The Value Investing Blog of Old School Value

Does the Magic Formula Really Work?

Jae Jun — Mon, 20 May 2013 14:05:18 +0000

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Magic.

That’s what you need to beat the market and that’s what the Magic Formula is supposed to do.

As a result of brilliant marketing, promotion and becoming a New York Times bestseller in 2005, Joel Greenblatt has turned the Magic Formula into a key strategy for many in the value investing and mechanical investing community.

Buy at least 20 stocks from the Magic Formula screening tooland then rebalance at the end of the year. Do this and you will beat the market, the book says.

The Little Book that Beats the Market

Greenblatt wrote The Little Book that Beats the Market for his children who were aged between 6-15 at the time.

It’s written in plain English and 6th grade math to make it easy to follow along. This is the strong point of the Magic Formula theme.

Everything is very easy to understand. The concept is simple, the explanation is simple, but most important of all, the execution for investors is simple enough to do on their own.

In it’s most naked form, the Magic Formula is described by Greenblatt as

a long-term investment strategy designed to help investors buy a group of above-average companies but only when they are available at below-average prices.

The Ingredients to the Magic Formula

Here is the formula courtesy of wikipedia. From beginning to end, it consists of 9 steps.

1. Establish a minimum market capitalization (usually greater than $50 million).
2. Exclude utility and financial stocks
3. Exclude foreign companies (American Depositary Receipts)
4. Determine company’s earnings yield = EBIT / enterprise value.
5. Determine company’s return on capital = ebit / (net fixed assets + working capital)
6. Rank all companies above chosen market capitalization by highest earnings yield and highest return on capital (ranked as percentages).
7. Invest in 20–30 highest ranked companies, accumulating 2–3 positions per month over a 12-month period.
8. Re-balance portfolio once per year, selling losers one week before the year-mark and winners one week after the year mark.
9. Continue over a long-term (3–5+ year) period.

Pay close attention to step 4 and 5 because they are the key driving formulas for it all to work.

Earnings Yield = EBIT / Enterprise Value
Return on Capital = EBIT / (Net Fixed Assets + Working Capital)

Earnings Yield is used because it targets companies with below-average prices. The idea behind of Return on Capital is to select good companies that are outperforming. This fits in line with what Greenblatt said

a long-term investment strategy designed to help investors buy a group of above-average companies but only when they are available at below-average prices.

The Magical Performance

So how magic is this Magic Formula in terms of performance? This table of values is from the revised 2010 version of the book.

and a better representation.

Starting with $10,000 the Magic Formula would have made you a millionaire by 2009.

The Magic Formula is famous for returning a 30% CAGR. From 1988 to 2004, it did achieve a 30.8% return, but the CAGR has declined significantly. No strategy can sustain a CAGR of 30%. Although the backtest in the book only provides data up to 2009, I wouldn’t count on 2010-2012 results showing vast out-performance.

The Magic Formula is a Fraud?

By popular demand, the Magic Formula will soon be added to the list of value stock screens, but the one thing that has held it back is the reliability of the backtest performed by Greenblatt.

I just don’t believe the results are as good as it seems.

What’s more, other blogs have tried to simulate the Magic Formula performance from the book, but none of them have come close.

Backtesting the Magic Formula Using Portfolio123

Portfolio123 has a very good predefined Magic Formula screen which I’m going to use for some more numbers and graphs.

Although the screen uses the same fundamental formula and tries to follow the Little Book, it ends up being slightly different to Greenblatt’s version.

Here is how the screen is constructed.

No OTC stocks
No ADR’s
No financial companies
No utilities
No real estate companies
Market cap greater than $50m
5 year average of ROI ranks in the top 35%
Slippage of 2%
Carry cost of 1%
100% long
Stocks selected based on ranking of Earnings Yield = EBIT / Enterprise Value and Return on Capital = EBIT / (Net Fixed Assets + Working Capital)

To try and compare apples to apples, data from 1999 to 2009 is used as the data only goes back as far as 1999, and 2009 is the latest year provided in Greenblatt’s Book.

(click to enlarge)

Although the backtest version kills the market over the same period, it doesn’t match or beat the Greenblatt version.

However, if I adjust the slippage to 0%, it comes awfully close. CAGR over the same period then becomes 17.33%, which is oh so close to the original 18.57%.

But I’m willing to bet that the original formula does not include factors such as fees and slippage in the results. If it did, it would fall to a level similar to my backtested results.

Either way, there goes my earlier comment about not believing in the results.

Sure it’s not the 30%+ CAGR that Greenblatt wrote about in the book, but there is magic in the air.

Additional Links

Gurufocus Magic Formula Newsletter and Screen
Magic Formula White Paper
Greenbackd analysis

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The Small Cap Strategy Returning 28% YTD

Jae Jun — Wed, 15 May 2013 14:57:45 +0000

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The market has been on fire this year. Up 15% and still going strong. However, there is a small cap stock screening strategy that has appeared out of no where and has achieved a performance of 27% YTD.

The fact that this strategy is focused on value small caps means that the strategy is still flying under the radar, and I bet it will continue to fly under the radar.

The secret sauce used in the screen is centered on Net Net Working Capital aka NNWC.

Net Net Working Capital Background

The original concept of NNWC came from Benjamin Graham as he loved to pick up stocks trading at dirt cheap valuations. Put simply, NNWC stocks are those that trade below their net asset value. In the value world, these stocks are called “net nets”.

Net nets = dirt cheap stocks with problems causing it to sell at less than a discount to its assets.

The mathematical formula is:

Net Net Working Capital = Cash and short-term investments + (0.75 x accounts receivable) + (0.5 x inventory) – total liabilities

As you can see, a net net must be in a dire situation to be selling below cash, 75% of accounts receivables, 50% of inventory minus liabilities.

But I lied.

This isn’t the strategy that is performing at 27%. The actual strategy is one where the stocks are seeing their NNWC value increase from the previous period.

This makes things a lot different.

The whole focus changes from finding cheap stocks, to finding cheap stocks where there is tangible evidence that the business is improving.

An unloved business which can increase its current assets faster than its liabilities is in a situation to turn it around.

If a stock is unloved as much as net nets, even slight positive news can send it rocketing up and that’s what has been happening with the NNWC increasing strategy this year. Note that this has some severe ups and downs.

Definitely not for the faint hearted.

Screener Set Up

I use portfolio123.com for my screening so here are the details of how I set it up.

Remove Chinese stocks
Remove ADR’s and financial stocks
Remove OTC stocks
Current quarter NNWC is greater than zero
Current quarter NNWC is greater than the previous quarter NNWC
Daily volume is greater than 30k

To do this yourself, here is the guide on how to backtest and screen using portfolio123.com.

The strategy has been under performing over the past couple of years, even during a rising market, so it is nice to see it trying to bounce back this year.

But it does go to show that it’s very difficult for any single screening strategy to beat the market year after year. However, with a longer term view, there is possibility of significant outperformance.

For the statisticians, here is a detailed look at how the portfolio has been performing this year.

The 2013 NNWC Increasing Stocks

I disagree with screens and strategies showing that you have to buy and sell stocks every 4 weeks.

It’s unrealistic to trade that often.

Instead, the value screens I post are rebalanced only once a year. Max holding is 20 stocks.

Here is the list of 2013 NNWC increasing stocks doing so well this year. Let’s see if it can hold up for the rest of the year.

Note: ORCC buyout offer occurred on Jan 31.

Disclosure

None

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Jim Chanos is Shorting Seagate. Should You?

Jae Jun — Mon, 13 May 2013 08:06:35 +0000

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At the Ira Sohn conference on Wednesday, Jim Chanos gave a presentation on being short Seagate (STX). Chanos has been negative on the entire PC industry citing the explosion in smartphones and tablets are eroding PC sales.

In June 2012, he called HP (HPQ) the ultimate value trap as it meets all five points of the characteristics for a value stock.

Cyclical and/or overly dependent on one product
Hindsight drives expectations
Marquis management and/or famous investor(s)
Appears cheap using management’s metric
Accounting issues

Regarding PC’s, he presents that PC sales numbers peaked in 2012 and has reversed into a decline in sales from the first quarter of 2013.

Here is a summarized version of his short thesis on Seagate and then I’ll get into some numbers to poke and see whether there are any signs of a failing industry.

Stock price is inflated due to higher prices. Chanos cites that hard drive prices are approaching 10% of PC prices.
PC industry operates on thin margins and as sales and prices come down, the price of hard drives is not sustainable. Chanos cites that Toshiba has announced its hard drive margins will be drop by half this year.
Pricing will come under pressure from competition of digital storage space

A Dangerous Short?

Although Seagate is hitting new highs, check out these numbers taken from the Old School Value valuation and analysis spreadsheets.

I have learned not to short, or claim a company is overpriced, based on stock price alone. Same thing applies to Seagate when looking at these numbers. You wouldn’t know that judged on the latest figures that Seagate is at all time highs. Even at these levels, these ratios are within value stock ranges.

Since Chanos is not claiming Seagate to be a good short because it is overpriced, but rather than business is bound to fail due to a fall in margins and drops in sales, let’s analyze those two areas.

Analyzing the Margins

The easiest thing to do is to draw a simple graph depicting the gross, operating and net margins.

Let’s just say for the sake of giving Seagate the benefit of the doubt, that the recession in 2009 is an anomaly. If this is the case, the operating income of Seagate from 2003-2008 was averaging 9.2%. In the last three years and TTM, it has jumped to 15.6% and Chanos’ question comes into mind.

Are the price of hard drives sustainable?

Seagate now offers SSD which comes at a higher price point, but it is bound to come down further in price. There is competition from digital storage which offers the convenience of accessibility from anywhere.

Physical storage is a commodity business with no moat so I find it difficult to believe that prices can stay high enough to maintain the current margins.

Does the DuPont Analysis Show Anything?

Taking it one step further, does the DuPont analysis point to any signs that the growth and increase in business performance is coming from anything other than improvements in margins?

See the 3 step and 5 step DuPont analysis below.

Looking over the golden years, the increases in ROE were due to

increase in margins
increase in asset turnover
reduction of interest
reduction in leverage

From a business and operational perspective, Seagate is on fire. They are doing everything right.

So far, Chanos certainly isn’t shorting Seagate based on fundamental deterioration. He is taking a top down approach by believing that the downfall of the PC industry will cascade into the hard drive space.

Inventory Analysis and Interpretation

Since the ROE didn’t show anything strange, let’s take a look at Chanos’ angle of sales set up to fall.

One of the leading indicators of sales is inventory and the way to do that is to analyze the details of the inventory to predict whether the company is expecting a boom or bust in sales.

Inventory is made up of raw materials, works in progress, purchased components, and finished goods.

(click to enlarge)

If you take a look at the area I highlighted, the latest quarter is showing a disturbing difference compared to the same period over dating back 10 years.

The last time there was such a drop in works in progress was back in 2004. Seagate was making more products even during the recession. Is this what Chanos was talking about?

Now that finished goods for the latest quarter is up 94% compared to one year ago, the next few quarters will be a telling sign depending on whether the inventory sells.

Here is another look by reviewing the quarters sequentially.

(click to enlarge)

The way the inventory line items integrate with each other is like this.

Company buys raw materials when prices are cheap or when there is an expected increase in orders and sales
As orders come in, “works in progress”.
Finished goods decrease as it is sold off and then replaced with new inventory once the works in progress products are complete

Additional interpretations to know:

Raw materials up, works in progress up, finished goods same or down = Good sign. More orders are coming in. Company is selling quicker than they can make.
Raw material up, works in progress up, finished goods up = Need to watch. If the following quarters continue to show finished goods going up, then that’s bad as the company can’t sell its inventory or is making too much. On the flipside, if finished goods go down, then it has become a good sign.
Raw materials down, works in progress down, finished goods down = Bad sign. Business is slowing down. Could be cyclical, but expect lower turnover or sales.
Raw materials down, works in progress down, finished goods up = Horrible sign. There is a glut of inventory that needs to be cleared. New orders are not coming in and current inventory will likely be sold off at a discount.

Applying this interpretation to Seagate, the line that draws my eye is works in progress. Compare it to the previous periods and there are big differences.

When it comes to inventory for Seagate, Chanos may be onto something, but there is nothing concrete at the moment.

Accounting Manipulation Checks

Running a quick earnings manipulation check via the Beneish M score, the score comes out to be a solid -3.03.

While the Beneish score or models can never replace a thorough and manual investigation, a cursory look reveals that Seagate doesn’t have any earnings manipulation factors to worry about.

If you are adventurous, here is a list of 52 techniques you can perform for detect financial manipulation.

Is Chanos Right or Wrong?

It is too early to tell.

Because it seems like he is shorting based on a top down approach, we’ll see whether his thesis plays out. I’m just not in the game of predicting industry trends.

If Seagate was showing fundamental flaws and a breakdown in fundamentals, then it could be come a compelling case, but Seagate does not fit into a value trap mold or one to short at this time unless you have deep pockets and can ride out margin calls.

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Value Investing Lessons from a Reader

OSV Guest Author — Fri, 10 May 2013 05:31:36 +0000

Last week I posted my thoughts on the importance of learning how to invest. It must have connected with some people based on the emails I received.

One that caught my attention was from a reader who shared with me his experience and was kind enough to allow me to share it with you.

This reader in particular is interesting because he has plenty of analysis experience coming from the a private equity background and has now changed from a top down investor to a more fundamental, bottoms up investor.

See if you can take away anything from what he is sharing.

An Investor has to be Realistic but Pay a Discount for “Pessimism”

A few underlying theses that a lot of investors in emerging markets go with are

multiples will expand
the market will re-rate the stock since it is a market leader
the management is world class

but you can’t go into the show banking on it.

Investing on the back of an expected tailwind from the market is like buying a car hoping for crude oil to fall to $50 a barrel once there is peace in middle east.

When extraordinary management meets an average business, it is always the business that wins, at least most of the times. Many high quality entrepreneurs have tried to turn around things in retail, aviation, commodities. However, the business quality outlasts their efforts.

Look at JC Penney.

Capital Allocation Skills are ALWAYS Different to Execution

These are two very different skill sets often mistaken as the same.

People who are good at execution tend to be “alpha males” – aggressive, focused who get stuff done. Similar to what Charlie Munger describes as a “locker room culture” which is a culture of always trying to win and be right.

On the other hand, great investors are cerebral, relaxed and do not focus on reaching the end-goal all the time. They have a wide view of what goes on around them.

Capital allocators go into a situation to calculate the potential and walks away if the return is not there. Executors go into a situation and the only goal is to turn it around and to come out on top.

In a way, the capital allocators are the more ruthless ones. Emotionless, cold and calculated seeking a profit over ego.

Liquidity Can’t Solve a Business Model Problem

Too many times, businesses that are losing cash get happy about raising cash and continue with their model.

It’s like filling up your car with a leaking gas tank.

You won’t get far.

You need to fix the problem.

My favorite whipping boys of these types of business are the ones in retail, aviation, social media, consumer brands going against a giant without any different proposition.

Understanding Why You Made or Didn’t Make Money is More Important than Making Money

You hear this too often in the venture capitalist world.

“We got this deal cheap at 100 x sales – our competitor fund paid 200 x sales for their investment “.

This is common especially in new and upcoming industries where there are no comparable benchmarks or demonstrated track records of FCF and ROE.

This type of relative comparison and anchoring bias leads to situations where you think the investment is worth a billion dollars whereas the actual market value is a million.

Given the lack of liquidity and any mechanism to discover price, such mispricings stay hidden for 5-6 years before the entire rug gets pulled out from under your feet in one go.

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Altman Z Score is Useless? Here’s Why I’m Still Using It

Jae Jun — Wed, 08 May 2013 15:39:49 +0000

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The Altman Z score is useless.

It’s outdated.

It no longer works.

That’s what these reports argue. They say that the Altman Z method is dead and here is an honest limitation of the model.

And another really good pdf report on why the Altman Z model does not work for turnaround companies.

The Unloved Altman Z Score

where

X_1 = Working Capital / Total Assets

X_2 = Retained Earnings / Total Assets

X_3 = EBITDA / Total Assets

X_4 = Market Value of Equity / Total Liabilities

X_5 = Net Sales / Total Assets

Here are the rules for interpreting the Z score.

When Z is >= 3.0, the firm is most likely safe based on the financial data.
When Z is 2.7 to 3.0, the company is probably safe from bankruptcy, but this is in the grey area and caution should be taken.
When Z is 1.8 to 2.7, the company is likely to be bankrupt within 2 years.
When Z is <= 1.8, the company is highly likely to be bankrupt.

Does that mean the Altman Z score is useless?

Regardless of what those reports say, I still plan to use it.

The reasoning is simple. The reports above dive into the Altman Z score and concludes that the variables that make up the Altman Z score are no longer predictive of bankruptcy.

It may be true when it comes to determining bankruptcy, but for most investments, it’s the quality that matters not whether it is going bankrupt. For companies teetering on the edge of bankruptcy, you already know from the overloaded debt and other burdens that bankruptcy is a clear risk.

Think of each part of the Altman Z formula as its own separate ratio and you can see that it is indeed useful in what it tells you about the business you are looking at.

The components of the Z score isn’t rocket science. Just simple, well thought out ratios.

Let’s take a look at each of the variables and see what it can indicate in a company.

X_1 = Working Capital / Total Assets

A simple ratio to understand.

This ratio provides information about the short term financial position of the business.

The more working capital there is compared to the total assets, the better the liquidity situation.

With working capital you still have to remember two points.

Point #1: Negative working capital isn’t always bad

Companies with high inventory turnover can have negative working capital. If you take a look at Wal-Mart (WMT), it has leverage over their suppliers with favorable payment terms so their current liabilities can outweigh their current assets.

Other examples include telecom companies such as Verizon (VZ) and airlines like Southwest (LUV) and Allegiant (ALGT).

Point #2: High positive working capital isn’t always good

Just because working capital is high, it doesn’t automatically mean that it is good. It could indicate that the company has too much inventory or they are not investing their excess cash.

It all comes down to being able to interpret the financial statements instead of just taking it at face value.

X_2 = Retained Earnings / Total Assets

What is retained earnings?

It’s the percentage of net earnings that isn’t paid out as dividends, hence the word “retained” by the company. The company will use it to operate the business whether it’s to be reinvested or pay off debt.

By combining it with total assets, the purpose of the ratio is to measure how much the company relies on debt.

Makes sense.

If a company has little to no retained earnings, then it has to get money from somewhere to continue with operations. Where does that money come from? Debt or dilution.

The lower the ratio, the company is funding assets by borrowing instead of through retained earnings.

This ratio is also a cousin to the equity multiplier used in the DuPont analysis. Grab the spreadsheet while you are there.

X_3 = EBIT / Total Assets

If you squint hard enough at EBIT/Total Assets, it will look familiar.

It’s a variation of a common ratio that you see everywhere.

Don’t see it? Neither did I.

EBIT / Total Assets is a variation of ROA. Instead of net income, EBIT is used for the numerator.

The definition is the same though.

This ratio looks at the company’s ability to generate profits from its assets before deducting interest and taxes.

X_4 = Market Value of Equity / Total Liabilities

Out of the 5 components, this one is the most controversial.

This ratio is supposed to show you how much of the company’s market value could decline before liabilities exceed assets.

Yup.

This one relies on market cap, which is the stock price x shares outstanding. If the stock price is high, then this ratio also goes up.

Here are two examples

LinkedIn (LNKD)

Market Cap: 19.7B
Total liabilities: 473.9M
Market Value of Equity / Total Liabilities = 19.7/0.4739 = 41.6

Apple (AAPL)

Market Cap: 436.2B
Total liabilities: 58B
Market Value of Equity / Total Liabilities = 436.2/58 = 7.5

Mind you, in terms of PE, LNKD has a PE of 940 compared to 11 for AAPL.

I would bet that AAPL can hang around longer than LNKD despite the lower ratio.

X_5 = Net Sales / Total Assets

This ratio is just asset turnover.

I use it all the time outside of the Altman Z score as well as it is a great indicator of business quality when comparing it with previous years.

Quite simply, it is the amount of sales made by the company for every dollar of its assets.

The more money you can generate from assets, the better.

If two people have the same amount of resources, but one person is able to produce more output, that is a sign of efficiency and what this ratio measures.

There is Also a Free Spreadsheet

Now you know exactly how the Altman Z score works.

However, there is no such thing as a clear bankruptcy indicator. If there was, I’d be shorting everything and becoming the next Jim Chanos.

It all comes down to how you put it into context and make use of it. Use it blindly and you’ll get bitten sooner or later. Understand how it works, and you’ll be like the man that knows how to fish.

Put it into practice with the free Altman Z score spreadsheet you can download when you sign up with your email at the bottom of the page.

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The Value Investors Guide to Buying Illiquid Stocks

Jae Jun — Mon, 06 May 2013 08:32:05 +0000

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AEY: 9,978
GRVY: 20,003
RHDGF: 363
YNGFF: 21,209
IEHC: 2,402

These are my illiquid holdings and their respective 30 day average volume.

Scary huh?

Compare that to something like this.

AAPL: 16.84M

But I managed to buy all of them for the full position I wanted despite the low volume.

So if you buy small caps or just fear buying illiquid stocks because your money will be “stuck”, read on.

Inverting the Typical Line of Thought

Let’s do a Charlie Munger and turn the definition of illiquid stocks upside down for a sec.

Are Coca Cola, Amex, Wells Fargo and IBM illiquid stocks?

Yes they are.

To Warren Buffett they are. In fact, every stock is illiquid to him. For big buyers, all stocks are illiquid so there is no reason to believe in the myth that your money is lost because you can’t take it out.

If you manage to buy a hidden gem and the price starts to creep up, people notice and so does the volume.

With GRVY, as anticipation grew for the release of RO2, a horde of people suddenly bid the price up.

Volume spiked.

I could have sold, but I didn’t. Stupid me, but that’s a prior mistake.

Illiquid Stocks Are Not as Illiquid as You Think

Geoff Gannon has written a lot on how to buy illiquid shares, and that’s where the idea for this post came up, so I’ll be using some of the ideas that he has brought up in the past.

Say you wanted to buy into AEY.

The last closing price is $2.30 with an average monthly volume of 10,000 shares. (I’m rounding off numbers to make it easier to follow)

This means that in an average month, $23,000 worth of stock is traded. $23,000 in a month is more than enough to build a position around.

The only problem is that you aren’t the only one waiting to buy the stock. There are other smart people like yourself that knows value when they see it.

The trick is to be patient.

Put in a limit order, set it to Good Til Canceled and then forget about it. Don’t bid up the price and be the greater fool that pays the higher price.

As you can see below, illiquid stocks don’t move in a linear fashion.

Set your limit price and forget it, because there is a good chance that you will get your fill.

Ben Graham Already Taught You About Mr Market

Even for low volume stocks like AEY, there is enough volume for most investors to take a full position. Remember that the public market is like a real market.

There are buyers and sellers.

Somebody like you is on the other end, holding out their goods (the shares) for sale. Just like how you would haggle at a real market, you should do the same. Don’t accept the asking price.

Put your bid out there and if the seller is desperate and wants to clear his goods, your bid will get filled.

Too Late. You Missed Out.

The only enemy when it comes to buying illiquid stocks is yourself and the psychology of missing out. I’ve done it myself. I put in a bid and then after 30 minutes of not getting it filled, I increased my bid slowly and eventually bought at 3-4% above my initial price.

At the end of the day, the stock had actually dropped 3-4% below my initial starting price. So I’m already starting down 6-8%. Way to go.

This sense of missing out, getting urgent is what causes you to buy at a higher price.

Companies use urgency all the time making you feel like you are going to miss out.

Say you found a good looking laptop bag at Zappos.com. The quality is excellent and best of all, it’s on sale.

Bingo.

Your eyes roam to the add to cart button, but above it, there are the words, “only 2 in stock”.

Sold.

The airlines do this all the time too – “Only 4 tickets left at this fare”.

Now that you are aware of the psychological behavior when it comes to buying shares, consciously make the effort to set your price and walk away.

Do that in a live market and the seller will run out to sell his goods to you.

Tips to Grabbing Illiquid Shares of Great Companies

Always buy stocks using the limit order
Use the good til canceled option
Don’t use All or None. If you are trying to buy 1,000 shares, what’s the chance that you will get all 1,000 shares in one order? Build your position in blocks if you have to. That’s why you need a good discount broker with cheap fees like optionshouse. $3.95 per trade. Yum.
Try to keep commissions below 1% of your order. Again, it’s why I use optionshouse. As long as my order blocks are at a minimum of $400, I don’t have to worry about fees eating my returns.
Don’t bid up stocks. Set it and forget it. You should get an email notification if a trade goes through.
A stock is always liquid enough for small investors.
If the stock price of AEY is $2.30, instead of putting in a bid price of $2.30, put in something like $2.31 or $2.32.
If you want to sell a stock like AEY, put in something like $2.29 or $2.28 to make the probability of the trade going through higher.
Most important of all, chill out and take it easy.

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4 Checklist Posts Worth Your Time

Jae Jun — Thu, 02 May 2013 19:04:04 +0000

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I posted an old investing process guide and checklist of mine the other day on facebook and it got plenty of clicks so I’ll share the whole series with you.

This one is all about checklists.

Save it, print it, use it.

Investment Checklist for Stock Selection

An investment checklist based on a flow diagram. Also includes a list of items to do at each step of the analysis process.

15 Points to Look for in a common stock

The original checklist by Philip Fisher. This is a list of 15 questions you should ask for qualitative research.

40 Point Stock Selection Investment Checklist

This is an extended stock analysis checklist covering many aspects.

52 Techniques for Finding Fraud

The mother of all checklists. This is an advanced checklist because it requires lots of digging into the financial statements. The central focus is to uncover signs of fraud so any failures is a red warning flag.

Please Share if You Find this Useful

If you find this useful, please help out Old School Value by sharing this article using the social sharing buttons.

The more you share, the more I know what type of content you really like and I will be able to provide more quality content.

Value stocks in 30 seconds with the stock valuation spreadsheets

The post 4 Checklist Posts Worth Your Time appeared first on The Value Investing Blog of Old School Value.

The Importance of Learning How to Invest, Not What to Invest.

Jae Jun — Wed, 01 May 2013 06:10:11 +0000

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Jae Jun

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I am a fan of Tim Ferriss and his obsession with doing things better, smarter and more efficiently.

Reading through some old material related to The 4 Hour Chef, it is amazing to see examples of ordinary people doing extraordinary things.

A 132lb girl deadlifting 400lbs
Shinji Takeuchi, a Japanese man who started swimming at the age of 37, is the #1 watched swimmer on youtube. Blows Michael Phelps and Ian Thorpe out of the water. But why?

The theme throughout Ferriss’ book is that ordinary people can excel beyond the pack and achieve phenomenal tasks by knowing how to train instead of what to train.

I found myself thinking how relevant this information is for people wanting to learn or get better at investing.

A lot of investing blogs, books, papers and other materials tell you what to learn, but not how to learn it.

This simple concept can be the difference between struggling for years to break through a learning plateau and leaping through it into newfound confidence.

Too Many Big Ideas

As much as I admire Buffett, the only difficulty that I have with his letters, speeches and books about him is that there is no real practical information on how to invest for the small investor.

This goes for a lot of the value gurus. It is understandable because gurus have moved onto a different level and have different agendas. They don’t have the luxury of writing weekly newsletters or blogs to explain every detail.

This is why, when they do put out reports, books, paper, interviews etc, it is all based on big ideas. Nothing small and actionable enough for people like you and me to handle easily.

The Investment Gurus are Cursed

To really improve your investing, you have to understand that Buffett was going to be successful no matter what happened. He was born with investing and businessman blood.

Ask the most muscular guy in the gym how he works out and do the same routine. It won’t work for you. The gym guy was born with great genes, while some people gain weight just drinking water and others find it difficult to gain and maintain muscle unless they consume 4,000 calories a day and ultimately become sick.

Same concept with the gurus. They may be gurus but they are cursed.

They have the curse of knowledge. They forget what it’s like to be a beginner.

I once listened to my vet talk for one hour about the structure of my dog’s teeth and the surgery involved. All I realized at the end was that my wallet was $1,000 skinnier.

Buffett is a great role model for analysts and investment managers, but not a relevant role model for retail investors who are trying to get to know more about their own stocks. He was born to be an investor, as this timeline of his life shows.

His words are gold, but it can confuse and mislead you unless you know exactly what context he is talking about. After he says something, there is still great debate about what he meant.

You need to find the Shinji Takeuchi’s of the investing world because you will learn exactly how to invest through these people.

There is no confusion. It’s just clear.

It’s people like Joe Ponzio of F Wall Street that you need to identify and cling to.

My Personal Story

If you are fairly new to old school value, you may have the wrong perception that I’m some smart numbers guy. That couldn’t be further from the truth.

I didn’t study in the USA, and if I converted my academic score to a GPA, it is probably between 2.5 – 2.8.

As you can see, I didn’t thrive in my studies. The world is full of people smarter and better than I.

Combine that with never having taken any finance, business, accounting or economics classes and it’s amazing to see how I got here.

It just turns out that the educational system does not suit my style of learning.

It was only after I figured this out, that things started to turn around because I found a method that worked for me.

So What’s my Secret?

First, take a look at this familiar question from Quora.

I’m 18 years old and want to learn how to invest my money. How do I get started?

Here is the top rated answer.

Great advice?

If I was that 18 year old, would I follow that advice? Absolutely not.

Although the very first investing book I read was the Intelligent Investor, it was a horrible experience. I didn’t understand anything, the text was extremely dry and there was no practical advice that I took from it. The only thing I remember is the concept of Mr Market. Nothing else.

My secret?

It all came down to how I learned. Not what I learned.

I realized I needed to write notes to organize and clarify the jumble of information I had been reading. I started with this blog and publicly posted notes, articles and analyses for critique. I got slammed and chewed in the beginning, but it helped with learning and growing a thicker skin.

The second vital part was realizing that investing is extremely tedious and redundant. Being an efficiency nut, I needed a way to simplify and speed up repetitive tasks.

That’s when I started making excel spreadsheet models like the ones you can download for free by signing up with your email. In the process of building financial models, I combed through books and technical papers to understand how a specific model worked.

Figure out what your strength is and twist it in a way so that you can apply it to investing.

Know Your Strengths, Weaknesses and Situation and Take Advantage of It

Make investing relevant to your interests.

Just want get better at writing investment analyses?

Find a stock analysis style that you like, break it up into manageable sections, find the information and fill up the sections.
It will get better the more you do it.

Are you a small business owner?

Think of your business as a public company instead of a small family business.
Find public companies in the same industry and see how they run the business.
What key performance indicators are important?
Learn the strategies and competitive advantages
Go through your accounting books and try to convert it to a full set of financial statements

In no time, you’ll be an expert in your industry and will be confident in analyzing and investing in such companies.

Same thing applies to any day job. Don’t just do it. Think of yourself as the CEO and look at the bigger pictures.

Do You Handle the Money in Your Home?

Personal finance is just like a business. Think of your household as a business.
Go through your bank statements and try to create your household financial statements.
Budgeting, projecting, allocating, depreciating is something you do everyday already. Why not think of it like managing a business?

Here’s what I did to monitor my household cash flow using a cash basis method.

Are You a Programmer?

Why not try to program simple tasks? That’s what I did with my spreadsheets.
Create an easy investment game
or just a simple stock portfolio spreadsheet

Don’t Have a Good Memory or Weak with Numbers?

Don’t try to improve your memory.
Investing math is just plus, minus, division and multiplication.
Create a simple glossary of the terms that you hear and use all the time from investopedia. Keep it as a cheat sheet. This isn’t school. It is encouraged.

Never Have Enough Time?

I recently hired a part time virtual assistant for $300 a month. A part time employee for $300 a month is a steal.
My virtual assistant goes through company reports, writes up point form summaries which I can read and analyze quickly.

Do You Travel Regularly?

Get some audio investing books and listen to it on the road.
Convert Khan Academy youtube videos to MP3 format and take it with you.
Download podcasts like Sound Investing by Paul Merriman that are short and focused on specific topics.
There are lots interesting people at the airport. Find someone reading investment news and talk to them.

Or Start Your Own Simple Business

By starting even something small and insignificant like selling on ebay, you will learn about an entire industry.
Try to import something cheap and sell it on ebay. You’ll learn what companies have to go through in the import/export business. Or just try to sell things around the home.
Selling on ebay requires that you know how to position your product, market it, word it and make a successful sale.
Shipping multiple items gives you insight into the shipping industry.
Starting your own business opens a can of worms and you will be a better investor for it.

There are Countless Possibilities

I don’t know everything about your situation so it’s difficult to try and come up with a recommendation for every scenario, but you get the point.

No matter what your skills are, there is a way you can benefit from learning how to invest. And best of all, doing it your way will make it stick.

Make Use of How to Tutorials

Still not sure? Then start with these topics and keep filtering down.

How to value stocks
How to perform financial statement analysis
Learn the specifics of accounting concepts for investing
How to improve productivity in investing

Summing Up

Learn the how, not the what.
Follow and learn from people who are like you but managed to make the jump to elite status. These are the people who will understand your situation and can help you get to the next level.
Gurus are not good role models for the layman.
You know what you are good and bad at. Use it to your advantage and make it relevant to investing.

Value stocks in 30 seconds with the stock valuation spreadsheets

The post The Importance of Learning How to Invest, Not What to Invest. appeared first on The Value Investing Blog of Old School Value.

You Missed Out on Visa and Mastercard. Then Keep an Eye on This One.

Jae Jun — Mon, 22 Apr 2013 10:00:13 +0000

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Jae Jun

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Here’s an analysis of a company that I came across which I struggled to value at first. But as I continued to read and learn about the industry, it continued to raise my interest. Take a read and see whether this is an idea that can suit you at the right price.

Quick Summary

FleetCor is a company with a strong moat in an attractive industry and performing well for shareholders.

The company has more room for growth but some questions have to be asked as to whether this will make it a good investment.

What is FleetCor Technologies?

Having missed out on Visa and MasterCard, stumbling upon FleetCor is a pleasant surprise.

FleetCor Technologies is a company that provides fuel cards and payment products used by employees. They also have lodging cards, but since the overall concept is the same, I will focus most of the discussion on fuel cards.

The important thing to understand is that although I’ve included Visa and MasterCard into the conversation, fuel cards and credit cards are different in many ways.

First, what is a fuel card?

Differences Between Credit Card and Fuel Card

A fuel card, as the name suggests is mainly used for fuel.

Companies that require lots of travel in their line of work gain a lot of benefits with issuing fuel cards to their employees instead of standard credit cards.

Here are the pros and cons taken from wikipedia.

Pros:

Discount fuel prices (i.e. wholesale prices)
Ability to choose from multiple providers like Shell, Esso, Keyfuels, Texaco etc. This enables better pricing due to competition.
Need for carrying cash (or giving cash to drivers) eliminated
Prevention of fraud
Increased security
Filling patterns can be customized by Smartchip technology
Fleet efficiency & MPG reporting
Reduced administration via management tools
Ability with some card management tools to capture private/business driver mileage split

Cons:

Card stopping/cancellation periods can sometimes be longer
Greater liability for fraudulent transactions often placed on customer
Credit periods typically shorter
Retail cards typically offer pump prices (usually higher than wholesale) and occasionally additional surcharge
Annual or monthly card provision charge sometimes applied (usually bunkered)

The pros far outweigh the cons and should now provide a clear picture of the business model.

FleetCor’s Business Model is a Competitive Advantage

FleetCor has been around since 2000 and has grown mainly from acquiring smaller fleet card companies around the world.

The company does business in over 18 countries and such an extensive network of where its cards are accepted that it would literally take a decade to replicate anything in the same size and scale.

There is also switching cost involved in such a network. Once you have gas stations equipped with hardware and software to work for these type of fuel cards, it’s very difficult to switch.

It’s different to just accepting credit cards and performing transactions.

Based on the data that fuel cards track, the data provided to the system from every gas pump is much more than the average credit card transaction.

This is a Very Profitable Business

Visa and MasterCard are very profitable businesses. They receive a percentage in fees for every swipe.

Since I sell stock valuation tools on this site, I have to accept credit cards. So I understand how powerful this industry is in terms of profitability.

The fee per swipe racks up and I understand why little mom and pop shops don’t like to take Amex cards or why they make you spend at least $10 before you can use a credit card.

Actual numbers showing profitability can be seen below.

High Insider Ownership is a Good Sign

The CEO holds a 5.5% stake in the company of a current $6B company which is more than $300m.

Two members of the board are also part of Summit Partners which owns 28% of the company.

These insiders have a strong interest in the company and with key investors on the board of directors, it’s pretty clear intentions are aligned with shareholders.

There are Always Risks

The majority of FleetCor’s revenue is dependent on fuel prices. Since they receive a percentage of the sale, if fuel price drops, then the fee also decreases.

I don’t see this playing out though. As the government continues to bring in more regulation and stricter practices, the cost to refiners will go up which will get passed onto the customer at the pump.

Another big risk is from competition. If companies like Shell or BP really get aggressive and try to launch their own version of the fuel cards and prevent their gas stations from accepting FleetCor’s cards, it will be a huge blow.

But this is something that the management have always known about and although it’s been tried before, it has not succeeded.

The balance sheet is full of goodwill and intangibles from all the acquisitions. It makes up 51.1% of total assets and the debt to equity ratio is at 71%.

Fundamental Numbers

What better way to identify profitability than ROE and CROIC which is an improved version of ROIC.

Some numbers to bring it all together.

Strong returns for any business but let’s take it a step further. I have been using the DuPont method a lot to really dig into whether the ROE is organic or artificial.

The five step DuPont analysis shows in better detail that the drivers behind the ROE increase comes from an increase in operating margins and an increase in debt.

If I were to decrease the equity multiplier from 2.98 down to 2010 levels of 2.3, the ROE goes down from 23.7% to 18.3%.

Brief Valuation

With the company still growing and investing cash for growth, using the standard DCF valuation is not the best idea.

A better way to value FleetCor would be based on its income statement.

Here is an EBIT multiple calculation assuming 20% revenue growth in the next year.

Based on this valuation, even by using the aggressive assumptions, FLT looks to be overpriced at this point.

Overall Verdict

A picture is worth a thousand words.

Summary

FleetCor has performed amazingly for shareholders since its IPO in December 2010 but rather than just jumping on board, I am watching this from the sidelines.

The business is attractive but the price paid determines whether a stock is a good or bad investment.

At current prices, I have to make aggressive valuations and assumptions but still it falls short of the desired valuation range.

I will gladly put it up on my watchlist though.

Disclosure

None

Value stocks in 30 seconds with the stock valuation spreadsheets

The post You Missed Out on Visa and Mastercard. Then Keep an Eye on This One. appeared first on The Value Investing Blog of Old School Value.

The Book that Changed Warren Buffett’s Life

Jae Jun — Fri, 19 Apr 2013 07:10:52 +0000

5 Minute Video on the Book that Changed Warren Buffett’s Life

In 5 short minutes, Buffett talks about:

how this book changed the way Buffett’s investment philosophy
Buffett went to work for Graham for free but was told he was overpriced
Just being around Graham everyday was a life changing
Graham influenced security analysis but he was also generous

Charlie Munger Reveals Secrets to Getting Rich

A 10 minute interview with Charlie Munger where he discusses:

that if you can’t stomach market volatility, you shouldn’t be a shareholder
how political idiots get in control
on Alan Greenspan and the Federal Reserve
Wall Street culture
and other topics where he gets straight to the point

Value stocks in 30 seconds with the stock valuation spreadsheets

The post The Book that Changed Warren Buffett’s Life appeared first on The Value Investing Blog of Old School Value.

[Video] Is For-Profit Education Profitable? ITT Tech Valuation

Dan Myers — Thu, 18 Apr 2013 08:30:24 +0000

by Dan Myers

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There is a lot of controversy on whether or not the profit motive should play a role in the education of society.

Those against it claim that corporations will just churn students through and not care whether or not they actually learn.

The pro side claims that if the corporations do not create value for the students, long term profits would decline and thus there is a motivation to provide the best education possible.

As that battle rages on, for profit education companies have taken a beating in the market. Those on the negative side seem to have the upper hand today.

The question now becomes: Is this the “blood on the streets” time to buy into these companies or is this the next buggy whip industry?

Introducing ITT Educational Services (ESI)

ITT Educational Services, commonly known as ITT Tech, provides post high school education in various fields.

Their programs range from Information Technology, Electronics, Drafting & Design, Business and Nursing.

ITT Tech has been around since the 1940’s so they have a well-established brand and business model.

What’s Explained in the Video

ITT Tech’s business model
Review of their financials
Why a high debt ratio is different from debt to free cash flow
Why there is a drop off in revenue recently
Valuing a business based upon only the parts we think are viable
The risks inherent in the education industry
Identifying businesses as Graham value investments vs. Buffett value investments

Enjoy the Discussion on ITT Tech

Part 1 | Part 2 | Part 3

Value stocks in 30 seconds with the stock valuation spreadsheets

The post [Video] Is For-Profit Education Profitable? ITT Tech Valuation appeared first on The Value Investing Blog of Old School Value.

4 Vanity Metrics that Feels like Investing but Means Nothing

Jae Jun — Tue, 16 Apr 2013 18:10:54 +0000

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Being able to take things into context is important.

Many companies and investors love to throw around numbers that sound impressive, but it ultimately means nothing.

In other industries, it’s called vanity metrics. Not sure what it’s called in finance.

Let me give you an example of a vanity metric.

The average time a visitor spends at oldschoolvalue.com is 2min 49s per visitor compared to 1min for other sites.

This means OSV is performing better than the average site by 183%.

Impressed? Don’t be, because it means nothing.

A visitor could have stumbled upon this site, started clicking all sorts of things, go for a coffee break, or simply wait for some big files to download.

Same concept with investing. Many companies boast about earnings growth, subscriber growth or improving operations, but these are just “power” words. Words meant to convey importance without much context or relevance.

Vanity Fundamentals and Investing Ratios

Previously I wrote about why you need to learn accounting.

To sum it briefly, it is the language of business. If you want to live in a foreign country, you must learn the language to be able to understand and interpret it.

Knowing the accounting concepts is like knowing the business vocabulary, but the important part is knowing how to interpret it.

Having a good understanding of accounting and how it all ties into business will help you avoid vanity fundamentals and investing.

But there are still fundamentals and ratios that

mislead investors
do not add value
should not be used on its own

Some Examples of Vanity Investing Ratios

I do use the below ratios but I want to show you the proper way of using it.

EPS (Earnings Per Share)
PE (Price to Earnings)
PB (Price to Book)
ROE (Return on Equity)

Vanity Metric #1: Earnings Per Share

Earnings growth. Loved by Wall Street and most investors, but it really doesn’t tell you much.

There is so much to earnings, but boiling it down to just a single value is overkill. The important factors have been eliminated and looking at earnings growth as a measuring stick for business growth is pure vanity.

Look at the following two companies.

Company ABC and Company XYZ both achieved $100k in earnings from $1m in revenue.

Now look at the two companies again.

Company ABC achieved revenues of $1m and net income is $100k.
Company XYZ’s revenue came in at $800k with other income of $200k making up a total of $1m revenue. Net income is also $100k.

With this extra information, you can see how different the two companies are. But most people simply look at the earnings line and judge the company based on a single number without taking the number in context.

For this reason, when it comes to judging EPS, I always recommend the book Quality of Earnings. It goes into great detail of how to adjust the EPS to factor in changes due to tax rates, non-operating and non-recurring income.

Instead of taking EPS at face value, go beyond the vanity number and get to the core metric.

Look at earnings growth next to account receivables growth and inventory growth to see trends in the business.

You could do something like the format below to better gauge the business.

Owner earnings is an alternative to earnings you can use.

Vanity Metric #2: PE Ratio

On its own, the PE ratio is absolutely meaningless.

It is a relative measure so it is only useful when you compare it to another PE ratio. Plus, it is difficult to figure out what a company is worth with just the PE ratio.

The best it can do is give you an approximation of whether the stock is cheap or expensive.

Somebody telling you that Netflix is a sell because it has a PE of 609 sounds smart, but it doesn’t answer questions such as what the fair PE is and why the PE is so high to begin with.

The PE ratio is just Price divided by earnings per share and you just read what I thought on EPS. This is why PE is just as useless as a standalone investment ratio. It is the most misleading, misused and abused metric.

Instead, you could use something like the Absolute PE valuation method. This method forces you to think about the different aspects of the business and growth to determine the fair value PE which you can then use to judge whether the stock is over or undervalued.

Or consider using alternatives like P/FCF or EV/EBITDA. Both are similar but offer more insight.

Vanity Metric #3: PB Ratio

Here is one more inclined to value investors but still often misused.

One thing is that Graham never spoke of finding just low PB stocks. He specified net net stocks because he wanted companies trading at a low price to tangible assets.

Graham even took it one step further by looking for net net working capital stocks where assets are of high quality and easily convertible to cash.

With that in mind, when looking at PB, it’s always best to eliminate intangibles and goodwill from the equation.

Unless you are dealing with a company where the brand sells itself like Coke, Pepsi and Windows, or necessary for business like Expedia (EXPE), most goodwill and intangibles is not as valuable as the company makes it out to be.

Best thing to do is remove it.

PB would then become Price to Tangible Book which depicts a much clearer view of the company.

Vanity Metric #4: ROE

You may be surprised that ROE is on this list. If I wrote this one year ago, it wouldn’t be on here.

Although ROE is a very helpful measure, it can do better. By understanding the drivers behind ROE it goes from an OK metric to a powerful one.

The best way is to use the DuPont analysis to break up ROE into 5 segments as shown below.

Via the five step model, the interest burden is increasing, but the main culprit is due to a decline in operating margins.

By using ROE alone, you may have deduced that the company is just doing poorly, but by dissecting the vanity metric, you get to see that the core operation of the business is leading the drop in ROE.

Also consider using CROIC as well as ROE with the DuPont analysis.

Bringing it Together

It is very important that you don’t just accept data at face value. Take things into context. You invest to make money.

There is no need to start with a conclusion and then pick data to match your conclusion. I’ve only lost money that way.

One of the quickest ways is to find the metrics that you think if important and really ask yourself whether it adds value to the overall investment.

If you saved a stock analysis and looked at it again 30 days later, are you confident that you will know why you saved it in the first place?

This is a problem I see with Wall Street analyst reports. I try to read it again a couple of months later and I have no idea what the report is trying to say because the numbers are filled with sales growth of 25%, earnings growth or 19% year over year. Impressive but fluffy duffy stuff.

Please Share if You Find this Useful

If you find this useful, please help out Old School Value by sharing this article using the social sharing buttons.

The more you share, the more I know what type of content you really like and I will be able to provide more quality content.

Value stocks in 30 seconds with the stock valuation spreadsheets

The post 4 Vanity Metrics that Feels like Investing but Means Nothing appeared first on The Value Investing Blog of Old School Value.

Free Personal Finance eBook and Sound Investing Podcast

Jae Jun — Thu, 11 Apr 2013 17:55:58 +0000

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I have a treat for you today. I had the pleasure of speaking with Paul Merriman this week and wanted to share some content that he has available.

Paul is a retired financial advisor and also the author of several personal finance books including Financial Fitness Forever.

What I admire most about Paul is that he loves to teach and share. He is also retired so 100% of the money he earns through book sales and royalties goes directly to his foundation dedicated to financial education.

I want to highlight two pieces of content.

But first..

Who Will Benefit Most from the Below Resources?

The content is mainly focused on personal finance. It is great for

People who don’t know much about finance
New investors
and retirees

If you know of such people, feel free to pass the message along.

101 Investment Decisions Guaranteed to Change Your Financial Future

Download a free copy of the book. It’s an easy read with 101 short pieces of personal finance advice.

It answers a truckload of questions that any new investor or retiree may have on their mind.

Sound Investing Podcast

Mr Merriman is also the voice behind the Sound Investing podcast which you can also listen through iTunes.

Voted best podcast by Money in 2008, the podcast comes out weekly, with plans for 3 podcasts per week a little later in the year.

Some topics that the podcast covers include

How much higher can the market go?
Is it time to sell gold?
10 things every investor should know
2012 in review: how did my predictions do?

Great sound advice. Pass it on.

Please Share if You Find this Useful

If you find this useful, please help out Old School Value by sharing this article using the social sharing buttons.

The more you share, the more I know what type of content you really like and I will be able to provide more quality content.

Value stocks in 30 seconds with the stock valuation spreadsheets

The post Free Personal Finance eBook and Sound Investing Podcast appeared first on The Value Investing Blog of Old School Value.

2013 Q1 Value Stock Screen Performance Summary

Jae Jun — Mon, 08 Apr 2013 07:02:57 +0000

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First quarter down and three to go.

Here are the Q1 2013 performances for the value stock screens. Follow the link to get an overview of each screen.

To see how the markets and the rest of the world has been doing, this is a short excerpt on the world market performance that I took from Adrian Day’s Q1 letter (pdf). (Adrian Day is a fund manager in the resource sector that I follow)

The U.S. stock market rose by just over 10% for the quarter, while the world outside the U.S. was up just a tad over 2%. Most of Europe was down (though the markets outside of the Eurozone—including Britain, and especially Sweden and Switzerland, were up), while Asia was mixed, with Japan and Australia up strongly, but China, Hong Kong, India and many other markets down. Emerging markets in general fell around 4%, but the performance was very mixed, with some smaller Asian markets (Thailand, Indonesia) up strongly. Interestingly, it is defensive stocks that have generally performed best in the recent market rally, the opposite of what one might expect at the early stages of a long run.

That’s it for the macro side. Back to the screens.

How the Screens are Set Up

Each screen consists of 20 stocks
Slippage ranges from 1% for screens with mostly large caps to 3% for small cap screens
Carry cost is 1.5%
Long weight is 100%
Rebalancing only once a year

These settings make a huge difference between the screen performances I put up with what you see on other sites. The above settings make it much more realistic when it comes to trading or following the screens.

Four of the screens are in the 10% range after fees and two screens have lost money so far, which is not bad.

But remember, even though everyone is making money except you, it is ok.

Stocks from the Top Two Screens

In the following section, I’ve provided the stocks that make up the top two screens.

20 stocks for each, so 40 stocks to go through quickly or keep an eye on.

The 2013 NNWC Increasing Screen Stocks

This screen displays companies with positive and increasing Net Net Working Capital (NNWC) compared to the previous quarter.

Such companies have been able to increase cash, accounts receivables and/or inventory at a much higher rate than debt.

NNWC = Cash & Equivalents + (Accounts Receivables x 0.75) + (Inventory x 0.5) – Total Liabilities

The 2013 Low Expectations Screen Stocks

A screen for companies where PE is between 7 and 8.5.

Benjamin Graham said that 8.5 is the PE of a stock with zero growth. If a company is being priced for zero growth, the downside is protected as the market has given up on the company. Conversely, any upside the company displays will surprise the market and shoot it up.

Value stocks in 30 seconds with the stock valuation spreadsheets

The post 2013 Q1 Value Stock Screen Performance Summary appeared first on The Value Investing Blog of Old School Value.

On Becoming a Successful Investor, Learning Accounting and How to Write

Jae Jun — Fri, 05 Apr 2013 09:13:12 +0000

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This is something new that I’m trying out. Providing responses to emails on the blog or highlighting some helpful forum posts as I’m sure there are people with similar questions.

Journey to Becoming a Successful Value Investor

A question came up in the forum that resonated with me.

In my journey to become a successful value investor I am having trouble retaining knowledge, whether it be from reading, watching lectures, or researching companies. What are some methods that have proven effective to retain knowledge? Do you have any suggestions on how expertise can be developed in the most efficient manner?

To view the answer, follow this link.

How to Learn Accounting if You have No Finance Background

Hey Jae,

I was wondering if you had any insight, or could speak from your experience on how you learned about accounting and how to interpret financial statement. You mentioned the book, The Basics of Understanding Financial Statements, which is a very good recommendation.

Just wondering if you could recommend any other books or have any suggestions. I know you come from an engineering background, and I’m assuming you never took courses on finance and accounting, so I thought you would be a good person to ask being that I lack the experience in these subjects as well.

Keep up the good work with the blog, and thanks for all the free content.

Spot on. I’ve never take a course in finance. If you are asking questions, you are eager to learn and that’s all you need. If I can do it, so can you.

But here’s some practical advice.

Start with the list of best investment books on value investing. It has been arranged from easiest to hardest and six out of the ten books focus on accounting and interpreting financial statements.

Don’t bother reading The Intelligent Investor or Security Analysis yet. I don’t recommend it. You won’t make it through. I literally fell asleep every time I picked it up. Took me two months to skim through the Intelligent Investor.

The biggest obstacle I had to overcome was interpreting the financial statements for investing. To do so, you have to have a firm understanding of accounting.

After all, accounting is the language of business.

Try going to a foreign country and not being able to speak their language. It’s tormenting.

Just because we speak about investments in English, it doesn’t mean it is correct. Learn the business language.

Many books only go as far as telling you to look for companies with low debt and growing cash, but that doesn’t mean much. Anybody can understand business with low debt and increasing cash flow.

However, what does it mean when raw inventory materials is up but works in progress is down?

If the percentage change in accounts receivables grows faster than sales, what does that mean?

These are things that accounting books won’t teach you, because accounting is like a dictionary. It’s the interpretation that brings the language to life.

Writing Difficult Concepts in an Easy to Understand Way

Hi Jae,

I have been your reader for almost 3 years, and I really enjoy reading your articles. Given English is not my first language, so it is not always easy to understand everything, but your articles have always been very clear and informative.

Is there some advice you could give in terms of how to write things the way you write ?

The question is actually deeper than a basic English question. Follow me through this and you’ll get the point.

The objective of the question: find out how to write difficult topics that are easy to understand
Other information: English is not primary language, wants to learn how to write, wants to write in a style that is easy to understand

See what I just did?

Given the information from the question, the objective was identified and then the information is broken down into manageable pieces.

In doing so, I’m trying to take a step back to understand who you are first and what your goals are before getting to the problem.

Just as I’m trying to understand who is sending this email, when writing, you must always start with knowing who you are writing for.

The key is to also understand that it’s never about you. It’s always about the reader.

The objective of this blog is to write for those who want to understand financial mumbo jumbo in a way that they can understand and I write like this because I was in the very same situation so I know how to frame it for the reader that stumbles on this site.

My writing style for the web can be broken down into the following:

Start with a big idea you want to write about
Write in a sequence of what should happen – just like a how to manual
Use lots of headings – more the better
Write like you talk
Keep sentences short
On the internet it is better to have one sentence paragraphs than blocks of text
Know your material
Use visuals wherever possible

Believe or not, two of the most popular articles are on accounting topics.

Analyze how I wrote those articles and you’ll see the pattern.

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The post On Becoming a Successful Investor, Learning Accounting and How to Write appeared first on The Value Investing Blog of Old School Value.

The 3 Most Profitable Criteria of the Piotroski Score that Beats the Market

Jae Jun — Wed, 03 Apr 2013 09:14:13 +0000

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The Piotroski Score is a great system to use when looking for solid companies with improving financial conditions.

A free Piotroski spreadsheet is available for you to download if you sign up to this blog with your email. Actually, you will receive a total of 9 free stock spreadsheets for your troubles.

The original Piotroski scoring system however, centers on the following nine criteria.

The Original Piotroski Scoring System

The first four criteria of the Piotroski Score count towards profitability.

1. Positive net income compared to last year
2. Positive operating cash flow in the current year
3. Higher return on assets (ROA) in the current period compared to the ROA in the previous year
4. Cash flow from operations greater than Net Income

Points 5-7 of the Piotroski Score, looks at the health of the balance sheet in terms of debt and the number of shares outstanding.

5. Lower ratio of long term debt to in the current period compared value in the previous year
6. Higher current ratio this year compared to the previous year
7. No new shares were issued in the last year

The last two factors of the Piotroski Score looks at operating efficiency.

8. A higher gross margin compared to the previous year
9. A higher asset turnover ratio compared to the previous year

Boiling Down the Piotroski Score

But I wanted to see if I could simplify this list and boil it down to the most profitable combination which I described in a previous Piotroski backtesting post.

Ultimately, the original 9 points can be boiled down to just three criteria.

By looking at these three criteria alone, you would never guess that it was based off the Piotroski score.

The 3 Most Profitable Criteria of the Piotroski Score that Beats the Market

This is as simple as it gets. No need for complex black box algorithms. No need to sign up for newsletters that claim market beating performance for just $1,000 a year.

Simple ideas are often passed by because it looks too… easy.

#1: Positive net income compared to last year

#2: Higher current ratio this year compared to the previous year

#3: A higher asset turnover ratio compared to the previous year

The above points really focus on three simple concepts.

1. Increasing earnings

2. Improving financial condition

3. Improvement in efficiency

If you think about this from a business perspective, it makes a lot of sense.

A business increasing net income is always a good sign. It is increasing its business presence, or creating new accounts, or expanding to new territories.

If the current ratio has improved, the asset base has increased as a result of better cash flow and/or working capital management.

Higher asset turnover is an awesome sign in any business. The more asset you turnover, the more cash flow you build, the quicker you can convert inventory to cash and boost productivity and efficiency. It opens the door to things like negotiating better terms with suppliers and buyers and bringing down cost of production.

When you think of the the above three criteria in relation to stocks, it may be oversimplified, but when you tie it in with a real business, there is actually a lot of deep meaning behind it.

How Has the Best Piotroski Criteria Been Performing?

From 2000 to 2012, this strategy has returned 123.64% compared to the SPY’s 22.39% and Russell 2000′s 95.91%.

For the full performance of how this screen has been performing, you can see the stats over the past 10 years from the value stock screener page.

So far for Q1 of 2013, this strategy has earned 11.33%.

Below is the list of the 20 names and their respective performance which makes up the 11.33% performance.

10 Stocks That Meet The Best Piotroski Criteria

Here are 10 stock ideas for you to ponder that meet the criteria of

#1: Positive net income compared to last year
#2: Higher current ratio this year compared to the previous year
#3: A higher asset turnover ratio compared to the previous year

View the full list and more with the following two links.

Disclosure

No positions

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The Practical Guide to Finding Stock Ideas

Jae Jun — Mon, 01 Apr 2013 07:06:21 +0000

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One area that most investors find difficult is finding stocks to analyze. It really isn’t difficult though.

Keep a pen and paper handy throughout the day and by the time you go to bed, I’m sure you will have at least 10 names to look up.

The secret is keeping it simple.

The Investing Funnel of Stock Ideas

Finding investment ideas is like using a funnel.

If you start with 30 stocks and you believe that 20 are worth further investigation, you have either discovered a secret formula that you should patent immediately and sell to make your millions, or you are simply doing it wrong.

Here’s an image I found similar to what should happen.

You want to be able to toss the losers and keep the potential winners. If you have a set investing method that you stick to, even better. This is where an investing checklist will come in handy. You can quickly eliminate stocks that fail to meet your criteria.

Say you like to investing in Buffett type stocks, make a list of the main criteria that a company must pass and use it to filter down the list of ideas.

I mentioned in a previous article discussing the Benjamin Graham Investing Checklist, where Graham and Walter Schloss spent all day filling in number of companies into their checklist to filter investment ideas.

He [Graham] and Walter collected numbers from the Moody’s Manuals and filled out hundreds of the simple forms that Graham-Newman used to make decisions – pg 185 Snowball

Doing it like this will let you filter that list of 30 stocks down to 2 or 3.

The Practical Guide to Finding Stock Ideas

But you still want to know where to find the initial 30 stocks?

Do this first if you haven’t.

Create a bookmarks folder in your browser or use something like diigo or evernote to save the sites I list below. Don’t over bookmark or over save stock ideas online. You’ll just get information overload.

Now visit the following sites to get your list of stock ideas. Each site has its own investing style, so look through it and select the list that best suits you. Don’t be like me and try to go through everything. I only have to because I need to keep this blog fresh.

10 Websites Offering Extensive Stock Ideas

AAII Shadow Stock Portfolio : AAII’s own flagship portfolio. You can access the list for just $29 a year. They have a very good list of value orientated stocks. The stock selection criteria can be found from this link. I was so cheap, it took me 2 years before I paid up. Nowadays, I’m willing to pay for anything that will save hours of my time instead of wasting time performing tasks that don’t add any value or amount to much.

AAII also has 78 pre-defined screens but I do not recommend their stock screens.

Cheap Stocks Blog: Purely cheap stocks. Mostly small caps. The portfolio has some serious alpha. I’m amazed at how his picks continually do so well.

Earnings Torpedo: Created by the Ross School of Business from the University of Michigan. A list long and short ideas. The stock selection criteria is unknown.

Fortune 100 Best Companies to Work For: Not all publicly traded but if a company gets on this list, the employees are happy. If employees are happy, business tends to do well. If business does well, then you make money.

Forbes 100 Best Small Companies: One of my favorites. Most are high flying small growth stocks which I like to keep an eye on in case it crashes for some reason.

Forbes Most Innovative Companies: List of fast growing companies from around the world.

Forbes World’s Biggest Public Companies: If you prefer large caps.

GuruFocus: Find your favorite investing guru and see what he holds. Get ideas from the pros. Requires an annual membership.

Old School Value Pre-definded Value Stock Screeners: 14 pre-defined lists focused on value strategies ranging from small to large caps.

TheLion.com Highest Gainers and Losers: Watch which stocks jump or fall to get ideas.

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3 Quality Investing Lessons and Videos on this Good Friday

Jae Jun — Fri, 29 Mar 2013 09:16:51 +0000

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As I prefer not to blast emails out during the week just to share links, if you want more frequent quality links throughout the week, make sure to connect with me on:

This weeks links come from Value Conferences, run by the guys at The Manual of Ideas.

Quality, quality stuff here. Don’t expect anything else from these guys.

I’m positive you will enjoy these and you will definitely take something away after watching the videos.

Investment Presentation on Amerco (UHAL) by Kerrisdale Capital

Sahm Andrangi is the guy who has become famous by shorting Chinese reverse mergers.

His fund, launched in July 2009, was up 787% net of fees through December 31, 2012, trouncing the S&P 500 Index, which is up 67% during the same period. I don’t think any fund has been able to match their performance over the same period.

Why Investing in Cyclical Businesses can be Very Profitable

Rahul Saraogi, managing director of Atyant Capital, makes an eloquent case for cyclical businesses, not because he believes them to be superior in quality to franchise businesses, but because some cyclicals possess attractive but overlooked business model features.

A Compelling Special Situation Investment in Asia

Benjamin Koh, who graduated from Stanford University in 2002 and founded Lighthouse in 2008, is one of the best “undiscovered” investment managers in Asia.

He discusses why he likes K1 Ventures so much and the specific drivers of this investment.

How to Get Up to Date Video Presentations from the Best Investors

If you like these videos, you should check out the presenters for upcoming events at Value Conferences.

Had you signed up and took action in investing alongside Kerrisdale Capital when they presented their thesis on UHAL at $130, you would be sitting on a nice gain which more than covers the cost of the event.

If you prefer to wait and see what videos come up for free, visit beyondproxy.com.

Somehow I got on their mailing list so I’m enjoying the quality content they send me.

Good Friday Reflections

It’s been a busy seven days.

My car window was broken and the thief took off with my computer bag. Also turns out he broke another nearby car window too. Thankfully, I left my laptop and important stuff at home so I just lost my favorite bag. I’m still monitoring craigslist hoping that he puts the bag up for sale online.
My wife’s happy 31st birthday.
Seattle saw its first snow of 2013 which lasted for about an hour. But I was scurrying to buy frozen yogurt, then eating it in the cold and somehow caught a cold which in then decided to turn into something else and I lost my voice for a day.

But, today is Good Friday and to me that more than makes up for everything. If you are unfamiliar with Christian traditions, today marks the day Jesus died on the cross as a sacrifice for us.

This brought me back down to earth from wanting to punch that thief in the face.

After all, it was my fault for leaving my bag in the car and the poor guy must have really needed the money. Just like how Jesus forgave me, the only thing I can do for that guy now is to forgive him and hope that he gets a few bucks out of my bag and uses it in a good way.

Whether you celebrate Easter or not, have a good weekend and enjoy the material.

I’ll be out taking photos of the cherry blossoms in Seattle and practicing on my punching bag, just in case ;P

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The post 3 Quality Investing Lessons and Videos on this Good Friday appeared first on The Value Investing Blog of Old School Value.

Two Ways to Export SEC Filings to Excel that People Don’t Know About

Jae Jun — Thu, 28 Mar 2013 05:16:35 +0000

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Having worked with financial data for several years now, I just cannot appreciate enough the transparency and access to data we have in the US. It is so far ahead of the rest of the world.

To be honest, I still don’t like searching and digging for data on the SEC. It isn’t the most user friendly website. It’s why I now use secfilings.com. Free and easier to use.

I also use my dedicated data feed which make life much easier and saves me countless hours, but for those who cannot afford the cost of the OSV spreadsheets, here are a couple of alternatives.

Exporting SEC Filings to Excel

XBRL is the new technology that is being used by companies to report filings to the SEC. At first it was the giant companies that complied with XBRL standards but all companies now support this which makes for pulling data easier.

But let’s get down to what you really want. Exporting financial statements directly from SEC to Excel.

Calcbench

This site was mentioned in the best investing websites magazine and if you haven’t downloaded it yet, I highly advise you to get a copy. It’s free and is filled with valuable resources.

I view Calcbench as the leader of the group in terms of web applications allowing you to export SEC data to excel.

You have access to each part of the financial statements and if you create a free account, you can export the data for free.

XBRL to XL

I spent some time today fiddling around with XBRL to XL and there is promise.

The process of getting to download the excel data can be confusing at first, but once you get the hang of it, it is quite easy.

Financial statements are not in plain English type format. There are lots of syntax and other “tags” to clean up.

No point in me trying to explain it all. Go play with it and you’ll figure out how to use it.

Important Reminders

XBRL is still being adopted and so things can change in a couple of years. At the moment, I would consider both sites to be in the beta stage. They are not perfect and you’ll encounter some bugs and numbers mismatch, but it more than makes up for the time, effort and hair pulling trying to manually do the same thing.

Since XBRL is still relatively new, the data is not going to go far back. You won’t be able to get data from 10 years ago because companies are not going to update all of their filings. That’s just crazy.

So it will take about 6-7 years before you can start exporting 10 years worth of data.

Nevertheless, having access to 3-4 years is a great start.

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5 Fast Growing Small Cap Stocks to Watch

Jae Jun — Tue, 26 Mar 2013 08:01:46 +0000

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This is a continuation of filtering through Forbes Best Small Companies. I love to get ideas and learn about new companies from this list.

Although Forbes magazine is well circulated across the country, people are lazy and will not take the effort to go through the companies so here’s your chance to go one up on most people.

First off, here is a spreadsheet of the top 50 stocks I compiled a couple of months back. Download this spreadsheet of the top 50 Forbes stocks.

As a quick recap, here is the method Forbes used to compile this list.

strong sales and earnings growth
publicly traded for at least a year
generate annual revenue between $5 million and $1 billion
stock price no lower than $5 a share
excluded financial institutions, REIT’s, utilities and limited partnerships

5 stocks ranked 11-15 will be looked at today.

#11 IPG Photonics (IPGP)

IPG Photonics is a maker of fiber lasers which are used in a wide variety of industries for welding, cutting, drilling and etching. It is used across all industries which gives IPGP the potential to continue capitalizing on its market.

Here are some video demonstrations that will immediately help you understand what fiber lasers do.

Last time around, I rated IPGP as a B+ stock.

Highlights

Continues to increase gross margins. It’s in the 54% range compared to 49% the year before as a result of reducing cost of goods sold.
Plenty of cash on balance sheet with big decreased in debt. Current ratio of 5.3.
High ROE of 19% and CROIC of 45%

Lowlights

Share count increases every year
Fundamentally, IPGP doesnt’ have many weaknesses. It is solid. The only concern is the valuation.
CEO is 73 years old, owns more than 40% and the business depends on him
Laser prices are going down which could lead to drop in margins

Valuation

Valuing IPGP is difficult because the company has never been at a consistent level. From 2005 to 2009, IPGP was in growth and investing mode. It wasn’t until 2010 when the company started to really reap rewards and the growth has been huge since then.

Thus the difficulty in trying to come up with a fair value.

Discounted Cash Flow

FCF isn’t a good metric to use for IPGP because of the heavy investment during its growing phase. Capex in 2005, 2006 and 2007 was $16m, $20m and $34m respectively. Those are some big jumps.

For IPGP, owner earnings is the better number to use as it eliminates working capital and adds back items such as depreciation and deferred taxes that should not be included.

IPGP has also performed extremely well over the past 5 years compared to its history. It has achieved an organic 15.4% ROE coming from healthy margin increases. See the DuPont analysis to see how it is calculated and download the spreadsheet too.

Using a discount rate of 12% and a growth rate of 16%, I get a value of $70.

Graham Valuation

Analysts are predicting an EPS of $3.16.

Using the Ben Graham formula, I get a value of $83.

Katsenelson PE Valuation

The current PE of 23 assumes that IPGP has an expected growth rate of 25%.

I believe this is too high so I’ve made an adjustment by entering the starting PE to equal 20% earnings growth which has been the historical growth rate.

This gives a fair value of $70.

If this is confusing to you, don’t worry. I’ve written a detailed step by step tutorial on the Katsenelson valuation model.

This gives a valuation range of between $70 and $83 based on the assumption that IPGP can continue its growth of at least 16% going forward.

If the company is unable to achieve such growth, then expect a hair cut on the stock price, which is what I will wait for.

Download the one page dashboard PDF of IPGP.

#12 United Therapeutics (UTHR)

United Therapeutics is a biotech company that focuses on developing drugs for small niches with unmet needs. Their main drug targets a high blood pressure disease between the heart and lungs. The disease occurs in young woman with an estimated 30,000 being treated in the United States.

It’s a small market and because of the unfulfilled needs, the pricing power is astronomically high.

Highlights

Average revenue growth of 37% for the past 10 years but slowed down to 23% the past two years
100% recession proof
Reduction in SG&A

Lowlights

R&D investment is decreasing
Increased long term debt despite strong financial position
Lots of gains in the “non cash items” line
Repurchased a big chunk of stock at its highest stock price

Valuation

I am going to admit that I don’t know how to value UTHR.

The company has experienced huge growth but there are some signs of slowing down. What’s more, for the growth, the finance ratios also fall into value territory.

Check out some of these numbers:

EV/EBITDA of 6
P/FCF of 13
P/B of 2.5
ROE of 18%
CROIC of 21%
Strong Piostroski score of 7

Download the one page dashboard PDF of UTHR.

#13 Air Methods (AIRM)

Air Methods is the largest provider in the air medical transportation industry. It’s a good business. People need emergency transport services and if you live in a rural area, you need air transport to quickly get you to a hospital.

The business is not easy to replicate either. You need a fleet or helicopters, national network of bases and pilots and trained medical staff.

Like United Therapeutics, you can see why Air Methods business is consistent and recession proof.

Some numbers to get you interested.

Highlights

Recession proof business. Posted increases in revenue during recessions.
Gross profit at all time highs of 42%
Operating profit at all time highs of 20%
CROIC of 12%

Lowlights

Big debt increase from 2011
Cash conversion cycle increased from 97.7 in 2010 to 118 in 2012
Valuation ratios no longer show anything on the value side
ROE of 30% (more on this below and why a high ROE is included in the lowlights)

Some Ratios

PE of 22
EV/EBITDA of 25
Price to tangible book value of 19
Piotroski score of 8
ROE of 30% due to increases in debt

For most solid companies, ROE and CROIC come out similar. For AIRM however, ROE is much higher than CROIC. Upon looking at it further via the DuPont analysis, it shows that a major source of AIRM’s ROE comes from its debt increase. ROE is increasing due to debt.

If I adjust the equity multiplier in 2010 from 3.73 to a normal value of 2.6, the ROE drops to 21.6%. Still good, but it is much lower than 31% showing that ROE is likely inflated at the moment.

Download the PDF dashboard for AIRM.

#14 Allegiant Travel (ALGT)

Allegiant Travel is the only airline I would be willing to own. ALGT operates a low-cost passenger airline marketed to leisure travelers in small cities.

For now, I will chalk it up as another investment miss.

I wrote about ALGT back in early 2012 and the business has continued to operate superbly.

I highly recommend you to read the article to get a better understanding of how they are different to other airlines.

Highlights

40 profitable quarters. Unbelievable for an airline but true.
Revenue growth every year even during recession and 9/11
Strong financial position – low debt and plenty of assets for an airline
Piotroski score of 7
No signs of earnings manipulation according to the Altman and Beneish models

Lowlights

Priced at a premium to all its competitors
High and fixed capex
Cash conversion cycle is higher than competition. Currently at 6 but LUV is at -17 as airlines get paid upfront for tickets.
High accruals across the financial statements

Download the PDF dashboard for AIRM.

Valuation

Although ALGT is profitable, cash flows are still inconsistent which means a DCF is going to be difficult.

With a projected EPS of $5.18 and growth rate of 11%, the Graham valuation shows a fair value of $121.

With ALGT trading at a premium, the absolute PE valuation model shows that ALGT can go as high up as $110 with a fair value PE of 27.

Here is another range of values using utilizing an EBIT multiple calculator.

Looks like the current price points towards a slight over valuation and nearing towards the aggressive assumptions.

Download the PDF dashboard for Allegiant Travel.

#15 Syntel (SYNT)

Finding Syntel is a pleasant surprise. The business centers on outsourcing their skills to global companies as opposed to outsourcing staff to companies which is a much lower margin business.

In a nutshell, Syntel will develop custom software applications according to a customers specifications related to their business.

There are plenty of these companies all around the world, but it is surprising to see how Syntel has achieved such success in such a competitive field.

Highlights

Surprised to see Syntel posting increases in revenue for the past 10 years even during the recession
Strong gross margins averaging 43% over past 5 years and net margin averaging 23%
Has grown book value for 7 years without any debt
A big cash flow generator
Excellent ROE of 32% and CROIC of 100%!
Strongest among competitors INFY, IGTE, CTSH and WIT

Lowlights

Lots of accruals in the balance sheet and cash flow statement. A high balance sheet accrual also leads to a high ROE.
Low Piotroski score of 5
Dividend yield is a tiny 0.36%
Highly dependent on a small number of customers
Just by looking at the company quickly, the numbers can look too good to be true

Valuation

With such strong fundamentals and exponential growth to date, how do you go about valuing a company like SYNT?

It obviously has excellent numbers but would I confident in assigning a growth rate of around 20% going forward?

If I’m going to assume an aggressive case of 20% growth, then the valuation I get is around $130 using the DCF method, $136 using the Graham formula and $100 with the Absolute PE method.

That’s about a 80 – 100% upside from current prices.

Other competitors are of lower quality but priced higher, so if you do a relative valuation, the fair value is around $80.

Doing an EBIT valuation which only looks at a maximum of one year going forward, the valuation range is between $32 to $72.

That’s a wide valuation range, and at this point, I’d rather keep an eye on it to see what a normal operating business level is as opposed to riding the wave up not knowing when it is going to end.

That goes for the rest of the stocks mentioned here. High flying companies that are operating at its peak so there could be a chance that it will come down at which point it would be a very compelling investment opportunity.

Disclosure

No positions.

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The Value Investing Blog of Old School Value

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X_2 = Retained Earnings / Total Assets

X_3 = EBIT / Total Assets

X_4 = Market Value of Equity / Total Liabilities

X_5 = Net Sales / Total Assets

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Quick Summary

What is FleetCor Technologies?

First, what is a fuel card?

FleetCor’s Business Model is a Competitive Advantage

This is a Very Profitable Business

High Insider Ownership is a Good Sign

There are Always Risks

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Brief Valuation