Value & Growth Investing Criteria

[skip9]

Hey guys,

Been in the market a little while, had some good gains and some loses as well. I'm at the point now where i've been researching and realised i should put together some sound criteria and strategies. At the moment I have decided upon 3 separate portfolios, all holding a set % of my investing funds - Value, Growth and Speccies (Everybody needs some play time right). I am only 21 and have a decent amount in investing but am ultimately investing for future property investments.

What I am looking for is what people generally look at when search for Value and Growth Stocks, things such as ratios - what ones are important and what their targets are for each - ROE, P/E (High P/E for Growth, Low P/E for Value) and so on? It is a pretty broad subject but i figured if everybody expressed what they find important and what their criteria is it will help us all out!

 

[Macros]

Skip 9,

If you need three different investment portfolios, it means you have no clear strategy for investing and don't know what you are doing. This means that you are prone to make unclear decisions in the future as you have no absolute strategy.

However, you could for example invest on a value basis and use technical components for entry and exit.

In my opinion, you can't have different metrics for each portfolio. It is like splitting part of your brain into different sections and hoping that everything works out well. I guess this is fine for socio-paths but for the rest of us it doesn't work out well.

Value and growth strategies are not mutually exclusive. Speculative investments are mostly like gambling and unless you have a significant knowledge of the business process, you might as well throw you money away.

 

[skip9]

Marcos - Thanks for your input, I see where your coming from and it has made me re-asses my thoughts, but would it not be possible to do so and view portfolio's as separate identities?

I suppose i decided to travel along the 3 portfolio paths is in sense that it does give me a bit of safety as typically the Value will be of the larger ASX100 dividend paying stocks where as the Growth (the majority of the overall % of my portfolio) will be focused on the Mid-Cap space that may hopefully move into the ASX100 and again aiming to select a few Small Caps that may be able to establish them self's into the Mid-Caps space and so forth.

As I'm young i figured that I should take some risk but only at the expense of all the fundamentals passing a selected criteria and thoroughly researching companies and not limit myself to one style, yet view each portfolio on a weekly review apart from the other as if i am that type of investor. I have about 15 books i want to read before i start with a proper investment stratergy, ranging from topics of Company Valuation and Financial Statements to overall Personal Finance and Asset Allocation/Diversification. After i feel sound with my Portfolio, i will start to research into Options and futures, I don't understand them at the moment, hence why i don't touch them but hopefully through researching about them I will start to understand.

I do have a bit of a draft for selection criteria that i will upload, though it is on another computer and is not completed as yet.

 

[Macros]

Skip 9,

The only benefit that you would have with three different portfolios would be to find out what type of investment strategy feels the best for you. You can't necessarily judge it by performance only in the short-term as it could be based on market timing and/or bad implementation.

ASX100 does not mean value or lower risk in my opinion. Same thing applies for smaller companies. It depends on the metrics of each company. Investing in smaller companies provides greater scope for growth as the larger companies in Australia are often restricted due to our smaller market size.

You can actually invest in smaller companies which are growing strongly, have relatively low risk and are undervalued. The same way you could invest in an ASX100 company with relatively high risk and is overvalued.

In my opinion, the only suitable times to invest in inferior businesses with lower quality is in times of a economic turn-around as they will benefit relatively more than a quality business based on the percentage change in earnings etc.

At most times it is best to invest in undervalued companies which are growing and have lower risk (e.g. competitive advantage, strong market fundamentals and low debt).

To generalise, I think it is best either to be a value investor or a technical trader. There is no grow versus value in reality. If you want growth, you can invest in either over or under-valued companies and I prefer to pay less than the company is worth to give me a greater margin of safety.

Hope this helps.

 

[skip9]

Surely Does.

I suppose what you mentioned at the end about being value investor or technical trader is really the end point, growth investing is practically value investing as undervalued companies in some way or another should technically have growth in them.

I guess in a sense i would prefer to invest in the mid-cap space as it generally[/B\i] allows greater returns (with the added risk of course) over large cap.

In terms of metrics Macros, what do you look for, through research i have found that while ROE, Debt-Equity Ratio, EPS Growth etc are all fundamentals of valuing and establishing growth patterns but say in terms of P/E Ratio, It seems that most undervalued companies are below sector P/E while companies that are growing due to market demand have higher P/E's?

Also determining intrinsic value is obviously a key factor, how do you go about this?

As I said i am still in the mist of putting together a sound plan so your input is helping a lot!

 

[Tysonboss1]

Value, Growth and Speccies

Whats your definition of value and growth.

I don't really understand how you can say you are going to have to separate funds for value and growth.

 

[skip9]

Value - Stocks that are undervalued to their intrinsic value.

Growth - Stocks that are forecasting a high rate of return and are exposed to sectors that are high in demand. They may be or above their intrinsic value but have strong forecasts and metrics for excessive growth.

I understand now from Macros it is a bit of much is much and pretty hard to separate..

 

[danbradster]

You say your value shares will be ASX100, that's drastically different to my perception.

To me smaller companies seem far more undervalued than ASX100 companies. Like RFG I consider undervalued with a 6% full franked dividend yield, with only 55% of profits returned to shareholders (45% retained for growth).

Would I be able to find a situation like that in the ASX100? I doubt it...

 

[skip9]

You say your value shares will be ASX100, that's drastically different to my perception.

To me smaller companies seem far more undervalued than ASX100 companies. Like RFG I consider undervalued with a 6% full franked dividend yield, with only 55% of profits returned to shareholders (45% retained for growth).

Would I be able to find a situation like that in the ASX100? I doubt it...

Yeah I see what your getting at, I think I may need to re-asses! But this is why i posted to see other opinions! Do you mainly look for Dividend yielding stocks or is that just a bonus? In my original plan i was going to target dividend stocks where as growth didn't matter.

 

[danbradster]

Most of my shares don't pay dividends, since I look for very undervalued companies. Like companies that have problems, but they are fixing them. The SP can be really low even though the problems will be fixed in 6 months.

Or I buy mining companies that are starting up and are trading far below their NPV.

Generally companies that I expect to have a strong future but are trading for a measly PE of 2-6.

The RFG example is not hugely undervalued at PE 10, but considering it is stable and dividend paying and trading at a 20% discount to its usual price all because of minor news, it is a BUY for me.

Another I am watching (and holding) is PBP. It has been in a crazy downtrend even though the company reports are fine. When they release some positive news I'll be back in. It is sitting on a PE of 2-3. When companies become this undervalued it doesn't take much to push them up 100%, just a couple of positive reports. When I see a positive report I'll be doubling up.

 

[danbradster]

To me smaller companies seem far more undervalued than ASX100 companies. Like RFG I consider undervalued with a 6% full franked dividend yield, with only 55% of profits returned to shareholders (45% retained for growth).

Actually, CBA almost matches that description, but I still believe that a smaller company can grow faster than an ASX100 company.

 

[skip9]

Definitely smaller companies can grow faster than ASX100. CBA in my original plan would be a candidate for Value if its price was lower than intrinsic value as it is low risk, dividend etc where as as you say PBP and RFG would be prime examples for Growth. Growth to me is the stage before the become well known market stocks where as value is often well known stocks trading below their value and on monthly/yearly lows etc. for some reason e.g. JB HiFi (just an example - haven't done any valuing on them)

 

[Julia]

CBA in my original plan would be a candidate for Value if its price was lower than intrinsic value as it is low risk, dividend etc where as as you say PBP and RFG would be prime examples for Growth. Growth to me is the stage before the become well known market stocks where as value is often well known stocks trading below their value and on monthly/yearly lows etc. for some reason

You don't mind ignoring the risk factor?

Out of curiosity I've just had a look at the above two companies.
PBP has been in a steady down trend for two years!. How can you classify that as a 'growth stock'??

Following is Morningstar's comment:

Morningstar's Recommendation: Probiotec Limited

Recommendation: Ceased coverage
Event
03-Dec-2010

We have decided to cease coverage given the unreliable, disappointing performance over the last two years.

Business Impact: There is the potential for earnings to re-accelerate, but our confidence in management is not high.

The business remains inherently risky due to a reliance on weight loss meal replacement products for over half of group profit.

Certainly they're paying a high dividend, but what's the point of that if your capital investment is diminishing every day?

 

[danbradster]

Certainly they're paying a high dividend, but what's the point of that if your capital investment is diminishing every day?

They have frozen dividends, I agree that it's not a growth share, but when it's trading at such a low PE, all it needs is a bit of good news to turn sharply upwards. For me it's a high-risk potentially high-value share, that's why I'm waiting for positive news to make a move, to decrease the risk.

 

[Macros]

My forward price target of PBP is $0.57, giving it a 35% margin of safety.

However, it is declining in value which is matched by the fall in share price. Earnings are falling and return on equity over the next couple of years is around 6% (consensus forecast).

It has a large amount of debt for such a small company and cash flow isn't looking good. It seems they did a capital raising last year to top up their cash.

Unless this company has some major plans or project that can be realised within the next year or so, I think this company will remain in the doldrums and at worst go broke if their cash flow isn't improving.

 

[skip9]

You don't mind ignoring the risk factor?

Out of curiosity I've just had a look at the above two companies.
PBP has been in a steady down trend for two years!. How can you classify that as a 'growth stock'??

Following is Morningstar's comment:



Certainly they're paying a high dividend, but what's the point of that if your capital investment is diminishing every day?

Sorry Julia, i hadnt actually looked at the two companies, just using them as a basis off what danbradster said.

I would be looking at companies such as AGO, MSB for growth and companies such as BTU, SPL etc for Spec. growth.

 

[VSntchr]

Most of my shares don't pay dividends, since I look for very undervalued companies. Like companies that have problems, but they are fixing them. The SP can be really low even though the problems will be fixed in 6 months.

Or I buy mining companies that are starting up and are trading far below their NPV.

Generally companies that I expect to have a strong future but are trading for a measly PE of 2-6.

The RFG example is not hugely undervalued at PE 10, but considering it is stable and dividend paying and trading at a 20% discount to its usual price all because of minor news, it is a BUY for me.

Another I am watching (and holding) is PBP. It has been in a crazy downtrend even though the company reports are fine. When they release some positive news I'll be back in. It is sitting on a PE of 2-3. When companies become this undervalued it doesn't take much to push them up 100%, just a couple of positive reports. When I see a positive report I'll be doubling up.

Its in a crazy downtrend for a reason. NPAT guidance for half of what the earned last year...

 

[danbradster]

Its in a crazy downtrend for a reason. NPAT guidance for half of what the earned last year...

• Ireland manufacturing facility fully commissioned and beginning to deliver savings
• First quarter weak due to soft trading conditions
• Second quarter stronger due to improving trading conditions and business improvement initiatives
• Q1 Revenue: 15.7m, Profit -$1.3m
• Q2 Revenue: 20.4m, Profit $2.3m
• Quarter on Quarter improvement of $3.6m to profit.
• Revenue momentum from 2nd quarter forecast to continue in 2HY11
• Contract manufacture soft but strong order book for 2HY11 (several major customers reduced inventory levels on cautious outlook, now reversing)
• Export revenue gained momentum in Q2, which will continue in 2H11
• FY2011 Guidance is restated at NPAT $5.2m after the first half of $1m, so guidance of $4.2m for the second half.

2HY11 Guidance of $4.2m, extrapolated to a year is $8.4m. Market cap is $22m. PE of 2.62 if management are to be trusted and I am correct to extrapolate on those projections.

AMA for example was another company trading around a PE of <2 after falling hard. Now it has recovered to a PE of 4 all because of management meeting their guidance. When/if PBP meets their guidance for another half year it will rise to at least a PE of 4. It's my expectation at least.

I have a few if these crazy companies sitting in my portfolio, mainly sitting on 100-200% profit and waiting for the ex-CGT date.

 

[Unintelinvestor]

Hey I've got this checklist thing that you might find helpful

 

[skip9]

Thanks!

That is what i was along the lines off, getting ideas what others look for at at what %'s.

Do you score or rank companies in regards to this checklist?