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Hi All,

1. I just posted this on the HG discussion board
2. Parkite - I see your question and will have an answer soon

Happy Thansgiving to you and your family,


Thanks for the nice comments re my HG interview. Tom asked great questions--the same ones I would have asked if the roles were reversed. It is an honor to be part of the HG community.

I should have been more precise about my "200 Ratio Spreadsheet." Actually, I use two.

The first spreadsheet is quantitative, and contains a firm's financials, defensive and enterprising income statements, Earnings Power charts, a few dozen ratios (standard stuff mostly), various dividend discount models, etc.

The second spreadsheet is more qualitative. It covers the income statement, balance sheet, statement of cash flows, and footnotes. The section on sales alone is a few pages. There are 200 or so questions on this list, probably more. Depending upon the industry the firm operates in, some questions are more relevant than others.

To give you a sense of what is in this list, here is an excerpt from the section on revenue:

Revenue Products/Services:
What are they? (Risk: One-product/service company.)
How meet basic need/want--e.g., attracts new customers, cuts costs, saves time, improves health, confers prestige, etc.
How frequently do customers buy products/services?
(Risk: Mature market with no repeat customers.)
Are these "cheap-repeat" products/services (less cyclical and more predictable than "expensive-one-time")?
How long does product/service last before customer has to replace?
(Shorter the replacement cycle the better.)
Will products/services be around in 10 years--or are they fads?

Marketing & sales:
How does company promote its products/services?
Is company discounting? Couponing?
How many salespeople does company have?

How many customers are there?
Who are top 5 customers? (Any public?)
Top 5 customers account for what % of revenue?
How long have each of these top 5 customers done business with company?
(Risk: Dependent upon small customer base who then demands lower prices.)
What is financial condition of customers? (Are they in trouble?)
Are customers discounting or couponing to their customers?

What is revenue recognition policy? Any change in policy over last five years?
Are these cash sales? Credit sales? (Cash sales better, as customer can renege, cancel or refuse to pay credit sales.)
Any revenue booked that should be allocated over time? (Risk: Revenues booked before delivery or performance.)
What is return policy for customers?
Does company offer extended payment terms (i.e., installment sales) to customers?
(If yes, how long has company offered extended payment terms?)
Does company lease to customers? If so, does company est. salvage value of asset?
(Red flag: Increase in estimated salvage value, which reduces depreciation and increases profits.)
Are any sales booked when there is only a token payment?
How long are customer contracts? (Long-term contracts where customers are locked up for many years are best.)
Multi-year service contracts? (Clues: deferred revenue, deferred income, advance payments, unbilled receivables)
(If yes, watch for percentage of completion assumptions which are subjective and can be aggressive.)

My goal is to not let anyone else out-analyze me. Of course, in reality there will be lots of people who will know lots more about a particular company. So what I have tried to do is develop a list of questions to attempt to answer before buying a firm's stock. If I can answer most of these questions, then I will probably know most of the important stuff.

Lots of these questions were learned from fellow TMFers. But the best teacher is Herb Greenberg, now at CBS MarketWatch. Herb has these terrific hedge fund contacts, so the analytical methods that he writes about are coming from some of the sharpest investment minds out there. I have learned more from Herb about how to read a financial statement than anyone else (and I have read almost every investment book written.)

My due diligence spreadsheet also has a checklist of 30 or so things I look for in a low-risk growth stock. Parts of this list were influenced by the TMF Foolish criteria. If you like, I am happy to post the list on this site.

Last, in early March Robert Barker of BusinessWeek asked for some investment ideas to accompany a column on my book that ran April 12. I am happy to report that my six picks (UNH, INFY, FAF, AGP, SAFM, PAYX) are up an average of 24%. Also, each stock is in positive territory. In contrast, the Russell 2000 and Standard & Poors 500 have gained 4% and 2%, respectively. My two pans--Allied Waste and General Motors--are down 34% and 20%, respectively. If you follow the method outlined in my book, you will learn how to find a few low-risk growth stocks for long-term capital gains for your own portfolio; equally important, you will learn how to spot the investment dreck that can cost you money and/or time.

Thanks again for reading the interview. Happy Thanksgiving!

Hewitt Heiserman
Author, "It's Earnings That Count (McGraw-Hill, 2004)
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