Value & Growth Investing Criteria

[skip9]

Ok so I have a few things down that what seem to be the most common when valuing stocks. They are as follows;

The Companies Operations?
Location of Operations?
Is its location High or Low Risk?
Who are the Directors - Do they have a shareholding %?
Who are its main competitors - Does it have an advantage over them?

P/E Ratio?
EPS Growth %?
PEG?
P/B Ratio?
EBIT?
ROE
OpFCF?
Is it in Debt? - Debt-To Equity Ratio?

Now all i have to figure out it set values on each criteria. Anything i am missing or recommendations? Also going to purchase Roger Montgomerys book to help with this and intrinsic valuing.

 

[kermit345]

I can tell you in basic terms what my process is.

I run a scan/filter on the ASX for stocks with greater than 15% ROE and less than 30% D/E with a market cap greater than $100,000,000.

Of these companies I then do a calculation to list the companies from greatest ROE/lowest D/E combination down to the lowest ROE and highest D/E combination.

Once I have that list which is usually around 80 companies i work through them doing valuations and looking at their business prospects. Once I find the ones that looks the most promising i'll do some further research and then buy if it looks like i should.

 

[Tysonboss1]

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..

The "Intrinsic Value" already values the likly growth of a company by factoring in the retained earnings and adding a multiplier based on the return on equity the company is likly to achieve on those retained earnings.

So "growth" companies can be valued and included in a value portfolio.

When you say "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". You sound like you are describing stocks that should be in you speccy list.

After all that Growth has to be coming from some where, If it is from retained earnings into a systematic expansion of existing businesses it can be measured and valued.

If the forecast growth in earnings is from things that can't be measured eg. products under development, future increases in prices etc.etc. then your calculations are based on speculation and caution shouldbe taken when deciding how many of todays $$$ should be outlayed for future earings $$$.

 

[Noddy]

I can tell you in basic terms what my process is.

I run a scan/filter on the ASX for stocks with greater than 15% ROE and less than 30% D/E with a market cap greater than $100,000,000.

Of these companies I then do a calculation to list the companies from greatest ROE/lowest D/E combination down to the lowest ROE and highest D/E combination.

Once I have that list which is usually around 80 companies i work through them doing valuations and looking at their business prospects. Once I find the ones that looks the most promising i'll do some further research and then buy if it looks like i should.

Hello Kermit

Interested in what method you use for company valuations.
Could you please post some info on that ?

 

[kermit345]

In valuing companies I use an adapted version of the Gordon model, which actually ends up not really looking much like the Gordon model itself anyway.

The equation takes into account DPS and retained EPS, applying a required rate of return to each. However I discount the DPS segment of the equation by 30% as I deem retained earnings more important then dividends paid, as retained earnings can be re-invested to earn the greater ROE already offered as I only value companies with ROE above 15%. Hence companies that are on solid growth paths that pay minimal dividends such as FGE and MML generally are trading at discounts to my IV's, depending on my required rate of return of course.

Also once I have the initial intrinsic valuation I apply a premium or discount to this valuation based on three metrics:

Management (my subjective view)
Return on Equity (automatically calculated)
Debt to Equity (automatically calculated)

These generally only work out to be small 1-2% premiums or discounts but just further help to identify the standout companies trading with a reasonable MOS to those who are mediocre or overvalued.

 

[Noddy]

In valuing companies I use an adapted version of the Gordon model, which actually ends up not really looking much like the Gordon model itself anyway.

The equation takes into account DPS and retained EPS, applying a required rate of return to each. However I discount the DPS segment of the equation by 30% as I deem retained earnings more important then dividends paid, as retained earnings can be re-invested to earn the greater ROE already offered as I only value companies with ROE above 15%. Hence companies that are on solid growth paths that pay minimal dividends such as FGE and MML generally are trading at discounts to my IV's, depending on my required rate of return of course.

Kermit,

I'm currently using a DCF valuation method.
Here are four valuations that I've come up with on companies that I would assume fit your scan criteria (All above 15% ROE, and little or no debt)
TGA $2.50
DWS $1.44
MOC $1.64
HSN $0.95

How do they compare to yours ?

 

[kermit345]

Hi Noddy:

TGA - $2.55
DWS - $2.00 (Note I don't have IV increasing over next 2 years though)
MOC - $2.03 (Note I don't have IV increasing over next 2 years again)
HSN - $1.03 (Steadily increasing IV)

 

[Knobby22]

Noddy

Why do you discount dividends especially to retained earnings?

Dividends are real in the hand while retained earnings can be misused.

Like to hear your thoughts.

Also, MOC IV is increasing and has in the past - the good thing about MOC is that the downturn in property prices should have no real effect as they are not taking any risk, just clipping the ticket. And I love getting those huge dividend checks.

 

[kermit345]

Knobby22,

Yes retained earnings *may* be misused, but a company with a track record of above average return on equity means that the retained earnings are more than likely going to be deployed to earn a greater capital return then the dividend.

Also i'm glad your happy with your MOC dividend, I was simply stating that *I* don't have their IV increasing, or if so, not by much. If your model shows MOC's IV is increasing then that is great for you, was simply stating that is isn't for me as Noddy asked for MY IV's.

Noddy:

Of the four companies you listed your IV's for, HSN looked like the pick to me. On my chart the trend in share price has been a steady increase and so to has my valuation both over the last 3-4 years and on a forecast basis for the next 2 years. I can paste my chart here if you have any further interest.

Cheers

 

[Noddy]

Knobby22,



Noddy:

Of the four companies you listed your IV's for, HSN looked like the pick to me. On my chart the trend in share price has been a steady increase and so to has my valuation both over the last 3-4 years and on a forecast basis for the next 2 years. I can paste my chart here if you have any further interest.

Cheers

Thanks Kermit,
Yes I am interested. Holding a few HSN and may buy some more.
Would appreciate a look at your chart.

Your system appears to be throwing up values a bit higher than a DCF calculation.
Will look into the method you are using, not aware of it at this stage.

 

[Noddy]

Hi Noddy:

TGA - $2.55
DWS - $2.00 (Note I don't have IV increasing over next 2 years though)
MOC - $2.03 (Note I don't have IV increasing over next 2 years again)
HSN - $1.03 (Steadily increasing IV)

Agree with you on DWS and MOC.
Can't see their I/V increasing much at this stage.
Have DWS at 3% inc, and MOC at zero in my calculations, but see them both as solid investments paying very good dividends.
Think your valuations may be a bit high though.

 

[kermit345]

Take a look:

 

[Noddy]

That's brilliant Kermit.
How many shares have you set up like that ?

 

[kermit345]

Any share I want to be, I plug in an ASX code, my management premium/discount and the required rate of return and it all automatically updates.

 

[danbradster]

Any share I want to be, I plug in an ASX code, my management premium/discount and the required rate of return and it all automatically updates.

Did you pay for that or develop it yourself? What technology is it using?

 

[kermit345]

developed it myself with the help of another person from this forum, uses a program some of you may have heard of called Excel :

 

[skip9]

Impressive Kermit!

Looks simple and effective!

Do you keep updating all the stocks you have on watch quarterly, half yearly or annually?

And with your MOS chart, Im guessing 25% is your target rate of return but how does your previous and forecasted MOS work? if your Forecasted MOS is higher than your target what is your action?

 

[danbradster]

developed it myself with the help of another person from this forum, uses a program some of you may have heard of called Excel :

How are you pulling data like the price chart into excel? What is the data feed?

 

[kermit345]

Price data is from yahoo historical prices, if you hunt around enough on google and/or yahoo there are ways to get the data into excel with more ease than copy/paste.

I've only developed this new spreadsheet recently, but previously when I was entering data mannually i'd only review the stocks if there were a reasonably significant change in earnings guidance etc, or an important announcement.

I'd update my filter weekly to see if any 'new' companies had flowed through my filter and were worth investigating further, however those i'd already covered were just monitored maybe one a month or so.

In terms of the MOS chart, you can follow that it mimicks the share price vs valuation chart. Rate of Return and MOS are two slightly different things. Required rate of return is essentially what you require the stock to return to make it worth risking your funds. i.e. companies that you identify have higher risk, should require a higher return, companies with lower risk require lower return.

Valuation of companies is not an exact science and it is highly unlikely there are any two random people using the same valuation model. For that reason, not all valuations are correct so if you apply a 25% MOS, its basically allowing your valuation to be out a little but still means you can make profits if it moves towards your valuation. So for instance you only look at buying value investments that have the 25% MOS on the current share prices. Forecasts can change and so too can the MOS/valuation, so if you buy a stock evenly valued now on the premis it has a MOS of 25% in the future, that could quite easily change and your stuck with a low growth or declining stock.

Hope that helps.

 

[skc]

Take a look:

Very neat kermit. Looks like the market might be using a higher discount rate on HSN then you this morning.