how to use stock screeners to find value stocks
DESCRIPTION
A presentation I used with founder of Screener.co, Lenny Grover. We discuss how he developed the technology to put incredible investing research power in the hands of individuals. Lenny also shares the criteria he uses when looking for value stocks.TRANSCRIPT
How to use technology to pick winning stocks
FinToolbox/Screener.co
Monday, September 26, 2011
My background
• management consulting
• generic frameworks for data analytics
• VC analyst
• ownership mentality
• “extreme” buy and hold
Monday, September 26, 2011
FinToolbox/Screener.co
2009 2010
sale sh
opping, lacke
d data
flash-cr
ash, opportu
nities
2011
launched beta
Monday, September 26, 2011
Investment Methodology
Monday, September 26, 2011
Investors struggle with too many decisions
Monday, September 26, 2011
look for reasons not to invest
Investing as exclusionary process
Monday, September 26, 2011
Screening process
= investment candidate
Monday, September 26, 2011
Continue looking for reasons not to
invest
Monday, September 26, 2011
TEST
intuition
outside knowledge
cyclical valuationsvs.
acyclical declines
Monday, September 26, 2011
Review public filings/public info
• Material changes to business• risk factors• long-term obligations• management/analyst forecasts• news (Internet traffic, industry data/reports, new
products)
Still looking for reason not to invest
Monday, September 26, 2011
Red flags?
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Metrics
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Define custom metrics
in addition to those normally used
Monday, September 26, 2011
Metrics used for exclusion
Still need full company checkup
Monday, September 26, 2011
Valuation
1. EV/EBITDA (in addition to P/E)1. target 3x to 6x for value2. 6x to 10x if willing to pay up for strong growth +
interesting (growth) markets2. Price/Net Tangible Assets (in addition to P/B)1. .5x to 1.5x for value companies (in other words, NTA/
Market Cap >.67x)2. Caveat: beware too many long-term or illiquid assets, particularly for financials.
New accounting rules since credit crisis give more leeway in valuing illiquid securities and whether PP&E and other long term tangible assets reflect true value depend on how their depreciation schedule reflects actual depreciation
Monday, September 26, 2011
Valuation (cont’d)1. “Margin of Safety”/Downside Risk
1. NCAV1. NCAV<Market Cap (1.2<x<1.5), if profitable2. otherwise just NCAV<Market Cap3. Caveats: beware high (and/or growing) levels of inventory
that may need to be written down if demand doesn’t materialize
2. Net Tangible Assets/Market capitalization3. (Total Current Assets - Total Liabilities)/Market capitalization4. (Total Current Assets - Inventory - Total Liabilities)/Market
capitalization1. higher is better (obviously), use this as display variable
(not filter)
Monday, September 26, 2011
Valuation (cont’d)
2. Multiple of Profitability1. EBITDA/(Market capitalization - Net tangible
assets)2. alternative to ROE, higher is better3. ranking variable (doesn’t have to be >5 but
flexible)
Monday, September 26, 2011
Consistency of results
1. Multi-period comparisons of revenue and net income
2. Estimates relative to past performance
Monday, September 26, 2011
Consistency of results [cont’d]
• looking for stability and or growth. • Screener.co supports up to 10 quarters/years but I rarely go that far
back (unless looking at PE10)• Now, I find looking at how companies performed during the last
recession (2008-2009 full years) an interesting metric, gives a sense for how the company holds up during the bottom of the economic cycle
• Even for cyclical companies, I like to see that they are able to maintain profitability or have modest cash-losses relative to their balance sheet (so they are not likely to get into distress even during a prolonged downturn)
• Use estimates to look forward and ensure future expectations are not dramatically poorer than past performance
Monday, September 26, 2011
Q&A
Monday, September 26, 2011
How to use technology to pick winning stocks
Learn more: Screener.co
Monday, September 26, 2011