Summary

• A checklist can help screen for the best stocks to invest in and those to avoid. It also allows you to screen by business model.
• Checklists also allow you to remain rational in an otherwise irrational world.
• Stocks mentioned in the article include: CMG, V, RYHTY, MGAWY, TSLA.

Investing is quite a strenuous process so when I wrote an article about checklists on my website, investiwealth.com. I was asked numerous times what my checklists looked like. I use checklists all of the time to help me analyze and screen my potential investments.

So I will just give you a short summary of that article, which isn’t published on Seeking Alpha.

• It forces you to do more in-depth research.
• It screens companies better than any stock screener can because you can look at things such as business models to screen out stocks.
• Unless something fundamental has changed about a company in your checklist analysis, you should not sell your stock. Unless you believe a recession will hurt you.
• Your checklist should be constantly changing to improve your investing strategy, not to suit the current status of the markets.

So I am going to use a checklist that I have created to assess stocks that I have considered buying, but first I’ll show you parts of my checklist. If a company or its stock doesn’t satisfy every point on the checklist, it is no big problem but questions should be raised.

Qualitative

• A company’s products/services/assets should continue to make revenue for the company after the point of sale with very little marginal costs. (Naturally this will screen out a fair majority of stocks but if a company doesn’t have this, it is not a big problem.)
• The industry it is in should be growing.
• The company should be well placed in the industry to take advantage of growth.
• It must have, in some form, an economic moat.
• There should not be much competition in this market. (This will take out a lot of industries.)
• Is the company likely to be around in 5-10 years.

Quantitative

• Should have a positive P/E less than 20. If it is significantly higher, then the stock may be overvalued.
• A Return on Assets of 10%
• The company should be able to increase prices over time without losing significant market share or its customer base.

Stocks

Ryman Healthcare (OTCPK:RYHTY ):

This company in New Zealand provides retirement living options and care services for the growing amount of baby-boomers. They build and own numerous retirement complexes, each one having at least a hundred apartments and houses.

Do their products/services/assets continually generate revenue? Yes, the company owns numerous properties that receive rent and lease payments from residents. These properties also increase in value over time as land and building values continue to rise, leading to increasing values of the business.

Is the industry growing? Yes, as more baby-boomers retire over the next few years and require aged-care services and living accommodations, the industry will be set to grow.

Is the company well placed to take advantage of this industry growth? Yes, most baby-boomers and older citizens are increasingly living in the cities especially in Auckland which is experiencing the greatest population increase in New Zealand.

Does the company have, in any form, an economic moat? Yes, Ryman Healthcare is a vertically integrated company. Not only do they provide living and aged-care solutions, they also: source for land, design the properties, construction, marketing, sales. This allows them to better maintain costs and generate a greater return on assets. None of their competitors are capable of doing the same thing as well as Ryman Healthcare. Also, they have economies of scale that other firms can’t match.

Is there much competition in this industry? At the moment there aren’t many competitors that are the size of Ryman Healthcare or provide the same level of services. There are, however, a few independent retirement villages and smaller groups out there. They don’t have the economies of scale that Ryman Healthcare have.

Is the company likely to be around in 5-10 years? No doubt about it. It has been around for 30 years. I don’t doubt for a second that it won’t be around for at least 10 more years. Baby boomers still have to live somewhere and receive aged-care services.

P/E Less than 20? Yes, currently at 18.82.

Return on Assets of 10%? At the moment it is just above 7%. While it isn’t up to my standard, understanding that this company has a lot of assets makes this standard very hard to beat for a company like Ryman Healthcare. So in this case, this point doesn’t have much weighting on my decision.

Ability to increase pricing over time without losing market share/customer base? Yes, it is able to increase prices in-line with inflation.

Worth looking more into? Definite Yes

Chipotle Mexican Grill (NYSE:CMG ):

This company owns and operates fast-casual restaurants all over the United States and a few in other countries. They focus on Mexican cuisine.

Do their products/services/assets continually generate revenue? No, Chipotle can’t make any more revenue from the food they sell. Once it is eaten it is eaten. This is no big deal.

Is the industry growing? Fast-casual is a growing market. Consumers have more money and are more willing to go out than a few years ago. It is however reliant on consumer spending. A recession would cut consumer spending and hurt the industry.

Is the company well placed to take advantage of this industry growth? The company only has around 1500 restaurants at the moment. Compare that to McDonald’s that has over 30,000. Chipotle still has a lot of room to grow even if that means taking market share from the big companies.

Does the company have, in any form, an economic moat? The advantage they have over franchising companies is that all of their restaurants are owned by Chipotle, not franchisees. Therefore, they have better control over their restaurants and can better maintain their high standards. Unlike franchises, there aren’t any disputes between Chipotle and franchisees that could ruin Chipotle’s reputation because there are none.

Is there much competition in this industry? A lot. Even though Chipotle is providing Mexican cuisine options, they still have to compete against companies like McDonald’s, Wendys, Pizza Hut, restaurants and the wider hospitality industry. Consumers only have so much money to spend.

Is the company likely to be around in 5-10 years? Most likely, they are growing and definitely have a loyal customer base. As long as they maintain a healthy balance sheet they should last a very long time.

P/E Less than 20? No. With a P/E of 53 times it is definitely overvalued. It is being treated as a growth stock. As far as I see, the price can only continue to rise if earnings rise and this P/E is maintained. How long can this be maintained? I have no idea.

Return on Assets of 10%? At the moment, ROA stands at just under 17%. This is a very strong ROA. Suggests that the company is very efficient in the utilization of their assets.

Ability to increase pricing over time without losing market share/customer base? Very difficult for them to do so. They are in a competitive market. Customers can easily shift to another restaurant for their meals. Only the very dedicated customers would want to stay with Chipotle.

Worth looking more into? Very good company at the moment with good prospects but really over-valued. If the P/E dropped to below 20 times then I will reconsider investing.

Visa (NYSE:V ):

Do their products/services/assets continually generate revenue? Yes. Consumers and vendors use their products and services all of the time. A lot of people have Visa cards which they use on a daily basis. A Visa card only costs mere pennies to produce yet if a consumer spends $100 and uses a card, the vendor pays commission to Visa of around 3%. That is $3. More than the cost of producing the card in the first place. The consumer can then buy more things with the card. This business model is absolutely fantastic.

Is the industry growing? While developed nations are saturated with cards, developing nations whose wealth is growing incredibly fast are very strong growth markets for companies like Visa. As consumers there start spending more, the more Visa stands to gain.

Is the company well placed to take advantage of this industry growth? Yes. Visa is investing heavily in the systems and infrastructure required to operate in these developing countries and is already increasing its presence in these countries.

Does the company have, in any form, an economic moat? Yes, there are only 3 major companies that provide these services: Visa, Mastercard (NYSE:MA ), and American Express (NYSE:AXP ). It is very hard for newcomers to enter the market and take market share from them. If a new competitor was to try break into the market, they would have to develop their own systems, banks must be happy to transact with them and vendors would have to be happy to use them.

Is there much competition in this industry? As described above there isn’t much.

Is the company likely to be around in 5-10 years? Most definitely yes. It is hard to argue that they won’t be around. Technology may be shifting but people still buy things with cards. Apple Pay may have a Mobile Payment system, but how many people have Apple phones? I personally prefer Android phones.

P/E Less than 20? With a P/E of 30 it is a cause for concern though nowhere near its highest of 70 in 2012. Still a P/E of 30 says it may be a little overvalued.

Return on Assets of 10%? Currently at 14.5%. Still very good.

Ability to increase pricing over time without losing market share/customer base? If the vendors who use the terminals increase their prices, Visa receives more commission. But I doubt that they can increase the % before facing scrutiny from vendors.

Worth looking more into? Yes. But the high P/E is a concern. Most definitely a reassessment if it goes below a P/E of 20.

Megaworld Corporation (OTCPK:MGAWY ):

This company in the Philippines is a real estate business which serves the needs of businesses in the growing ‘Business Process Outsourcing’ industry. They own several multi-use complexes which include apartments, offices and leisure components.

Do their products/services/assets continually generate revenue? They continually earn rental income from their assets from tenants and businesses with little marginal costs. Also their assets which includes land can appreciate in value over time.

Is the industry growing? The ‘Business Process Outsourcing’ industry which this company mainly services is a growing industry with thousands of firms in need of high quality office and technological infrastructure. This is a strong growth opportunity for Megaworld. Also, as more people become employed in this industry, there is ever-growing demand for housing again providing growth prospects for Megaworld. Philippines is also one of the fastest growing nations in the world with ever-increasing wealth. These points all serve to benefit Megaworld.

Is the company well placed to take advantage of this industry growth? Megaworld is increasingly investing in the infrastructure and land to position themselves well in this industry. This company is constantly seeking opportunities and building more complexes.

Does the company have, in any form, an economic moat? In a way yes. While most other real estate companies focus on one type of real estate whether it be commercial, residential or leisure, Megaworld seeks to have all of these types in their complexes. The reasoning being that businesses who rent office space want workers to be happy and be close to everything they ever need. Workers want the convenience of living close to their work and everything they need and not have to travel in the occasionally grid-locked Filipino traffic and Megaworld likes the diversity of investments. Their investments aren’t stuck in a particular industry sector. It is this idea that keeps them different from any other real estate company and makes them a favorite among people.

Is there much competition in this industry? While there are companies that compete in specific real estate sectors, no other firm competes against Megaworld in the way they do business.

Is the company likely to be around in 5-10 years? Definitely. As long as there are people who need a roof over their head and businesses need a place to operate, there will always be demand for goods and services provided by Megaworld.

P/E Less than 20? At a P/E of 7.89 this company is definitely one to look at. Unlike other companies with very low P/Es, this company has growing profits, assets and a very solid capital structure.

Return on Assets of 10%. This company has a return on assets of 5.66%. While it is not the 10% standard I have set, it is understandable as asset-rich real estate companies can find it difficult to achieve this standard. Their return on equity however stands at 11% which is very strong.

Ability to increase pricing over time without losing market share/customer base? Megaworld has a strong ability to increase prices over time in line with inflation and with strong demand for their services they can set prices higher if they wish to. People also need shelter and therefore will be willing to pay slightly more over time. The switching costs, opportunity costs of their time to move out and the lack of convenience of places they would move further away from work serves to disincentivise them to move out.

Worth looking more into? Definitely worth looking into. It is an excellent company in a strong growth market with solid financials.

Tesla Motors (NASDAQ:TSLA ):

Do their products/services/assets continually generate revenue? No. After a car is sold it does not continue to generate revenue for Tesla. This means that the only source of growing revenue is to sell more cars to new customers. It is easier in the world of business to make money from existing customers than from new customers. Marketing to new customers can be a huge expense.

Is the industry growing? The electric motor industry is growing quite fast but when an industry sector is small compared to the industry at large it is easier to grow relatively. There is however growing demand for more fuel efficient and cost effective cars despite lower oil prices. With lower fuel prices though, some people who like more powerful cars can afford to splurge on these cars because of lower ongoing costs of operating the car. This can make it more difficult for the industry to grow at the rate it has.

Is the company well placed to take advantage of this industry growth? The company sells cars that are in the high end of the car market. Until they can substantially reduce the prices of their cars, they can easily lose market share to lower cost car producers in the EV or car industry in general.

Does the company have, in any form, an economic moat? Essentially no. There is nothing that is preventing new car manufacturers to enter the market or for existing manufacturers to enter into the EV market. These manufacturers also have big budgets and are willing to invest in R&D.

Is there much competition in this industry? A lot. No other way to say it. Tesla has to compete against other EV manufacturers, car manufacturers domestic and foreign that sell cars in the same market Tesla competes in.

Is the company likely to be around in 5-10 years? I am not sure. If it does last that long I would be surprised. It is hard to assess whether it can be profitable in the future and when (more like if).

P/E Less than 20? Tesla doesn’t even have a P/E ratio as it does not have any earnings. Big red flag. If it did have a comparable P/E to its competitors (around 10), earnings have to be roughly $18-$22 a share to justify its current share price of $193. I don’t see that happening soon.

Return on Assets of 10%. Tesla has a negative return on assets as they have no earnings.

Ability to increase pricing over time without losing market share/customer base? Tesla is in the top range of the EV and general car market. At the prices they sell their cars, demand can be very elastic. If Tesla was to increase their prices, the demand for their cars may very well fall sharply not improving their bottom line.

Worth looking more into? Definitely NOT! You can feel free to speculate on the stock. But personally I wouldn’t.

Conclusion

Hopefully you look at these stocks and do your own research on them. As I have demonstrated, the checklist I use is a rough method of screening out companies I would like to invest in while keeping me away from stocks that I wouldn’t like such as Tesla. The primary points on my checklist are just points that I look for and if I like a company I would do more research. Everybody’s checklist can have different things. It is important to note that if a company does not fit into every point of your checklist, it does not necessarily make it a bad investment. However, you should be asking yourselves questions as to why it did not fit. Good luck out there investing.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.