The Harry Domash Stock Analysis Process

I have recently been reading a book called, “Fire Your Stock Analyst: Analyzing Stocks On Your Own” as I am always looking to improve my own stock analysis process. This book offers a clear process to stock analysis that I thought I would outline here on The Dividend Guy. In fact, Domash provides two processes for stock analysis – one for value stocks and one for growth stocks. In this post I am going to focus on the value one. If the process looks intriguing, I recommend you pick up a copy through your local library.

Domash’s strategy for analyzing stocks is a series of 11 steps, with each one evaluating the various aspects of a company’s fundamental and valuation characteristics. He directs readers to his COSC principle: Concentrate on the Strongest Candidates. As an investor moves through each step in the analysis framework, any stocks that do not pass the stage should be dropped from further analysis. In essence, there is no use wasting your time evaluating a stock that is not passing the strongest of your criteria for investment. Here are the 11 steps as identified by Domash:

1. Analyze analysts’ data
2. Examine current valuation
3. Set target prices
4. Evaluate industry
5. Analyze business plan
6. Assess Management Quality
7. Gauge financial health
8. Analyze profitability and growth trends
9. Search for red flags
10. Examine ownership
11. Check the price chart

The interesting thing about Domash’s process is the emphasis right up front with examining the current valuation of the stock and establishing price targets early. Although I did not see anything in the book discussing the reasoning for this process, I suspect it has something to do with the mantra, … money is made when you buy, not when you sell”. Seeing if the price of the company is in line first will save you time down the road as mispriced stocks are immediately avoided and the search for alternative cheap stocks can forge on. Again, this is a value-based process which at the end of the day is all about price.

Although I recommend the book, my main criticism is the emphasis Domash places on the analyst data put out by the large investment firms. I do not think too highly of the ratings provided by these firms (Strong Buy, Buy, Hold, Sell, Strong Sell) – take a look one day and you will see very few Sells and fewer still Strong Sells). However, in his defense he uses these ratings as a way to quickly weed out the real crappy stocks – if an analysts calls a stock a sell then the world must really be ending for that stock and your time is probably spent in other areas.

The best part of the book was the detail that Domash went to to describe how to carry out each step. He provides clear and complete descriptions of the metrics used in each step. I can see it as easy for an investor to set up a spreadsheet that uses the analysis methods to compare and decide on the best stocks. Of course, as with all investment processes it is easy to add some of your own criteria to the mix (i.e. dividend growth). At the end of the day, you will have a complete process to analyze stocks, and most importantly one that you trust and can rely on.

• Dividend Stock Wednesday: Johnson & Johnson (JNJ-N)
• The Dividend Guy Investment Process Part 8: Fundamental Analysis – Valuation
• Dividend Stock Wednesday: Pfizer (PFE)
• Dividend Stock Analysis: Royal Bank of Canada (RY-TSX)
• Dividend Stock Wednesday: Hasbro (HAS-N)