Hey everyone!
First off — thank you for subscribing to the newsletter. The goal of this really is a personal challenge to myself to become better at analyzing companies. If I am going to do this for a long time, I think it will be very important to learn the nuances of what it takes to meaningfully dissect a business, hopefully finding enough companies in my lifetime to invest in. Below will give you a broad overview into how I do research. This method is evolving and I expect it to constantly change, but it should give you a general understanding of how I approach beginning to look at a company.
I have 3 core pillars that I care about:
What sector/theme is this company in and how much can I understand about the industry?
Do I trust management in being able to be a good steward of capital?
Is the company profitable or are they on the path to profitability?
Let’s take these questions one by one.
What sector/theme is this company in and how much can I understand about the industry?
So, I like to start off my research by understanding where the company sits in the broader industry that it’s a part of before I even look into the company itself. I know some people are more agnostic, as long as they see numbers or another criteria going in the right direction then they’d be willing to invest. I think that can turn into a dangerous approach over the lifetime of being an investor.
Let’s go back to 2020…a young Amit who graduated college thought he knew about biotech. He graduated with a degree in business from Rutgers. He barely even went to class. He knew nothing about biology, other than the fact that he had plenty of chemistry with some girls in his biology 101 class.
Fresh out of college, I chose to invest my net worth, $25K, into $PPBT, Purple Biotech. I bought 30K shares. I thought I was going to change my life because this company was going to cure every important disease in society with their NT-219 molecule (I still remember this based on the DD that I did do).
The company did not solve any major diseases, I learned the harsh way what reverse splits were, and I lost all my money.
This is why it would be VERY hard for me to touch biotech stocks. I really do think the industry and sector of a company matters. Now, when I invested in Palantir in 2021, I didn’t have much industry expertise about SaaS.
But software isn’t the hardest business model to understand — talking with plenty of industry experts and doing my own research allowed me to really understand the company. It is very rare I could do that for biotech. I’m not an expert in semiconductors or financials, but I can try to become one. The point is, if you aren’t ready to learn about the industry of your stock DEEPLY, it becomes very hard to actually deep dive on the company because the internal nuances of the industry, in my opinion, truly matter.
Do I trust management in being able to be a good steward of capital?
So, I am a bit biased here because of two investments that have worked out for: PLTR and HOOD. Both of those companies are lead by exceptional founders and management teams, which has really forced me to take a deeper look at management before I invest.
I don’t need to know every nuance about a CEO, but I personally will TRY to find as many details as I can. I want to know their motivation, where they grew up, how they became passionate, etc. I feel that actually understanding a founder/CEO gives context to the way they will think about the business.
Does the CEO care about shareholder returns? Do they actually want capital to be rewarded? How do they think of executive compensation? With Palantir, it really was a bet on Alex Karp. His ability to philosophically communicate the intersection between Palantir’s mission and how they approach implementing software in the enterprise is what really did it for me. Vlad’s background as an immigrant with a giant chip on his shoulder and almost finished Math PhD really did matter to me. It makes me more comfortable when Robinhood launches a 3% cash back credit card (never done before) when the CEO understands math and what it would take to make a product like that profitable. Alex Karp’s PhD in neo-classical social theory helps me understand his approach to working with western nations and defending the work Palantir does to make the argument for why that type of revenue deserves a multiple.
Management truly does matter to me.
Is the company profitable or are they on the path to profitability?
I like investing in companies that make a profit. Now, they don’t need to make a profit. However, I need to see a path to profitability. I think companies become mature when they can show that after all the expenses they have to deal with as a publicly listed entity, they can produce earnings per share for shareholders.
I have invested in companies before they became profitable but it is because I saw the path to getting there. The path is actually quite important — Wall Street wakes up when a company is close to becoming profitable OR making a significant change in their profitability outlook, for example, if operating margins were to dramatically increase. Why? Wall Street wants to invest in a name that can produce earnings. If a company is not getting anything down to the bottomline, they aren’t actually showing they can operate as a long term business.
So, when I go through financials, this is my major concern. I tend not to be overly obsessed with the financials — engaging in this usually stops you from actually understand the company itself when the DCF model becomes the only perspective towards caring about a valuation. However, operating leverage, free cash flow, and net income are what I gear myself towards better understanding.
GRAB is a stock that I bought at $4.7. I have a target of $10. I need to be able to explain to myself how I get from $4.7 to $10. If I cannot easily explain this to myself — I can’t invest. In fact, I didn’t really take a massive position until I came up with a way for this to make sense to me. This was the same process for HOOD, when I came to the conclusion that the math would get me to $20, $8 looked like a steal. Now, at $20 for HOOD or $10 for GRAB, one could still get overly focused on financials and think those targets wouldn’t make sense for whatever metric they care about. I want a story that gets me the numbers to make sense, but I also want the imagination on my end to allow me to think of how the company evolves (because as a function, the numbers will also evolve.)
So, I want to understand the dynamics of the numbers, but I really want the numbers to be rooted in a broader story to make it make sense in my head and give me a timeframe to better hold an invesment.
Some of these things can be very simple by the way — if a stock trading at 1 times sales can double their revenue and expand margins, one can come to a conclusion that the sales multiple should expand and if you trust management and believe in the story — you can make the investment. I recently did this with $AMKR.
However, some investments take much more time to come to a broader conclusion to and the approach outlined here is the way I try to understand companies.
Alright, that’s my first post on this substack — deepdives will becoming soon!
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Amit your work ethic is admirable
Legend 🐐