# Stock Analysis Framework

This reference provides detailed analysis frameworks for evaluating stocks across different markets.

## Fundamental Analysis Checklist

### 1. Financial Health Check

- [ ] **Revenue Growth**: Consistent revenue growth over 3-5 years
- [ ] **Profitability**: Gross margin, operating margin, net margin trends
- [ ] **Cash Flow**: Positive operating cash flow, free cash flow generation
- [ ] **Balance Sheet**: Debt-to-equity ratio, current ratio, interest coverage
- [ ] **Return Ratios**: ROE, ROIC, whether they exceed cost of capital

### 2. Business Model Analysis

- [ ] **What does the company do?** Clear understanding of business and revenue sources
- [ ] **Competitive Advantage**: Does the company have moat (brand, scale, network effect, patent)?
- [ ] **Pricing Power**: Can they pass cost increases to customers?
- [ ] **Customer Concentration**: Is business dependent on few large customers?

### 3. Management Evaluation

- [ ] **Capital Allocation**: Does management deploy capital wisely (reinvestment, dividends, buybacks)?
- [ ] **Insider Ownership**: Do managers have significant skin in the game?
- [ ] **Transparency**: Clear and honest communication with shareholders
- [ ] **Track Record**: How have they performed through market cycles?

## Valuation Methods

### Price-to-Earnings (P/E) Ratio

- Compare to:
  - Historical P/E of the company
  - Industry average P/E
  - Market average P/E
- Growth adjusted P/E (PEG ratio) < 1 often indicates undervaluation

### Price-to-Book (P/B) Ratio

- Particularly relevant for:
  - Financial institutions (banks, insurance)
  - Capital-intensive businesses
  - Companies holding significant assets
- P/B < 1 may indicate deep value (but always check for asset quality)

### Discounted Cash Flow (DCF)

- Project future free cash flows for 5-10 years
- Calculate terminal value
- Discount to present value using appropriate discount rate (usually WACC)
- Best for companies with stable predictable cash flows
- Sensitivity analysis is important (change growth and discount rate assumptions)

### Dividend Discount Model (DDM)

- For mature companies with stable dividend history
- Gordon Growth Model: Value = D1 / (r - g)
- Focus on dividend growth rate and sustainability

### Relative Valuation

- Compare key multiples with direct competitors
- Identify why the company should trade at premium/discount
- Common multiples: EV/EBITDA, P/S, EV/Sales

## Analysis by Market

### US Market Analysis Considerations

- US markets are generally more efficient
- Focus on institutional holdings and analyst coverage
- Consider currency impact for non-US investors
- Tech sector dominates, so growth stock analysis skills are critical
- Earnings reports and guidance heavily impact prices

### Hong Kong Market Analysis Considerations

- Strong link to Chinese economy
- Influenced by both global and China factors
- Higher weighting for financials and property
- Pay attention to southbound/northbound capital flows
- Liquidity varies significantly between stocks
- Some companies have different share classes (A/H, different voting rights)

### A-Share Market Analysis Considerations

- More retail investor participation, higher volatility
- Policy changes have significant impact
- Focus on government industrial policies (five-year plans, etc.)
- Sector rotation driven by policy and macro cycles
- Pay attention to regulatory risks
- Consider Shanghai/Shenzhen/HK Stock Connect flows

## Risk Assessment Framework

### Systematic Risk (Market Level)

- Interest rate changes
- Economic recession
- Geopolitical risks
- Market liquidity risk

### Idiosyncratic Risk (Company Level)

- Industry disruption
- Competition
- Management fraud/error
- High debt default risk
- Product/market failure

## Margin of Safety

- Always require a margin of safety between intrinsic value and market price
- Typical margin: 20-30% for high-quality companies, 40-50% for lower-quality
- Larger margin for more uncertain businesses
- Never overpay for growth hype

## Final Recommendation Categories

- **Strong Buy**: Deep value, strong fundamentals, excellent risk-reward
- **Buy**: Good company at reasonable price
- **Hold**: Already fairly valued, no urgent need to buy or sell
- **Watch**: Interesting company, waiting for better entry point
- **Sell/Avoid**: Poor fundamentals, overvalued, significant risks
