Mental Models discussed in this podcast:

• Scuttlebutt
• Quality Investing
• Capital Stack
• Dark Stocks

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode127

Scuttlebutt on Overlooked Companies - Areas of Focus

• Capital Stack:
  • Clean is better. Ideally only common stock.
  • No lending to insiders or other self dealing.
  • Has management issued themselves options in the past? Were the prices reasonable? How much of the company does this represent?
  • "Overdue or delayed payment to insiders."
    • Red flag. This basically menas the company is in default putting your equity at risk. Can't even really mount a proxy fight because the management could force the company into bankruptcy.
• Filings:
  • Current or pink limited on filings with the SEC
  • I want to see financials. (They don't have to be audited)
  • Some sort of management commentary is nice. (Shows shareholder friendliness)
• Business Model:
  • Change
    • New products
    • New management
    • Growth of some kind
• Asset Base:
  • Ideally assts to cover the market cap (providing a margin of safety)
• Earnings Power:
  • Profitable (every year for 10 years, no more than one loss in 10 years)

 

Summary:

Overlooked companies are often cheap. Therefore, scuttlebutt on overlooked companies needs to focus on filtering for the quality of the business. High-quality and cheap makes for a great stock. Look for abnormal signs of positive potential.