A Systematic Approach to Reviewing a New Stock – Part II

In Part 2 of our analysis we find out what the company actually does and arrive at a conclusion.

The Motley Fool

Jumping right in from where we left off, let’s take a break from the numbers and find out what Mediagrif Interactive (TSX:MDF) is all about.  What we’re looking for is an indication of barriers to entry and a competitive advantage.

Background

Mediagrif has been around since 1996 and is a provider of e-commerce solutions for business.  Not an overly focused pitch.  The company provides solutions in the fields of electronic components, computer equipment and telecomm, medical equipment, automotive aftermarket, wine and spirits, diamonds and jewellery, classified ads, supply chain, and government opportunities.  Why not taxidermy?

Luckily, the model is not as scattered as it may appear.  A great resource for business descriptions is the annual information form (AIF), typically found at www.sedar.com.  From the AIF we learn that Mediagrif provides e-commerce platforms that enable clients to find, purchase and sell products, exchange info, gain access to business opportunities and manage supply chain collaboration.  These platforms are largely industry agnostic, hence the diverse range that the company serves.

This business model explains the cyclicality that we uncovered in Part I.  As the economy slowed, less transactions were flowing through the Mediagrif platforms.  It also explains the operating leverage.  The platform is there.  The more transactions, the more profitable it is.

Unfortunately, this business model does not fit very well with our desire for barriers to entry or a competitive advantage.  This is a significant obstacle to our review.  The company’s business is not about the platforms that it owns.  Others do the same thing and barriers to entry are non-existent.  It’s about who uses the platforms.  The only possible competitive advantage would be if the company could somehow lock-up its clientele to prevent them from moving their business to another platform.  The reality is, the users will go to the e-commerce platform that is best for them.  Today it might be Mediagrif.  Tomorrow, nobody knows.

Valuation

Given the nature of this business model, valuation doesn’t matter.  You can’t accurately assess the value of a company that carries such a high risk of having customers today and not tomorrow.  This company has potential value trap written all over it should it slide again as past numbers do not reflect future results.  The recovery may not be as kind next time.  Time to move on.

The Foolish Bottom Line

A systematic approach to evaluating potential investments is one of the best things that you can do to help ensure success.  Eliminate the noise, like stock performance.  Focus on simple metrics and concepts.  If these metrics check out, go deeper.  If you keep poking and find nothing that pokes back, chances are good you’ve found a great candidate for your hard-earned savings.  At the very least, you will build an inventory of go-to stocks for when prices co-operate.

We could have started with the business model for Mediagrif and tossed this name aside right away.  Numbers however help paint a picture, and they are relatively quick and easy to access.  If Mediagrif would have had a heavy debt load, or no history of generating free cash, we would have moved on.  It just so happened it didn’t, so we kept poking.

Investing takes time and effort and you’re going to (or at least should be taking a) pass on many more ideas than you end up transacting on.  However, if you focus on key variables like financial risk, free cash flow, barriers to entry and competitive advantage, the long-term will reward your time and effort.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own shares in any of the companies mentioned in this report at this time.  The Motley Fool has no positions in the stocks mentioned above.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

A person builds a rock tower on a beach.
Dividend Stocks

CPP Pension: Boost Your Payouts by $5,232 per Year

You can raise your after-tax CPP by making RRSP contributions. Alimentation Couche-Tard (TSX:ATD) is a good RRSP stock.

Read more »

Overhead shot of young adults using technology at a table
Tech Stocks

1 Stock That’s Just as Hot as Tesla Stock  (Without All the Hype)

Sure, Tesla stock (NASDAQ:TSLA) has the headlines, but this other stock has far more growth, with even more on the…

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

3 No-Brainer Stocks to Buy With $20 Right Now

Here are three no-brainer stocks that are suitable for anyone getting started on their investing journey.

Read more »

thinking
Bank Stocks

Could Royal Bank Stock Reach $200?

Growing rate cut hopes and improving analysts’ expectations from Royal Bank’s financial results could help its stock maintain strong upward…

Read more »

A plant grows from coins.
Investing

3 Growth Stocks to Buy With $3,000 for the Next 3 Years

These growth stocks have the potential to deliver above-average returns and compound investors’ wealth.

Read more »

Young woman sat at laptop by a window
Investing

Here’s Why I Think Restaurant Brands Is 1 of the Best Bets on the TSX Today 

Here's why Restaurant Brands (TSX:QSR) could be one of the best stocks to buy for long-term upside in this current…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

This 5% Dividend Stock Pays Cash Every Month

This monthly dividend stock offers cash every month, but also returns that continue to climb higher from being in a…

Read more »

growing plant shoots on stacked coins
Dividend Stocks

3 Top Dividend Stocks That Keep Raising Their Payouts

These three TSX stocks are ideal buy as they consistently raise their payouts, depicting their healthy financials.

Read more »