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Subject:  Importance of Checklists Date:  5/13/2015  12:21 PM
Author:  MartianRtns Number:  761 of 3716

Minor note - but I wanted to pound the hammer on checklists. I just missed something on - can't believe this - my largest holding that absolutely changed my perception of the business. Markit - which is a wonderful cash generating business with lots of recurring revenue, has a serious and maybe fatal option problem.

Options galore - like candy. Like giving out 7.6m options last year or 4% of their count. Granted, they did have 2.8m cancellations in 2014 too but 4% is ridiculous. In the latest earnings report, share count was up - 2% - in successive quarters.

This is just insane. Now, the company recently came public, and we know companies that moderate their option policies when they left the private world behind, but there is no sign of that. And a company that gives out grants like this almost can't, in my mind, be a long-term holding and that's how I was treating MRKT and sizing it.

So, how I miss this? I just didn't pay attention to it - again, cause I knew that you get distortions with IPOs. But when the 20-F came out, there is was - the ugly option table on F-61. But I wasn't pursuing the 20-F notes until another money manager mentioned his issue with the company.

A checklist picks this up. And it doesn't have to be a separate checklist. Your company evaluations simply have to contain required fields (e.g., see management line below) - and I was neglecting to fill mine out. No longer.

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Posted before, but maybe you can find this helpful

Writing and Updating a Company Profile - Pausing the Key to Everything

Category – include forward numbers based on estimates
TIS Ownership and Trading History; How Long have you Owned?
3 and 5 Year CF and CapEx; Options; Proxy
Previous Evaluation
Key factors
• Decide or review prior ones – could be category or industry related
• Economic Moat
• What is happening to make earnings go up?
Short-term
• Brief overview of EPS report
• Possible Catalysts to drive Value
Five/Four Variables (ability to boost sales, to return capital to shareholders, improve margins, and expand PE multiple
• Margins
? High/low, trends, and level
• Top line growth
• Level of saturation – relates to PE multiples and category
? What is past sales growth rates in prior years and quarters?
? What does company say? Either from calls or directly asking them.
? What are growth rates for other companies?
• Balance Sheet/Capital allocation
? Capital allocation: dividends, buybacks, acquisitions on a 3-5 year basis
? For acquisitions, usually PS is the most applicable measure
• Management – Good or Not? Proxy, Options, and Capital Allocation
? Should You Call Company? What are Three Most Important Questions?
• Positives/Negatives (as needed)
Conclusion
• Your Thesis: Story Better, worse or same; Price Up or Down or Flat
• Two-minute drill (why I’m interested, pitfalls, what has to happen for business/stock to succeed)
• Items important for category (review Lynch) and industry
• On Valuation, frame in terms of expectations embedded in the price as to whether the stock is attractive or not
• The better you can define the path to higher earnings, the better the evaluation; specifically identify factors behind future earnings growth? reduce costs; raise prices; expand into new markets; sell more of its product in the old markets; or revitalize, close or otherwise dispose of a losing operation
• Competitors?
Include Buy/No Buy
? If a buy, give opinion on position size and holding period
? We can own anything, at any size and absolute judgments aren’t necessary
? Does the evaluation reflect a fully formed conclusion?
? If not, what is the next step? More time?
? How many positive or negative statements are there in the evaluation? If positive, higher position?
? Set a time to re-read for all buys

Slow Growers - dividend history and payout ratio
Stalwarts – PE Ratio, long-term growth rate
Fast Growers - merit the PE being assigned; VL or other estimates used realistic; forward PE is what; growth rate in earnings has been in recent years; saturation and inning of growth
Turnarounds - Balance sheet – debt structure; plan for turning


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i'm back - part-time now, but i'm back
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