Value Investor

[Warren Buffet II]

Hi Guys,

I would like to know if there is anyone here who considers himself/herself a Value Investor?

Can you give an example of companies you have consider buying or have bought based on these thoughts?

Regards,

 

[RichKid]

I do use a bit of value investing in my strategy to reduce risk but mainly use charts. Value sometimes takes time to be realised and the stock can go down or get delisted in the meantime- eg MRL was bought by people on the way down, it'll probably come good but who knows? But I do appreciate that there are better candidates on the way up which can go much higher:

For eg,
AZR Aztec Resources, see thread- operational risk has overshadowed future value of business.
OST One Steel, market overestimated impact of furnace problems, now rejoining trend (again see thread) after everyone ran to BSL.

 

[vandalic]

I am a strict Warren Buffett, Benjamin Graham and Philip Fisher value investor and I think telling you the stocks I consider and have purchased as "value" is providing the end of the tunnel without the reasoning and ideas behind each purchase. The process of value investing is like any procedure in business, you need the input, the steps in between and the output in order to determine why an purchase would be a value investment based on your own strict criteria. My criteria would be significantly different to anyone elses based on my own personal life, my beliefs, my mentors and life experiences. An investment philosophy must be best fit for you not a copy of what someone else has done and made significant income doing .

It's worth doing some reading on value investing and you'll be enlightened into which investments are worthwhile. If you take the time and read a lot you will learn a lot more then hearing the vague overview from others which may miss part of the process

- Josh

 

[Warren Buffet II]

I am a strict Warren Buffett, Benjamin Graham and Philip Fisher value investor and I think telling you the stocks I consider and have purchased as "value" is providing the end of the tunnel without the reasoning and ideas behind each purchase. The process of value investing is like any procedure in business, you need the input, the steps in between and the output in order to determine why an purchase would be a value investment based on your own strict criteria. My criteria would be significantly different to anyone elses based on my own personal life, my beliefs, my mentors and life experiences. An investment philosophy must be best fit for you not a copy of what someone else has done and made significant income doing .

It's worth doing some reading on value investing and you'll be enlightened into which investments are worthwhile. If you take the time and read a lot you will learn a lot more then hearing the vague overview from others which may miss part of the process

- Josh

Something does not sound good about this reply, "made significant income" and value investor

Sorry Josh but what a lame and useless reply, normally if someone is asking this kind of question is to get some stories, trades and information, I am pretty sure none will follow any of your trades or advice (you can keep your secrets : ), we are only interesting in knowing if you have sucefully follow this technique and share us an example.

Thanks anyway,

WFII

 

[Mofra]

WB II,

I have one example of what I would call a value trade - bought MGX last year when suggested on another forum to research them, management gave an after tax forecast of 5 cps (they had carried over losses from previous years) and they were trading at 18c at the time. They did nothing for a while, they last traded at over 50c on Friday (although I had taken profits by this time, had a couple of ST plays as well).

Not sure if its the style you were after, but basically involved two steps;

a. Finding a company whose revenue / profit forecasts for the next financial year would gve it a significant discount to their sector PE
b. Analise the company to ascertain if the forecast is achievable, and if so, how likely.

Its not the only way I trade/invest but for longer term plays do take PEs into heavy consideration (more emphasis on sector PE comparisons than the overall market PE)

If you have any stocks in mind that fit your criteria of value I'm sure a few would be interested,

Cheers

 

[Warren Buffet II]

WB II,

I have one example of what I would call a value trade - bought MGX last year when suggested on another forum to research them, management gave an after tax forecast of 5 cps (they had carried over losses from previous years) and they were trading at 18c at the time. They did nothing for a while, they last traded at over 50c on Friday (although I had taken profits by this time, had a couple of ST plays as well).

Hi Mofra,

Good example thanks for sharing that one.

Cheers

 

[RichKid]

I am a strict Warren Buffett, Benjamin Graham and Philip Fisher value investor and I think telling you the stocks I consider and have purchased as "value" is providing the end of the tunnel without the reasoning and ideas behind each purchase. The process of value investing is like any procedure in business, you need the input, the steps in between and the output in order to determine why an purchase would be a value investment based on your own strict criteria. My criteria would be significantly different to anyone elses based on my own personal life, my beliefs, my mentors and life experiences. An investment philosophy must be best fit for you not a copy of what someone else has done and made significant income doing .

It's worth doing some reading on value investing and you'll be enlightened into which investments are worthwhile. If you take the time and read a lot you will learn a lot more then hearing the vague overview from others which may miss part of the process

- Josh

Hi Vandalic,
Must agree with you on those points, The Intelligent Investor by Graham is a classic and even though I favour TA I really enjoy his thinking and try to get into stocks that are fundamentally below value and technically attractive too. I know of a tip sheet by the same name (The Intelligent Investor, that looks for stocks that fit the 'value' approach) that just adores Graham and his ilk.
I've had a quick look at Fischer's book and it's all good advice (some a bit dated but can be extrapolated for current circs). Clearly it's hard to implement all those things at once but it does add to my overall appreciation of the stockmarket and helps me reduce risk in my stock picking (or so I think!).

Also agree wholeheartedly about finding a plan/method that suits the individual as many others on these forums have said there are many ways to skin a cat there isn't just one secret way to success in the stockmarket.

WBII- if you haven't already try a free subscription to the intelligent investor tipsheet- more discussion of it in this thread: https://www.aussiestockforums.com/forums/showthread.php?t=253&highlight=tip+sheets

They'll give you some reviews of stocks they think are undervalued and will recommend buy prices etc. Be warned though, it is a tipsheet and they take a long term view so you may lose money rather than make money (I recall they raved about MRL, Miller's Retail, last year, not sure what the view is now, may still be positive).

Also, although Vandalic didn't mention any of his stocks it's often details of the approach that is more important, feel free to share if you like Vandalic, we can all learn from each other, but there is no obligation- I think those three authors you mentioned are a really good starting point.

As Stefan suggested in the tipsheets thread we can start an 'ASF tipsheet', perhaps a thread on tipping 'value' stocks but there will have to be set entry criteria and that is difficult to sort out, usually the result is everyone posts their favourite and we just end up with a big list. See the 'My Hot Stocks' thread for example (https://www.aussiestockforums.com/forums/showthread.php?t=743&highlight=hot+stocks) stocks chosen for various reasons, might be some good value candidates there.

Personally I also like BSG Bolnisi Gold (have a thread on it somewhere here), the general views among some brokers is that it's undervalued relative to it's peers as a global gold stock. In the middle of some complex arrangements at the moment so maybe the market is waiting till it's sorted before climbing on board.

 

[tech/a]

Rich/WB

Im Technical as well but do trade only stocks listed on BT Margin list so I guess some of the fundamentals are researched for me.

I never know if a buy is value or not till after the fact.

UTB from $3.60 to $11.00+ being the best.
TOL
QBE
SFE
ALL
CTX
PMP to name some that have been excellent over the last 3 yrs.

I also subscribe to Inside Trader and have taken their top recommendations from 3000 analysts and placed them on a watchlist.There are about 10 of them and I did this a month ago.They are rated by the analysts and while the list doesnt cover every stock chosen I thought it a good broad spectrum.
So far its about 50/50 but those rising have risen more than those falling.

Ive often thought of having a much larger Fundamentally based universe chosen from the analysts and then applying the technical buys I use to that list as I do the BT list.
I havent done that yet but would be interesting to see how it fairs with the BT list being traded.The list is updated every month as is the BT list (Think thats less often).Ofcourse being a long term trader it will take ages to find out if its a great idea.Cant backtest it as I dont know the selections 2 yrs ago.

tech

 

[RichKid]

Tech,
Have you considered trying out The Intelligent Investor tipsheet as they boast to be a value outfit. You can also get old picks for backtesting. The subscription is free for a few issues but you wont get old data (which is via website access). They have a refund policy too I think. They have different types of portfolios in their picks so you can choose one (or all tips) to backtest. Just a suggestion. Again note that they pick for 'buy and hold' so it may take several years to make a profit.

Also, it's hard to just follow a tip by a value stock holder as most of the value may have been recognised and incorporated into the sp since the value picker first bought the stock.

 

[ducati916]

WBII

See the thread detailing fundamental selections.
But in answer to the original question I am a value investor.

jog on
d998

 

[bullmarket]

Hi Warren

Hi Guys,

I would like to know if there is anyone here who considers himself/herself a Value Investor?

Can you give an example of companies you have consider buying or have bought based on these thoughts?

Regards,

This topic was covered in another thread and below is basically what I posted there.

I'm in the camp that uses both fundamental and technical analysis and I consider myself as an investor and not a trader. However I do use technical analysis to help determine entry points if the company fundamentals pass my tests.

Below is a summary of what I do to try to determine whether a company is fundamentally good value or not.

Basically I go through a series of 5 tests and a company has to gain a score of 70%+ in these tests for me to rate it as ok to buy fundamentally. I've set up an Excel spreadsheet to model these 5 tests. Then I look at the company's price chart to help time buying points if the stock passes my funamental tests.

1) I use the Altman-Z Factor to gauge whether a company is financially sound or not. For info on how the Altman-Z Factor model works, maybe have a look at http://www.nysscpa.org/cpajournal/old/16641866.htm if interested
This test has a 25% weighting to the final score.

2) I look at various financial ratios including, working capital ratio, Debt/Equity, Gearing, ROA, ROE, interest cover, dividend cover, EBIT margin etc
This test has a 22% weighting to the final score.

3) I then look at the PER and PEG ratios to make sure they are within reasonable limits.
PER and PEG each have a 10% weighting to the final score.

4) I then look at what total returns (cap gain + divs) I can expect in the next 2 years based on increased share price according to PER and EPS,DPS forcasts. I aim for at least 10%pa potential return.
This test has a 23% weighting to the final score.

5) I then discount that total return back to NPV to see if the current share price is above/below the NPV.
This test has a 10% weighting to the final score.

example:

Company XYZ

Current Share Price: $1.00
Forcast EPS in 2 yrs: 7.5 cps
Forcast Div in Yr 1: 3.0 cps
Forcast Div in Yr 2: 3.2 cps
'Fair' PER: 16.0
Long term 'Risk Free' Return: 5.5%

Therefore, potential price target = 0.075 x 16.0 = $1.20

Potential TOTAL 2 yr return = $1.20 + 0.03 + 0.032 = $1.262

Now I 'discount' this $1.262 total return back to NPV using a transposed compound interest formula:

NPV = TR/((1+I)^n)

Where

NPV = Net Present value of the $1.262 total return
TR = Total Return
I = Discount Rate
n = number of years
^ = to the power of

NPV = 1.262/((1+0.055)^2) = $1.13

Since the current share price at $1.00 is well below the $1.13 NPV of my total potential return then I would consider XYZ to be good value atm. But to pass my NPV test, the share price has to be at least 10% below the NPV. The current share price having to be 10% below NPV is my risk premium as compensation for buying the shares and not simply investing the funds at the 'risk free' interest rate.

So although all this above doesn't actually value the company, it does value my expected returns in terms of what those returns are worth today (NPV).

So after I have the results of the above 5 tests, the individually weighted test results need to add up to a score of 70%+ for the company to pass my fundamentals/valuation test overall. If the company passes then I look at the price chart to help time buying points.

As far as charting goes, I tend to keep to the KISS principle and look for support/resistance breaks, stocks that are in or show a high probability of going into an uptrend. I mainly look at volumes, MACD, MACD-H and the Stochastic indicators for confirmation of the price action.

cheers

bullmarket

 

[ducati916]

bullmarket

I've read through your post, and I definitely like some of what I see, and I won't be criticising as there are just not enough of us fundies to go around.

The Altman Z-Factor, you may or may not, be aware was updated into the "improved" zeta model that is utilized by Moody's and Standard & Poor's.

Your discount rate is also "fixed" @ 5.5% or is it variable?
If fixed why so low?
If variable, and adjusted to interest rates, do you have a minimum in low interest rate environments?

Your other inputs are very different from mine, but that is really quite irrelevant.

jog on
d998

 

[bullmarket]

Hi ducati

Thanks for the tip on the Zeta model. I wasn't aware of it so I just did a quick google on Zeta and found this web page which explains briefly the concepts behind both the Altman and Zeta models.

In summary the web page says

Around 1977, Altman developed jointly with a private financial firm (ZETA Services, Inc.) a revised seven-variable ZETA model based on a combined sample of 113 manufacturers and retailers. The ZETA model is allegedly "far more accurate in bankruptcy classification in years 2 through 5 with the initial year's accuracy about equal." However, the coefficients of the model are not specified (without retaining ZETA Services).

According to this web page the accuracy of both Altman and Zeta in predicting company failures in the first year is about equal but Zeta is supposedly more accurate if looking further out. Personally I'd like to know if a company is in trouble sooner rather than later but it would be nice to have another model to compare results with.

The web page also says that you will have to pay Zeta Services Inc for the coefficients to their model

Re my discount rate: the cash component of my portfolio is kept in an Esanda online-only bank account which currently pays 5.55%pa. For all intents and purposes I regard that account as 'risk free' and hence use that account's interest rate for my discount rate. But of course anyone can use whatever discount rate is applicable to their circumstances....ie...10 year bond rate or whatever suits. As I don't invest in bonds I don't see it appropriate for me to use their rates as my discount rate.

Finally, re your comment "......there are just not enough of us fundies to go around." :iagree: imo there are pros and cons and merits in both technical and fundamental analysis and so I use both. To those that totally dismiss fundamental analysis I usually ask them what are they doing that is so much better and more profitable than what the likes of Waren Buffet do and not surprisingly not one of them has come up with an answer yet

cheers

bullmarket

 

[ducati916]

bullmarket

I have them, as I do bankruptcies, I tend to use them.
I'll PM them to you.

jog on
d998

 

[cubsfan]

the best investment book i've read is buffettology
it basically says:
1. find a quality company to invest in (usually a monopoly or business with brand name products with consistent earnings growth)
2. only invest in 1 if its selling below the instrinsic value
3. hold onto 1 for dear life to take advantage of the magic of compound interest

my latest exploit was an investment in Funtastic @ $1.56
Funtastic is a fantastic company! It owns and distributes at least 6 of the top 10 selling toys in Australia, has delivered consistent earnings growth and ROE
At the time it had an earnings yield of 12-13%, div yield of 8%...which beats the bond yield hands down.
Now the hard part is holding onto the stock for dear life, as I don't have the patience....the longest i've ever held onto a stock is 1-2 years....why oh why am I so weak.

 

[ducati916]

cubsfan

Buffettology, I agree, is an excellent book, and in addition it is an extremely easy read, although you will need to read it several times to derive the most benefit if this is your first foray into the fundamentals.

I have no problems with cigar-butt investing, as this negates the requirement for extremely long holding periods, which can be difficult when you are just starting out. Intrestingly, Buffett modified his approach under the influence of Munger, but started out life, and his rather moderate fortune, cigar-butt investing.

There are stocks that may well eventually find their way into a "permanant based" holding, but nothing yet.

This forum is positively crawling with fundies.
jog on
d998

 

[ducati916]

bullmarket

Re my discount rate: the cash component of my portfolio is kept in an Esanda online-only bank account which currently pays 5.55%pa. For all intents and purposes I regard that account as 'risk free' and hence use that account's interest rate for my discount rate. But of course anyone can use whatever discount rate is applicable to their circumstances....ie...10 year bond rate or whatever suits. As I don't invest in bonds I don't see it appropriate for me to use their rates as my discount rate.

The reason that many will use the "Bond interest rate" as their discount value is that the Bond market and the Stock market are usually, but not always correlated, viz. one falls, one rises, this actually is not really true at all, they are both correlated to inflation.

It is the movement in inflation, or deflation, that will adjust the bond rate through market operations. As the stock market does not directly reflect inflation as an interest rate adjustment, but as a P/E ratio adjustment, to directly correlate the two markets, you would use the Bond rate to adjust the required risk free return.

Thus while there is nothing "wrong" with using your discount rate, you may be badly out of kilter at the "extremes" of market valuations.
It is at the extremes the most money can be made, or lost, as the case may be.

jog on
d998

 

[bullmarket]

hi ducati

no problem...

I also assume that most of those that use bond rates as a discount rate would also then invest in the bonds if the NPV showed they should.

But my 'risk free' investment choice is the online-only account and so I think it is more appropriate for me to use the interest rate of my risk free investment as my discount rate....but I see what you are getting at

re your comment :

Thus while there is nothing "wrong" with using your discount rate, you may be badly out of kilter at the "extremes" of market valuations.

If a stock is genuinely at an 'extreme' value (in terms of what would be accepted as a fair PER) then it would be fairly unlikely the stock would pass my returns test and NPV test as described in my earlier post - and with the weightings I have assigned to those tests (as described earlier), both of them failing would give me a 'Fail' overall in my fundamentals model (pass level is a score of 70%+). But if just one of the two tests failed then the stock could still achieve a 'Pass' overall (on fundamentals) depending on the results of the other 3 tests.

cheers

bullmarket

 

[ducati916]

bullmarket

If a stock is genuinely at an 'extreme' value (in terms of what would be accepted as a fair PER) then it would be fairly unlikely the stock would pass my returns test and NPV test as described in my earlier post - and with the weightings I have assigned to those tests (as described earlier), both of them failing would give me a 'Fail' overall in my fundamentals model (pass level is a score of 70%+). But if just one of the two tests failed then the stock could still achieve a 'Pass' overall (on fundamentals) depending on the results of the other 3 tests

Generally speaking that is true.
However with cyclical industries, the PER is inverse.
A good example is the Automotive industry, low P/E's are the time to sell, and high P/E's are the time to buy.

Utilizing your PER on a cyclical industry as a weighting, could again throw up some anomalies. In Australia, cyclical industries are all the miners, gold, oil, timber, silver, you name it currently.

Extrapolating EPS from cyclical highs, can also be somewhat misleading, dependant upon the "growth factor" utilized.
Retail Banking another industry that springs to mind, currently projections are based on cyclical highs, but "Reserving for bad debt" has been reduced, thus increasing profit margins even further,

"Revolver's" are at all time high's, and are off Balance sheet items, absolute landmines in the statements just waiting to go off, and tank share prices.

jog on
d998

 

[bullmarket]

no problem ducati

I don't use EPS itself as a weighting. I use what I perceive to be a fair PER based on a company's and its sector historical PER averages and the forcast outlook for the company to calculate a potential future 2 year value (including dividends) of my investment which I then discount back to NPV.

I accept coming up with a 'fair' PER can be very subjective and hopefully as one gains experience they can more accurately determine a fair PER more often than not.

My fundamentals/valuation model I described in an earlier post was aimed as food for thought in reply to WB's thread starting post. I am happy with the way it has helped me over time determine which companies I should follow and which I should avoid in accordance with my investment objectives and risk tolerances. It obviously won't be suitable let alone applicable to all but if it prompts someone to at least think about maybe incorporating some fundamental analysis into their plans/strategies then my post will have served its purpose.

cheers

bullmarket