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.

  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.  A good chart gets a 1, a bad one, -1 and inconclusive is 0  I can’t tell much from this chart so I give this a 0
  2. ANALYSTS- read analyst reports but come to your own conclusions.  If the consensus is favorable, 1; if unfavorable -1, and mixed 0.  Analysts are generally bullish on this stock with % strong buys, 4 buys, 3 holds and no sells.  I give this one a 1
  3. INSIDERS- if the people that know the company the best are not buying it, why should you?  This one gets a positive mention plus 1 since a director recently bought 28,000 shares at slightly higher prices.  I’d get more excited about this large purchase but the director just rejoined the board and he’s a wealthy person. +1
  4. 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.  Company has a defined benefit plan with future obligations.  This is a lien on shareholder distributions.  They also may have some disruption from earthquake and tsunami in Japan.  Company is a serial acquisitor which makes for difficult comparison of organic growth vs acquired. -1
  5. MARKET DIRECTION- 80% of stocks follow market direction in the short-term.  This is your read on the market.  Don’t have an opinion, it’s a 0.  Market is near term oversold but I’m not decisive here. Give it a 0
  6. SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience.  Avnet is a large wholesale electronics company.  This is one of the strongest sectors of the market this year.  Plus 1
  7. CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.  I give this a +0 as cash flow for the last 10Q was slightly more than earnings.  In 2010 though cash flow was significantly below earnings.  Company is acquisitive and uses cash and debt to fund acquisitions.
  8. PEG RATIO- it’s good to find a company growing faster than it’s multiple.  Peg Ratio os .43.  Anything less than 1 I give a +1
  9. VALUATION- contrary to popular opinion, valuation does matter.   Use a discounted cash flow analysis.  If the stock is trading for substantially less than its DCF, that’s a 1.  According to inputs from Valuepro AVT  intrinsic stock value is 83.62  +1
  10. CATALYST- what’s going to change the status quo?  slowing global economy is a -1
  11. ?

Conclusion: Avnet is a global company and will be sensitive to any general economic slowdown.  It’s a very acquisitive company and may or may not be able to find future acquisitions at good values.  It’s hard to analyze the real organic growth but it’s substantially less than the actual reported numbers.  The final score is 3.  It might be good for a trade but I’m not committing to it.

 

Trading the markets is a humbling experience. I hope this handy checklist makes it less so.