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The BMW Method
A Due Diligence Template

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By JJMSpartan
February 24, 2011

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This is my Due Diligence template My personal method of Due Diligence is ever changing and evolving as I learn more and tweak it to better fit my experiences as an investor. As a husband, father of 4, working full time and with many outside interests, I don't have unlimited time to research stocks. So this method is more of a survival guide for me as a long-term, buy-and-hold investor.

I update these DD sheets for companies I own every few months to verify if my investing thesis is still valid. I have several screens I use to make sure a potential investment meets my investing criteria. I start with one and only progress to the others if I give a company a pass on a particular screen.

My screens as shown here are based on the most influential investing books I have read. These are Peter Lynch's "One Up on Wall Street", Philip Fisher's "Common Stock and Uncommon Profits", Benjamin Graham's "The Intelligent Investor, and David and Tom Gardner's "The Motley Fool Investment Guide". Yes, I'm serious about that last one - Dave and Tom's book taught me a few incredibly valuable lessons. One of those lessons is to compile my own Due Diligence on a company and keep it updated, which is exactly what I'm doing here. So thanks Dave and Tom.

I've also learned a TON from discussions on the Fool boards. And that is probably as important as anything - I keep learning and adjusting. So this template keeps changing. So thank you to all on the BMW Method board who have assisted me in looking at other items in my analysis. And keep the ideas coming.

So without further delay, here it is...

Lynch Screen: My first screen is based on how Lynch described finding stock ideas. I've tweaked it to meet my own personal needs. My rules are simple: Only invest in a company that I know, and that I like their products or services. There are more than enough companies out there that fit these criteria so that I don't sweat missing on another company that I may not care for. This helps make myself more confident in what I am buying, and to have enough interest to keep up with the company with the limited time I have available to analyze them. Of course I do pay attention to what others are recommending, but I will only buy based on my own analysis. So with all that said, here goes...

Who they are and what they do: Here I want to know a bit about the company - a little history, how big they are, what industries they are in.

Their products: And here I want to know a little about their products - are they market leaders, innovators, visionaries, efficiency experts, etc.

Lynch Summary: I want to summarize why I am interested in this company. What is it about them that jumps out at me and makes me interested enough to consider them as an investment possibility. I have a lot of screens like this that end here - I just don't have enough interest in the company to go any further.

Fisher Screen: Next, I move on to the "15 points" of Fisher. These points clarify what makes for a great investment in a growth company, one led by management that understands and aligns itself with shareholder interests. Info on each of the Fisher points can be found here:
http://www.fool.com/specials/2001/sp010118.htm

I keep this to a bullet-point list and write a blurb about how the company in question fits each of these bullet points. I'm usually looking for a company to get passing marks on at least 10 of the 15 points to continue further with my analysis.

1) Pursuit of Growth -

2) Expansion and Innovation -

3) Research and Development -

4) Rate the Sales Force -

5) Margin of Profits -

6) Continuous Margin Improvement -

7) Workforce Enthusiasm -

8) Coherent Leadership -

9) Depth of Talent -

10) Mathematics and Consistency -

11) Different, Better, Special -

12) Long-term aims -

13) More than enough cash -

14) Full disclosure to all investors -

15) Uncompromising Integrity -

Fisher Summary: I summarize my thoughts on the company's performance on the Fisher points. I usually have a good feel for the company as a potential purchase at this point, and I want the numbers to tell me if there are any red flags, or if I need to wait for a better price. I really only go to the numbers if I'm convinced enough to consider buying, although I've gone to the numbers a few times for my investment club to show examples of companies I'm not interested in.

Graham Screen: This is the Graham (numbers) part of my review. I focus on a few key metrics that help me determine the financial strength of a company. A lot of learning has come from TMF, including from the newsletters. This section has changed several times as I have learned more, and I'm always looking for suggestions on how to improve it.

Growth Rates: First, I start out looking at the growth rates. TMF has a pretty good section with some nice new graphs ready made for consumption.

Revenues: Are they going up? Consistently? Is it cyclical?

Earnings: Same questions as revenues

Money Management: I want to see if the company is managing their cash flow well. I use the old "flow ratio" concept from TMF to help me evaluate this area.
http://www.fool.com/investing/small-cap/2005/01/03/quotflow-ratioquot-explained.aspx

Profitability: Similar to earnings and revenue - going up consistently is good.

Cash Management: If the company has a pile of cash, I want to know what they are doing with it - reinvesting it, acquisitions, return to shareholders, etc.

Margins: I want a feel for how the companies margins are in a relative sense and how they compare to their competitors

Valuation: I project a future valuation based on earnings growth and an anticipated P/E ratio. Then I calculate a CAGR based on that estimate. I want a CAGR over 20%.

Graham Summary: I summarize the company according to the numbers I've calculated, and try to estimate how good of an investment this would make.

Accounting for the unknowns: Finally, I try to assess what I don't know about the company. What could change in the future. This is based on my own gut instinct and what I've read, and is completely speculative, but it gives me a better feel for the risk involved.

Potential growth multipliers: I want to estimate for what the company could do to accelerate earnings even more than my prediction.

Potential Pitfalls: And the opposite - what could cause the company to stumble or fall hard.

Conclusion: When all is said and done, am I going to buy now, wait for a better price, keep on my watchlist, or remove from future consideration.

That's how I do it. I've found that when I put in the time to fully fill out this sheet, I have a much better feel for my investment. I'm definitely not perfect with it, but I do like the results it has helped me achieve.

Best Regards,

Sparty