Post edited 8:21 pm – August 10, 2010 by Strawberry Investor
Of course you
are right, that’s what investing is all about, trying to assign price tags to
securities. I try to come up with a price that seems to be reasonable. Your
spreadsheets are just great!
I want to explain why I believe this screen is going
to make me really happy in the long run .
I have read about your rationale creating the negative
enterprise screen EV= MCap + Debt – Excess Cash ; meaning a company with negative EV is likely to
deliver some nice returns in hard times, when debt collectors are busy visiting companies.
So therefore I tried to implement this trough a low level of debt and a quick
ratio {(AccR+C&CE)/Curr Liab} of > 0.8
Then Bruce Greenwald emphasizes that competition will
drive ROIC down to Cost of Capital(WACC), that’s a 12% discount rate for an average company with low levels of debt
and low business risk. It’s the government bond rate + equity premium. I
therefore assumed that ROIC should have been at least near the upper range in
the past. So the company should have been at least earning its Cost of Capital.
And the third section, as you pointed out, is about
having a company operating in a favorable industry with a worthwhile operating margin.
And finally I want
them to be cheap. I use PSR instead of P/E to come close to earnings from doing
business, because the gap between net earnings and operating earnings is filled
with items not deriving from the daily business. The “E” in the P/E can go up and down with no changes in the real
business itself. Simply take a quick look at Motorola (MOT) and you will
see the EBIT margin has been up more
than the operating margin for a couple of years.
So what I tried to do was to come up with a screen
where the DCF analysis is already “built in”. Now in my view the only variable
of importance left is the growth rate.
All great investor from Bill Ackman to Berkowitz and Co. all mention that in
environments like this and the upcoming most likely quality business will do
well, in essence just keep doing what Buffett has been doing.
So far the results since 06/21/10 are as follows:
BVF +38 NE
+7 UEPS -3
TNH +26 VPHM
+6 MNDO -8
CPHI +16 TBV
+6
ALIF +16 FRX
+5 Overall: + 12 S&P500: +1
BIIB +16 ATW
-0.4
The time period is just to short, but it seems to work
pretty well.
Jae take a look at the chart of e.g. TNH or NE . It
seems as if this screen grabs them at the right point just when the air goes out.
Do you have an idea how to screen for Owner Earnings
growth?
Sorry for
taking up so much space.
Best wishes Mike
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