Right Price Checklist: Conclusion

· Business, and an Explanation of the Checklist
· Moat
· Management
· Financials
· Valuation

The final part of the series, I've decided to put off the psychology post until I have time to learn more and know what I'm talking about, is the conclusion.

I believe there are three crucial factors to apply in your conclusion:

• Margin of Safety
• Why it undervalued
• Catalyst

Conclusion

Margin of Safety

Margin of Safety is at the top of any value investing strategy.

It's a very easy to understand concept: when buying shares in a company make sure they are worth more than you are paying.

The thing most debatable about margin of safety is how much of is needed. To guarantee future profits I like to look for companies that poseses a 40% margin of safety between the current price and value, but for truly great companies I'd pay up to 80%, with the intention of holding them for a very long time.

Why is it Undervalued?

This question is usually found in the investigation of the company, but it needs to be restated in words, so an analyst can easily find how it will be changed.

This can be as simple as a company missing earnings or as extremely strange as a CEO reporting that Gross Margin will be down, even if that is extremely obvious and not something that one should worry about.

Catalyst

Many value investors choose to ignore this. I think it is one of the most important parts of investing, and making sure you haven't found a value trap.

These are usually easy to find, what will make the stock price reach the company's value? this can be as easy as continuing earnings growth, or more complex like a competitor raising its prices.

Buy or Sell

The last decision is when an analyst sums up all his research and decides whether to buy or sell.

To run a truly concentrated portfolio, I would suggest not buying a company unless the business is great and can be proved so by the financials, the management can run the business and allocate capital without the need of debt and there is a high margin of safety between the stock price and value.

Also, I advise holding 15 or less stocks, and even if a company passes all the above tests if it doesn't possess a good catalyst to propel the stock price in the coming years, I would pass on it.

Blockbuster

Margin of Safety

For this I will use two values, the value form Pabrai's multiple and Matt Richey's DCF.

The value form Pabrai's multiple was: $50.58 this is a margin of safety of just 13%.

The lower case scenario gave a value of $64.75, and the middle case gave $90.69, though it was $72 with a 12% discount rate. This present margins of safety of: 32%, 52% and 39%.

I'd say the range of values is from $50.58 to $72, so the margin of safety is from 13% - 39%, because best Buy dominates its industry and continues to repurchase shares I think this is sufficient.

Why it's undervalued

Best Buy reached a high of $52.29 in December, after that some funds sold their stake and in February it reduced guidance for this year and fell to $39.87, since then it's creeped up a little to $43.83 where it stands now.

Catalyst

I believe Best Buy has a few catalysts:

• Future earnings growth propelled by battles between HD and Blu-Ray and its continued market share gains as Circuit City falls off the planet or is bought by Blockbuster
• Share repurchases

Buy or Sell

This is a hard one for me, I will continue to examine AXP and some special situations at which I'm looking, and decide whether Best Buy has better potential than these, but for investors looking to find a good undervalued company I believe Best Buy is worthy.

The author owns no shares of Best Buy, this article, in no way, is a recommendation to buy or sell any securities.