Using Stock Screeners To Find Value Stocks

How to use technology to pick winning stocks FinToolbox/Screener.co

Monday, September 26, 2011

My background • management consulting • generic frameworks for data analytics • VC analyst • ownership mentality • “extreme” buy and hold Monday, September 26, 2011

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Investment Methodology

Monday, September 26, 2011

Investors struggle with too many decisions

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Investing as exclusionary process

look for reasons not to invest

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Screening process

= investment candidate Monday, September 26, 2011

Continue looking for reasons not to invest

Monday, September 26, 2011

T S E T cyclical valuations vs. acyclical declines outside knowledge

intuition

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Review public filings/ public info

• Material changes to business • risk factors • long-term obligations • management/analyst forecasts • news (Internet traffic, industry data/reports, new products)

Still looking for reason not to invest

Monday, September 26, 2011

Red flags?

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Metrics

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Define custom metrics

in addition to those normally used Monday, September 26, 2011

Metrics used for exclusion

Still need full company checkup Monday, September 26, 2011

Valuation 1. EV/EBITDA (in addition to P/E) 1. target 3x to 6x for value 2. 6x to 10x if willing to pay up for strong growth +

interesting (growth) markets 2. Price/Net Tangible Assets (in addition to P/B) 1. .5x to 1.5x for value companies (in other words, NTA/ Market Cap >.67x) 2.

Caveat: beware too many long-term or illiquid assets, particularly for financials. New accounting rules since credit crisis give more leeway in valuing illiquid securities and whether PP&E and other long term tangible assets reflect true value depend on how their depreciation schedule reflects actual depreciation

Monday, September 26, 2011

Valuation (cont’d) 1. “Margin of Safety”/Downside Risk 1. NCAV 1. NCAV<Market Cap (1.2<x<1.5), if profitable 2. otherwise just NCAV<Market Cap 3. Caveats: beware high (and/or growing) levels of inventory that may need to be written down if demand doesn’t materialize 2. Net Tangible Assets/Market capitalization 3. (Total Current Assets - Total Liabilities)/Market capitalization 4. (Total Current Assets - Inventory - Total Liabilities)/Market capitalization 1. higher is better (obviously), use this as display variable (not filter)

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Valuation (cont’d) 2. Multiple of Profitability 1. EBITDA/(Market capitalization - Net tangible assets) 2. alternative to ROE, higher is better 3. ranking variable (doesn’t have to be >5 but flexible)

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Consistency of results 1. Multi-period comparisons of revenue and net income 2. Estimates relative to past performance

Monday, September 26, 2011

Consistency of results [cont’d] • • • • •

looking for stability and or growth.   Screener.co supports up to 10 quarters/years but I rarely go that far back (unless looking at PE10) Now, I find looking at how companies performed during the last recession (2008-2009 full years) an interesting metric, gives a sense for how the company holds up during the bottom of the economic cycle  Even for cyclical companies, I like to see that they are able to maintain profitability or have modest cash-losses relative to their balance sheet (so they are not likely to get into distress even during a prolonged downturn) Use estimates to look forward and ensure future expectations are not dramatically poorer than past performance

Monday, September 26, 2011

Q&A

Monday, September 26, 2011

How to use technology to pick winning stocks Learn more: Screener.co

Monday, September 26, 2011