I can imagine that amongst the WSO community there are countless members that follow value principles. As I strive to expand my knowledge into this area I was looking to get some insight from more seasoned professionals.
As of now my current strategy involves the following:
-Screen equities based on fundamental criteria (I.E. P/S, P/E, P/EBITDA below a certain threshold; somewhere to the tune of 11-15 depending on measure, etc).
-Continuous earnings growth (Looking primarily are true indications as opposed to non-gaap manipulated numbers; I take adjusted numbers with a grain of salt).
-Companies that have entered wall streets bad graces; a bad quarter doesn't indicate fundamental flaws (I.E. coach after they reported poor earnings at the end of January/February. Bought at 51, increased my position at 45, sold at ~57 in April).
-Look at inside buying.
-Look at institutional ownership.
-Review latest 10k and last 4 10q's.
While I understand that everyone develops their own screening criteria and rationale my three questions are this:
1). Am I missing something very glaring that should be incorporated?
2). Does anyone take this one step further and screen for companies exiting bankruptcy, or buy bonds with convertible features as they are deeply discounted for companies with a questionable going concern?
3). To what extent do you weigh in sell-side ratings? (Their value add is questionable but they obviously move the needle one way or another in the short term).
Discuss.
What about corporate governance? I tend to find that significantly important when deciding on a potential value investment.
Def haven't incorporated this before unless there's massive ethical issues. Ill add it to my process, thanks!
I'd check the 8Ks for each quarterly filing if they have color on non-GAAP metrics and other good stuff.
It's almost important to take it a step further and understand what's going on in the markets as a whole. Not necessarily from a macro sense, but from a "what has the market been doing and what sectors are working now?". Stocks are getting buoyed right now from QE so when a bad quarter arises for a company, it doesn't take long for investors to snap it right back up (as the ex you pointed out). This won't always been the case, especially on such a short time frame, and is important to note when buying certain "value" stocks.
1) I would say focus on developing your circle of competence rather than trying to be broader.
2) Lots of value investors do this and lots don't. See #1.
3) We don't. In addition, lots of value shop put a premium on independence, If you're a LT investor, short-term moves won't be a deciding factor.
Thanks for the clearly spelling this out. By competence are you referring to establishing your analysis foundation, or industry vertical specialization?
I think many/most investors see sell-side ratings as a gauge of current market sentiment, but almost never a leading indicator of stock performance..
If you don't know exactly what he means by circle of competence you have not read nearly enough Buffett. Definitely check out some of the old shareholder letters and everything by Graham and Klarman.
The recommendations that analysts give on companies is a good way to see where the market sentiment is, but also try checking social media (twitter) and type in the stock tag to see what people are saying about the company in real time. That information can give you insight as where your entry point could be. There is a lot of noise in the market so its important to hone in on whats worth listening to.
Both.
The comment above isn't to make you feel like being a generalist is wrong - I in fact prefer it - but you make you realize that a fundamental analyst works towards gaining an informational edge. You need to find your path of doing so.
Right on. Still very much a work in progress but I appreciate the insight.
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