Porcupine, Limiting the Value Investing Universe.
As I indicated previously, I believe that the first step in creating an investment portfolio is to limit the investment universe. Morningstar's Stocktools has extensive information on more than 7,600
companies. How do we get this number down to reasonable investment universe, again understanding that I'm only interested in beating the S&P over time - let's say a period of one year.
I utilize four methods to bring companies into my investment focus; thus, limiting the universe. I call these Buy and Hold With A Twist, DJIA Dividend Yield 11-15, Return on Equity, and Reasonable Momentum. I will focus herein on the first.
Buy and Hold With A Twist (BHWT) attempts to recognize that Mr. Market has already identified the superior investments. Consider the following extremely relevant information:
Of the investment universe of 7,486 companies that have 1 year stock performance, 37.0% (2,770) beat the Index, 29.4% (2,203) provided a return between 0% and the Index, and 33.6% (2,513) had a negative investment return. Of the investment universe of 5,925 companies that have a 3 year stock performance, 30.5% (1,807) beat the Index, 42.7% (2,532) provided a return between 0% and the Index, and 26.8% (1,586) had a negative investment return. Finally, of the investment universe of 4,373 companies that have a 5 year stock performance, 32.5% (1,423) beat the Index, 43.2% (1,887) provided a return between 0% and the Index, and 24.3% (1,063) had a negative investment return. This is in the midst of a raging bull market.
BHWT attempts to identify those companies that have already been recognized by Mr. Market as superior performers. The screening criteria is very simple: 1) the company stock performance beat the Index over 1, 3, and 5 years, 2) the current ratio is greater than 1.3 or the company is a financial services firm, 3) the company is generating positive cash flow, 4) the company's 1 and 3 year revenue and earnings per share are increasing at greater than 10%, and 5) the return on equity is 130% of the price/earnings multiple.
WOW, very simple criteria. Of the some 7,600 companies for which this criteria was applied, only 11 passed the test at the end of February (this is the lowest number in the two years that this screen has been applied). One (CON) was eliminated because it has already agreed to a takeover. The ten semi-finalists are: ATRO, BSC, DRC, JOB, JEF, MER, RJF, ROST, SIF, and TNL. While I assure you that all of these companies passed Step 2, several would be eliminated in Steps 3 and 4.
The basic issue is that no matter how under- or over-valued Mr. Market, there are always reasonable values. Enjoy!
Now then, I've got to get back to work; but look forward to participating in future discussions.
Berney |
