Michael Shearn's Checklist

"The Investment Checklist" by Michael Shearn

  • Basics

❒ Do I want to learn more about this business? ❒ How would you evaluate this biz if you became CEO? ❒ Describe how the business operates ❒ How does the business make money? ❒ How has it changed over time? ❒ What countries does it operate in?

  • Customer

❒ Who is the core customer? ❒ Customer concentration? ❒ An easy or hard sell? ❒ Customer retention rate? ❒ Is biz customer-oriented? ❒ What pain is alleviated for the customer? ❒ Is customer dependent on business? ❒ If biz disappeared, would customers care?

  • Business

❒ Sustainable competitive advantage? Source? ❒ Pricing power? ❒ Good or bad industry? ❒ How has the industry evolved? ❒ Competitive landscape? ❒ How intense is the competition? ❒ Good supplier relationship?

  • Financials

❒ What are the biz fundamentals? ❒ What metrics matter most? ❒ What are the key risks? ❒ How does inflation affect the business? ❒ Is the business’s balance sheet strong or weak? ❒ What is the return on invested capital for the business?

  • Cash Flow

❒ Accounting standards conservative or liberal? ❒ Is revenue recurring? ❒ Cyclical, countercyclical, or recession-resistant? ❒ Operating leverage? ❒ Working capital affect cash flow? ❒ High or low capital-expenditures?

  • Management

❒ What type of manager is CEO? ❒ CEO a lion or a hyena (see image)? ❒ How did CEO rise to lead the business? ❒ How are senior managers compensated, and how did they gain their ownership interest? ❒ Have the managers been buying or selling the stock?

❒ CEO considers all stakeholders? ❒ CEO improve day-to-day operations? ❒ Issue guidance? ❒ Centralized or decentralized? ❒ CEO value employees? ❒ CEO hires well? ❒ Cutting unnecessary costs? ❒ Disciplined capital-allocation decisions? ❒ Buy back stock?

❒ CEO love money or love the business? ❒ CEO have integrity? ❒ CEO good communicator? ❒ CEO independent thinker? ❒ CEO self-promoting?

  • Growth Potential

❒ Organic or M&A? ❒ What is the motivation to grow? ❒ Has historical growth been profitable? Can it continue? ❒ Favorable growth prospects? ❒ Growing too quickly or at a steady pace?

  • M&A

❒ How does management make M&A decisions? ❒ Have past acquisitions been successful?