In this Initial Checklist I am taking a quick look at Cochlear Limited (COH) as a potential investment.
By running a company through the below research notes model it helps me to update my knowledge on a company and decide whether it is worth placing (or removing) a company on my Watchlist, taking the time to complete a full Checklist and then possibly making an investment for one of my Portfolios.
My Strategies: Great Companies, Cyclical Companies and Asset Plays
During my research and screening processes I look for three different styles of potential share market investment opportunities:
- Great companies at a fair to discounted price compared to my valuation.
- Solid cyclical companies at a discounted price compared to my valuation.
- Asset Plays: Companies trading at a large discount to their net tangible assets, that also have a little something extra.
This is my order of preference, with great companies at the top of my list, cyclical companies second and asset plays third. The reason for this is a great company should keep churning out large profits well into the future, a cyclical company as the name suggests will require you to keep an eye on the cycle and price more closely, and an asset play will be an investment you usually sell within 1-5 years once the market has realised it’s value or not.
My Goal: Greater than 15% (preferably 20%)
All three of my above strategies are based on a value investing framework and my goal is the same for each: ‘To produce long term compounding annual returns over 15% (preferably 20%).’
For this to happen I need to ensure three things:
- The companies I invest in need to return over 15 / 20% p/a.
- I need to ensure the company can more than likely perform this way for the long-term at as low of a risk as possible.
- I need to purchase my shares at less than fair value to ensure my investment returns are over 15 / 20% and allow for a margin of safety / error.
My Methods: Price vs Value
Great Companies: Durable competitive advantage & price
When looking to invest in Great Companies for the longer term there are only two things I believe I really need to know in order to make a sound investment decision.
- Does the company have a durable competitive advantage?
- Is the company available at a fair to cheap price (10-15%+ discount to my valuation)?
Cyclical Companies: Endurance & price
When looking to invest in Cyclical Companies there are only two things I believe I really need to know in order to make a sound investment decision.
- Does the company have a solid balance sheet, a solid income stream and some sort of advantage over competitors?
- Is the company available at a cyclically cheap price (20-50%+ discount to my valuation)?
When looking to invest in Asset Plays there are four things I believe I really need to know in order to make a sound investment decision.
- What are the companies current and future Assets & Liabilities?
- Is the company currently making any income? If not is there potential and what is the timeframe?
- Is there some likely potential or upside on the horizon?
- Is the company available at a very cheap price (30 – 50%+ discount to my valuation)?
Conclusions: How I will use the results
As mentioned above the below research notes will help me to decide whether it is worth placing (or removing) a company on my Watchlist, taking the time to complete a full Checklist and then possibly making an investment for one of my Portfolios.
- If the company appears to have a durable competitive advantage I will place it on my Watchlist and then run it through a full Checklist.
- If the company appears to have a durable competitive advantage and appears to be available at a fair to cheap price I will place it on my Watchlist, run it through a full Checklist and then possibly make an investment for one of my Portfolios.
Cochlear Limited (COH)
Introduction: Cochlear Limited (COH)
“Cochlear is the global leader in implantable hearing solutions with products including cochlear implants, bone conduction implants and acoustic implants. Cochlear’s implant systems comprise an implant which is inserted during surgery and an external sound processor.” (Cochlear Annual Report 2017)
Method used: ‘Great Company’
Cochlear is a great company, so what I am looking for here is a solid balance sheet and income stream, a durable competitive advantage, and availability at a cheap price.
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Enjoy the ride!