Stock Analysis and Valuation: The Five Step Research Process - Gary Mishuris

How do you perform company analysis and stock valuation once you have identified an attractive opportunity? In this video I explain my Five Step Research Process and how I use it to perform company due diligence and security analysis.
The Five Step Research Process consists of the following steps:
Step 1: Company Quality Assessment
Company quality is based on the quality of the business, the management team and the balance sheet.
Business quality: How structurally attractive is the industry? How strong is the company's competitive advantage? Is it getting stronger or weaker?
Management quality: How competent is the management team at operations and capital allocation? How aligned are their incentives with the shareholders?
Balance sheet quality: Is the balance sheet strong enough to withstand temporary adversity without the company being forced to raise capital on unattractive terms?
Step 2: Analysis of Key Economic Variables
This step aims to:
1. Identify the handful of economic variables that will have the greatest impact on the business’s long-term economics, and
2. Estimate a reasonable range of outcomes for each variable.
Step 3: Financial Modeling
The third step of the process begins where the second step ended. Having identified the key economic variables and a reasonable range of values for each, I use that analysis to model the company’s income statement, balance sheet and cash flow statement, and then create three scenarios: worst case, base case and best case.
Step 4: Valuation
My basic valuation tool for stocks is the discounted cash flow model (DCF) of equity free cash flows forecasted in the prior step. I use the same discount rate - 10% - for all companies and all scenarios.
The DCF can be an imperfect tool. A reasonable criticism is that it is overly sensitive to small input changes and to user manipulation of assumptions. To guard against these, I cross-check DCF-derived values against other measures such a valuation multiples (e.g. normalized P/E, EV/EBITA) and private market transactions.
Step 5: Behavioral Checklist
Before investment analysis is complete, I apply a checklist designed to identify things that I may have missed as well as behavioral biases that may have influenced my analysis. This is a dynamic list; it has been evolving over time, reflecting lessons learned from past mistakes made by me and by other investors.
Doing thorough fundamental analysis and valuation work is an important part of any value investing process. The Five Step Research Process helps ensure a systematic and repeatable approach that helps minimize the impact of behavioral biases.
If you want an example of how I apply this process, please check out a recent article that I wrote for Forbes titled "Lyft IPO from a Value Investor's Perspective" www.forbes.com...
Please SUBSCRIBE to my channel above to get regular content that can help you make better investment decisions.
For more resources, check out the articles that I write at the Behavioral Value Investor: behavioralvalu...
If you want to learn more about Silver Ring Value Partners, you can find more information here: silverringvalu...
Connect with me on LinkedIn: / gary-mishuris-cfa-7567902
Follow me on Quora where I regularly answer questions: www.quora.com/...
Send me an e-mail: [e-mail]

[@GaryMishuris]

How do YOU approach company analysis and valuation? Please leave comments below.

[@thegamerboneless2864]

Man where was you a few years ago, I searched and search for a layout like this. Course after course learned nothing that was promised or laid out. 😂 😂 very basic and understandable great video 100% one of the best

[@pgabrail]

Gary, as you know from our chats, I have been more inclined to wait for market declines in top quality and large companies that are selling for a discount as opposed to smaller companies. I prefer the boring slower growth fully mature companies that people suddenly dislike for whatever reason but have great balance sheets and consistent profit and revenue growth. This takes patience of course, but that's a very 500 foot view. I like to see great free cash flow and a yield of free cash flow well into the double digits.

[@abhixguitar4444]

Isn't that a Warren's strategy also :)

[@raheem109]

Damn man! Suggest me some good books if you have read any on stock market

[@Ammar23217]

extremely useful discussion. I already know all this but it is amazing to remind yourself of basics again and again and again and again. It is amazing.

[@tobybear8297]

Thank you for sharing this process!

[@TrailBlazer5280]

I really enjoy this video and your discussion. Every tutorial online has its own angle and I appreciate your personal comments to expand the meaning behind each technique.

[@azherhussain3562]

Thanks for sharing another wonderful video @Gary Mishuris and your explanation was great. I would love to join your devil's advocate group if possible.

[@harveys2631]

What tools do you use most of the time to gathering this information?

[@jackwigglesworth935]

Thank you for sharing!

[@hakkinenlee6172]

i really like this

[@RadheVajrakaya]

Share few easy points to analyse any Stock if the Investor is not an Analyst.

[@GaryMishuris]

Great suggestion, I will add it to the list of future videos to post in the Q&A section of the channel. Thank you!

[@abdonperalta5376]

👍🏻👍🏻

[@chewie1355]

Thanks

[@salaheddinehk]

HI Nice video . Step 2 In not clear for me. regarding business variables . Can we find them based on 10-K report in risk Factors ? or we need to be more specific and check beyond the annual report ?

[@anthonycantu8879]

Not impressed in a good way. Analysis paralysis. Just give the down-and-dirty on how to evaluate a stock. The essentials. Ever heard of of K.I.S.S.? You would be well-advised to streamline your next video. A lot of the stuff you mentioned is okay, but J.C., who has the time?