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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Mario :-) who wrote (59879)	10/8/2017 1:02:55 AM
From: David	Read Replies (1) \| Respond to of 78702

I have a question about fundamental screening parameters if some of you would like to comment on it. Screen may be partially OT since it is not designed to find low intrinsic value candidates. But it does try to find fundamentally sound companies. It is quick and dirty screen based on only two parameters: retained earnings and stockholders equity.... When I first started getting into trading stocks my father gave me an overview of a Balance Sheet and taught me that what you wanted to see was retained earnings growing from year to year, current assets better than current liabilities, and assets that didn't consist of a lot of goodwill and intangibles. That was in the late '90s and he was using a 1971 pamphlet from Merrill Lynch as reference material. In more recent years I have tried to increase my understanding of financial statements with limited success with my current thinking being that they are no better than a quick screen. Oil companies, and the market talk using operating cashflow for them was probably the first concept to throw a wrench into my thinking. A few years ago I started getting into US stocks and was seeing lots of different companies and sectors I wasn't used to seeing when Colgate's balance sheet jarred my thinking some more. What I saw was no shareholder equity with mostly intangible assets balanced against debt - on a company with very strong earnings. I sold my Colgate stock although I use and like their products, I don't think they are going to disappear anytime soon but the balance sheet picture just didn't seem prudent to me. Last year there was a book here in Canada, Easy Prey Investors by Al and Mark Rosen discussing IFRS accounting and how companies are applying it. I bought the book to better my understanding of operating cashflow and finished the book with less confidence in corporate reporting, operating cashflow and the balance sheet. Although not fully understood by me, the most disturbing thing to me was how the financial statements were no longer a report of the previous quarter. I'm still progressing, slowly, through Benjamin Graham's books and have a long way to go yet so I am not yet sure what I will get out his books. A few years back their were complaints here in Canada, coming from the government, that companies had too much retained earnings on their balance sheets. The complaints seem reasonable if you agree with Colgate's balance sheet, I haven't looked a them lately, but as I mentioned I didn't like the lack of shareholder equity and for that reason I'll say your screen for retained earnings reflected in shareholder equity is good as a quick initial screen. An investing concept I have for oil producers is the annualized cash flow to debt ratio should be below 2. The number used is similar to assigning a growth rate, it is subjective. My understanding of the ratio is that it is a measure of how long it would take to pay off the debt if the producing was to stop operations. The value 2 is based on both older stock forum posts and my observations of stock price declines during the last decade. Although oil wells can produce for many years, the value has some merit in my thinking with regard to well production decline rates and company wind-up. With regards to your screen, I do like that the screen attempts to show that retained earnings are actually being applied to shareholder equity. I have seen enough Shareholder Equity sections that seem a little confusing, and read enough about management reporting tricks that I don't think shareholder equity means what it did it a century ago. It seems like more of a remainder of the Liabilities to Assets equation and I'm not even sure I trust reported assets anymore. I haven't lost all confidence in financial reports.

To: Mario :-) who wrote (59879)	10/9/2017 11:20:46 AM
From: Micah Lance	Read Replies (1) \| Respond to of 78702

I think its important to match the way you search for companies to your investing style. If you prefer the Buffet-like approach to value investing, then screening like you discuss is a good way to go. As far as your screener specifically, I would change it up by looking at free cash flow as well. Retained earnings and stockholders equity are both balance sheet items, so adding in free cash flow will slightly diversify your screen by looking at cash coming and going out of the company. You could probably run a screen with just retained earnings and free cash flow and find some good success. If you prefer the Graham route of value investing, I've found more success looking into bombed out industries and using google searches than using fundamental screeners.