Value Stock Investment Criteria


All value investors aim to find the perfect value stocks and make that purchase.

What I define as value has been ridiculed and called speculation many times. Vice versa, what I deem speculation has been embraced by others.

I’ve gone over how to find the best value stocks and special situations, but the following are a few things I look for in any value stock investment.

Value Stock Criteria

Butt Ugly

I love the butt ugly stocks. The uglier it is, the more I like it. I consider myself an investment softie so if a company is neglected, rejected, abused and thrown to the curb by analysts and investors alike without good reason, I like to nurture it in my portfolio.

These are the types of companies that many people assume will go bankrupt, fail or never recover. A little deep analysis shows that they are far from ch 11. These companies are also cigar butt type net net stocks where there is always one or more good remaining puffs.

The thing is, most people just assume they know a company will do this or that without actually digging in. A majority of people just read the press release and news headlines to grasp an overview of the company.

Now this is your advantage, your playing field. You control the court and define the rules… Only because no one is there to play with you ;)

Keep it Simple

Buffett has said to invest only in what you know. i.e. circle of competence.

Let me take it further to explain why I think I’ve been able to do so well this year.

Invest in companies that are so cheap, you don’t need to understand what it does.

Of course it’s a good idea to know what they do but you don’t have to understand every single detail about the company. The simpler the investment scenario, the less risky. The less risky, the more capital you will invest. The more money you put, the more conviction you have.

It all leads to higher returns. This is also what value investors define as concentration.

Most of my multi-baggers this year only required 1 or 2 questions before I made a decision to buy.

e.g. Q. Will the company go bankrupt?

A. No

e.g. Q. What’s the margin of safety?

A. A lot

This is why I don’t invest in growth and story stocks. Too many variables to figure out in order to make money.

Keep the ideas simple and don’t over complicate or cloud it with unnecessary facts.

Correct data + incorrect data = incorrect data.

Downside Protection

I like to look for companies where the downside is protect by the assets. The higher the liquidity and quality of the assets, the better the investment potential. It reduces the risk of a sudden erosion in the margin of safety.

e.g. if a company has a high amount of accounts receivables or inventory, there is a good chance that a substantial amount could be written off which immediately affects the margin of safety.

On the other hand, while cash can be burnt at a fast rate, cash can never be subject to impairment charges.

I prefer to keep the downside protection based off current and short term assets. Not long term assets such as patents or buildings and equipment.

Understand the Definition of Risk in Investing

  • Probability of losing all your money
  • Having too many scenarios, too many variables and over complicating
  • Not protecting the downside

Some Value Stock Ideas

What about these potential ideas for you to consider? They are all on my to do list. Need to find time to go through them.

Disclosure

Not positions in any stocks mentioned

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  • Tylergold

    Hi Jae

    Im relatively new to investing. im 15 years of age. i have an account on etrade.com.au but i dont think i can trade on the us exchanges. i am absolutely enthrawled in the biography ” The making of an american capitalist” and in buffet. Is there anyway i can learn how to implement the NNWC formula if i dont know how to do it, is there a way i can learn.

    I have shares on the ASX currently and gold shares

  • Hey Tyler,

    Only 15? woah keep up the questions and thirst for knowledge and by the time you reach 18, you’ll probably be a genius in the stock market.

    NNWC is a very simply calculation and concept. It’s just simple addition and subtraction.
    Follow the instructions in the following link to know how.
    http://www.oldschoolvalue.com/valuation-methods/ben-graham-net-net-deep-value-stocks/

    The only piece of information you will need are the annual or quarterly reports for the companies you are interested in.
    With the ASX, companies don’t publicly file every single report so you may have to ring the company directly and ask them to send it to you.

  • Tylergold

    thanks.

    if possible can you work out one company for me, its intrinsic value.
    Name: Westfield
    Ticker: WDC

    Im thinking of selling my bank shares (CBA,WBC),

    For CBA the yield has gone from 12% at the last bottom (march) to 6%. and the P/E has gone from sommething like 9 to 16.

    For WBC yield has gone from 9% for 4.5% and P/E has gone from 8 to 12

    Before the Crash yields were 4-6% and P/E was 30

    im not sure which bank is more valuable as wbc has a low p/e but a low yield aswell compared to CBA.

  • Tylergold
  • @ Tyler
    I’ll see. I’m not familiar with how shopping centre real estate prices are in Australia at the moment. You’ll have to consider that with Westfield and look at whether the current valuation is underpricing the value of the properties if the market stabilizes.

    Australia was the first to raise interest rates so maybe things are looking good back there.

  • Tyler

    Theyve got like 17 bil of assets in america and 21 here about 10 in uk and 4 in nz

  • Tyler,

    WDC is too complicated for me to quickly view and offer my opinion. You’ll have to go through the report, analyse the assets, look at cash flow, look at occupancy % and other metrics important to real estate and figure out whether the market cap is above or below your calculation.

    Also try and get historical real estate prices. How does the current cost per sqm compare with a more normal scenario.

  • Tyler

    Another one i was loooking at was Telstra.

    Telstra:
    Assumptions Annual Profit Growth Rate of 8% (Last Year it increased 10% so its realistic)

    Intrinsic Value =( .33 * (8.5+16) * 4.4 ) divided by 5.2 (5.5 being current AAA 10 yr corporate bonds) (4.4 yield of average AAA bonds – Im not sure on the exact yield but id guess it would be higher then 5.2 but ill leave it at 4.4)
    Intrinsic Value = 6.84 Per Share

    Risks : The Company might be split Refer to http://www.theaustralian.news.com.au/business/story/0,28124,26189909-36418,00.html

    Under Valued = >1
    Over Valued = <1

    6.84 / 3.16 (last traded price)
    = 2.16

    Therefore Telstra Is Undervalued enormously, however The Debt TO Equity Ratio is 139% which is ridiculous and I don’t understand that situation. Where 30% is usually acceptable.

    Telstra has been battered and bruised by the media, and the government and with a solid yield of 9.5% and its profit growth last year was 10% looks like a steal

    – Tyler

  • It’s hard to say that Telstra is undervalued just by using Graham’s method.

    What you could try is to normalize the past 5 years of Telstra earnings and then using that number in the calculation.

    I don’t think Telstra could be that undervalued considering how many people follow it.

  • Tyler

    Graham Formula At 5% Growth
    = $6.66

    DCF = $5.33 At 4% forever growth. And a DR of 11%

    Telstra looks cheap, not ridiculously cheap.

    And The CEO that was horrible is gone

    Profit this year was up 9% and revenue up 3%

  • Tyler

    The DCF of TLS.AX is $4.90 at growth of 4% and discount at 11%

  • Tyler

    however the NNWC is about $1.05 per share

  • Tyler

    Page 8,11,17,18,22,23
    Have A Look Please Jae
    http://www.asx.com.au/asxpdf/20090813/pdf/31k250lz9d30z5.pdf
    And The NNWC is not $1.05

  • Telstra is a large company so you’ll never see it at NNWC or anywhere close. Also if an investment requires you to look at so many things in order to decide whether it is a good opportunity or not, it usually isn’t.

  • Tylergold

    Why are larger Companies not near their nnwc

  • Tylergold

    i was look today at the Historical P/e of indexes. The Results: Disturbing

    Average P/e ratio for SP500 At March Low = 15
    Major Bear Market Lows For SP500 = 7-9
    Average P/e ration for SP500 Now = 20

    P/e ratio of ASX All Ords At March Low = 8

  • Tyler,

    check out this link. It’s an aussie based value investing asset management company. They have lots of good stuff and analysis.

    http://www.intelligentinvestor.com.au/articles/Telstra-TLS/Telstra-structural-separation-coverage.cfm?articleID=1020426

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