I have been writing a series of articles on attractively valued research candidates available in the various sectors as depicted by FactSet Research Systems, Inc. In every article in this series, I try to be clear by pointing out that these are only research candidates and not recommendations to buy. Stated more directly, these are stocks that I feel are reasonable candidates to examine more deeply.
However, I was motivated to write this sidebar article because a subscriber to my YouTube channel asked me if I could do a video and explain how I go about conducting the comprehensive research and due diligence that I always suggest. So, I thought I would go through and share the process that I would utilize to conduct my own comprehensive due diligence and research on any stock that I might eventually be interested in buying.
First, I determine if a stock is research-worthy. If it is, then (and only then) will I conduct a comprehensive research and due diligence effort prior to investing. My point is that it doesn’t make any sense to waste my time researching a stock when it’s obvious that I cannot, or will not, buy it. Of course, for me the primary determinant as to whether a stock is research worthy or not is valuation. No matter how much I admire a company, I will not overpay for even the best-of-breed business. As Warren Buffett so aptly put it, “Price is what you pay, value is what you get.”
On the other hand, if I come across a stock that I truly admire and simultaneously see it at what appears to be an attractive valuation, I am excited to dig deeper. Moreover, the word "excited" is most appropriate, because to me nothing is more fun than learning about an attractively valued great business. But most importantly, I would never purchase a stock without conducting a comprehensive research and due diligence effort.
Comprehensive Research and Due Diligence Is a Process, Here Is Mine
With the above said, here is how I approach the research and due diligence process. One of my primary considerations is that I am looking for a company that has a consistent operating history. If it’s a dividend-paying stock, I'm also looking for consistency of the dividends, so I start out by looking at the fundamentals. If the fundamentals appear enticing, then my final incentive is attractive valuation. On the other hand, if the stock is overvalued, then I will simply take a pass. However, I might put it on an "I would love to own it someday" list, pending a better valuation. But I will not waste my time doing a detailed examination of a stock that I would not buy.
F.A.S.T. Graphs Analyze out Loud Video: How I Conduct Comprehensive Research and Due Diligence
Snap On, Inc. (SNA) is a high-quality dividend growth stock with an above-average dividend yield that has recently gone on sale. The company is A- rated, has only 22% debt-to-capital and is trading at a low blended P/E ratio of 13. Consequently, it represents a quintessential example of a company that I believe is worthy of conducting a more comprehensive research and due diligence effort upon.
Therefore, in the following video, I will utilize Snap On, Inc. as my example as I walk you through my personal research and due diligence process:
Summary and Conclusions
Due diligence is all about whether it makes any sense to spend this kind of effort in researching a stock, be it Snap-on or any other stock. Once you determine that, due diligence is just about trying to learn as much as you can about the company, because knowledge is power. The better you understand the business you invest in, the less likely you are to be taken advantage of by a market behaving badly. Whether the market is going up or down and making people nervous, knowledge about your business can help you make sound and prudent long-term decisions. In my opinion, there are no shortcuts, because your financial future is simply too important.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.