Here are some more details on the challenge and how I suggest you use it.
- Every Sunday, I will post one stock to analyze, as well as the time frame to analyze it for. To make it easy on you, I will link to their two or three most recent 10-Ks (and most recent 10-Q, if applicable), as well as their most recent earnings release from the time frame we went to analyze, plus their most recent proxy.
- For example, I may say to analyze Wendy’s at the beginning of 2008. In this case, I would provide you with their 2007, 2006, and 2005 10-Ks, as well as their earnings announcement announcing 2007 results. Your job would be to figure out how much you would pay for the stock based solely on the information you can find in those documents. Alternatively, I could say to analyze McDonald’s today, in which case I would simply link to their most recent K’s and Q and you would try to value them today.
- I recommend that, after reading through the K’s and Q’s, you estimate how much you would pay for the entire enterprise (what EV you would pay for the company). By doing that, you take any knowledge you have of the stock price completely out of the equation and thus prevent anchoring bias (you may know Walmart’s stock price is $65, but I bet you couldn’t tell what their total EV is. Thus, nothing to anchor on). After you guess at the company’s EV, you can then back out debt to find market cap. Now that you’ve determined your estimate of market cap, figure out how big of a discount you would need to have enough margin of safety to make an investment (or, if it’s in the too hard pile, say that and say why!). Finally, divide your estimate and margin of safety target by shares outstanding to get target stock prices.
- Other areas to try to hit on: what are the key risks going forward? Are there any red flags in the financials? If you owned the entire company, what changes would you make (for example, with Wendy’s, you could envision selling company owned stores to franchises, or selling off real estate, or possibly levering up. With a retailer like Target, you could imagine selling off their credit card division)? Try to create both a bear case and bull case for the company.
- On the following Saturday or Sunday, I’ll post my analysis of the company. I encourage you to post your analysis before I post mine (leave in the comments section of the introduction post) and then compare your analysis to mine and to other commentators. Try to figure out where other investor’s analysis is stronger than yours, and where yours is stronger than others. If you hit on something I missed, call me out on it! If you missed something someone else hit on, go back and figure out why you missed it so you won’t make the mistake again!
- Finally, to make life easy on you, if the practice was analyzing a company in the past, I’ll go forward and pull the future financials and stock price, and show you how an investment would have played out.
My goal with this is to make the blog more interactive and use it as a tool to develop both you, as the reader, and me, as the writer, into better investors.
Please feel free to leave comments if you think of a way to improve on this “challenge”.
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