish you had taken the time to read if something goes bad with your investment. There is really nothing negative one can say about Apple's business, products, or strategy. It didn't get to be the world's most highly valued company with a flawed business plan. Therefore the most you can hope to achieve from reading the "k" is to better understand risks you might have glossed over. In that vein, I'm highlighting and commenting on the notable ones.
"Some of the Company's current and potential competitors have substantial resources and may be able to provide such products and services at little or no profit or even at a loss to compete with the Company's offerings." I think that's a reference to Google's free Android operating system and Amazon's remarkable ability to have a grandiose stock price with lackluster profit margins.
"Substantially all of the Company's hardware products are manufactured by outsourcing partners that are located primarily in Asia. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations." Investors should be aware that Apple could have supply disruptions. That would only be a temporary setback and if sold off, stock should be bought on that dip, as it's a high probability it could find substitute manufacturers in time.
No company in history has generated the mountains of cash like Apple. Its growth rate for the last three years has been staggering and the company has accumulated $121 billion dollars with no debt. They are almost certain to increase the dividend and buy back stock. It's almost a certainty too that they can't continue to compound growth at these rates. The only negative I can think of is that the iPhone has grown to represent over 50% of revenue. Yet the market still seems to be growing overall but this dependence on one product increases risk to investors.
A clean, straightforward "k" without any hidden surprises deserves a +1
RELATIVE PERFORMANCE- If the stock has a superior relative performance to the market in the short term. Apple is down almost 25% from its recent highs. -1
SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience. Mobile is promising. That's where the growth is and Apple is humming there. Also they invented the tablet category and the newly released iPad mini and full-blown brother blows away all competition. Although the PC market is in secular decline, Apple continues to gain share on Windows. +1
CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated. $121 billion in cash and growing every quarter. Apple had $50 billion dollars in operating cash flow over the last twelve months. +1
PEG RATIO- it's good to find a company growing faster than it's multiple.
VALUATION- contrary to popular opinion, it does matter what you pay for a company. Check its discounted cash flow value. Buy it for less than what it's worth, a 1, less a -1, about the same 0. The real question is what is Apple's sustainable growth rate over the next seven years. Let's take the worst case and call it zero growth rate. Based on my DCF model with zero growth and a 3% 10-year treasury, Apple is worth over $700 per share +1
CATALYST- what's going to change the status quo? Upcoming earnings, new larger display iPhone, TV? All are easily imagined catalysts. +1
Trading the markets is a humbling experience. I hope this handy checklist makes it less so.