Using a checklist to help you choose potential investments can really revolutionise your portfolios performance.
Indeed, checklists remove anelement of human emotion and human error from stock selection, which enables the average investor to minimise mistakes and invest like a pro. Many of the worlds most successful investors use checklists to select stocks.
Personally, I use a simple five-point checklist to assess potential investments, before moving onto a more vigorous analysis.
Today Im puttingQuindell(LSE: QPP) through its paces to see if the company meets my strict value-investing criteria.
Five key criteria
The first question on my checklist is simple: is the company in question cheap?
Quindell is currently trading at a forward P/E of 2.1, which is dirt cheap. However, I also like to consider a companys value in relation to its tangible assets. And at present, Quindell is trading at a price to tangible book value of 1.3, which is slightly expensive for my liking.
The second question on my checklist relates to the companys debt. I like companies with low levels of debt and solidcash cushions.
According to Quindells financial statements, the company hasa low gross gearing ratio of 7.3% and a current ratio of 2.5. These figures show that Quindell has enough cash on hand to meet liabilities falling due within the next 12months and debt only amounts to 7.3% of shareholder equity. On this basis, the company meets my gearing criteria.
Quindell fails criteria number three: cash generation. To meet this criteria, the company in question must have been free cash flow positive for at least three out of the past five years. So far, Quindell has yet to report a positive free cash flow from operations.
My last two criteria concern the companys business model.
To tick the box on checklist question number four, the company in question must generate half, if not more of its revenue from recurring sales. Essentially, this question is designed to weed out one-trick ponies that get rich quickly off one idea, but are unable to generate long-term growth. Quindells business model relies on the companys ability to sign up an ever-increasing number of customers who are looking to claim compensation, which in my view isnt a sustainable business model.
And lastly, checklist question number five asks if the companys management can be trusted. Has Quindells management shown over the past few years that it is working in the best interests of shareholders?
Unfortunately, based on the fact the majority of Quindells management team has been replaced during the past few months, its not possible to answer this question with any real conviction.
The bottom line
All in all then, Quindell only meets one of the five points on my value checklist. The companys valuation is still slightly expensive for my liking, and management hasnt really been around long enough to prove its worth.Additionally, Quindell isnt generating cash and the companys business model does not appear to be sustainable.
On that basis, for the time being I’m going to be staying away from Quindell. However,before you make any trading decisionI strongly recommend that you do some additional research of your own — you may come to a different conclusion.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.