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Shiraz Lakhi
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Investor/Entrepreneur. Founder: tradePilot.com
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  • Value Investing In Technology Stocks With The Strongest Free Cash Flow Yields

    Value Investing: Technology Stocks with the Strongest Free Cash Flow Yields

    by Shiraz Lakhi

    One of the most successful self-directed investors I know, often makes the passing comment in times of uncertainty and market correction (paraphrasing): "despite the current market downturn, there is nothing fundamentally wrong with this company and the demand for its product or service - it's outlook - and this alone is what drives me to maintain objectivity, and deter panic/emotional decision making".

    It is simple truth that cuts through to what is essential in investing. A good business with consistent sales growth, a growing market, healthy profit margins, balance sheet, strong free cash flow yields relative to industry peers, and competent management (often including founding members) delivering year-on-year ROE growth, can get pulled down with the rest of the market due to macro fundamentals - the rest of the market undergoing a necessary pullback/correction. In such times, one of the best sectors I prefer to focus on is the technology sector, primarily because the sector by and large serves a global market, and (as a side-point) where demand may temporarily slow in one part of the world, but it is generally compensated by demand from emerging global markets and will likely continue to be so indefinitely.

    To identify quality businesses, my first point of call is a simple stock screen focused on the technology sector. This process extracts a shortlist of companies which I can then focus on and research further. Stock screeners allow investors to narrow down a universe of thousands of stocks into a handful of businesses one can focus on.

    In this weekly article (which I try to update every Tuesday), I will run through a simple, example stock screen which combines both fundamental 'qualitative' screening rules together with the price/free-cash-flow value ratio. The goal is to identify growth companies in the technology sector, providing strong free cash flow yields.

    Screening Rules:

    Selected Sector: Information Technology Sector

    Market Capitalization > $50 Million

    Average Volume > 30,000 Shares/Day

    Company Universe: US Listed Companies Only

    Sales Growth Current Quarter > Previous Year Quarter

    Operating Margin Current Quarter > Previous Year Quarter

    Price/Free-Cash-Flow (Price/FCF) Ratio < 15.0

    Liabilities/Assets Ratio < 1.0

    Results are ranked (sort-order) by lowest Price/FCF ratio first.

    Stock Screen Results:

    Pre-Open Tuesday 14th October 2014

    (click to enlarge)Price-to-Free-Cash-Flow-Stock-Screen

    As stated earlier, note that the screen results do not imply any investing or trading opportunity. Rather, the stock screener functions as a practical filter, narrowing down a database of thousands of stocks into a list of companies that meet a specific set of screening rules. Investors can focus on the top-most results, and apply further research, analysis, reasoning, and due diligence.

    The objective is to discover good businesses with strong fundamentals, and more critically, 'continuing' growth fundamentals (study of product/service, and the global market). It is a good bet, astute investors will discover companies which are fundamentally sound, and undergoing a temporary correction/pullback. In my view, these are businesses which represent the best opportunities to build up positions at a discounted (pullback) price...

    In the long run, as long as there are no structural/systemic issues within the business itself, the company is likely to continue growth and produce long term value creation.

    Investors/traders can view the latest stock screen at any time, based on the same rules above, or custom build their own screens...

    This includes multiple free stock screening filters, such as sales growth, gross/operating/net margin growth, return on assets, equity and capital (and QoQ/YoY growth in the same metrics), key value and balance-sheet ratios, including P/E, P/EBIT, Price/Free-Cash-Flow, Price/Book, and so forth. Price and volume based technical indicators (updated intraday) are also included.

    By Shiraz Lakhi

    Oct 14 5:42 AM | Link | Comment!
  • Value Stock Screening - Growth Stocks Trading Below Book Value

    Value Stock Screening - Growth Stocks Trading Below Book Value

    By Shiraz Lakhi

    Often times, a good business with consistent sales growth, operating margin growth, strong free cash flow yields relative to industry peers, low debt, and a capable management team delivering year-on-year ROIC growth, can get beaten down with the rest of the market due to macro fundamentals - the wider economy undergoing a necessary correction - or something more fundamental/structural within the business.

    One of the key objectives in developing our own in-house stock screener was to provide investors with the ability to combine fundamental screening rules (identifying quality businesses, exhibiting strong value and growth fundamentals), with 'value' ratios (eg., price/book ratio, price/free-cash-flow, etc.), in order to shortlist companies which may have become potentially undervalued.

    In this article, I will run through a simple, example stock screen which combines both fundamental 'qualitative' screening rules together with the price/book value ratio. The goal is to identify growth companies currently trading below book value.

    Screening Rules:

    • Selected Sector: All Sectors (Excluding Financials)
    • Market Capitalization: More Than $50 Million
    • Average Volume: More Than 30,000 Shares/Day
    • Company Universe: US Listed Companies Only
    • Sales Growth: Quarter/Previous Year Quarter Growth
    • Operating Margin: Quarter/Previous Year Quarter Growth
    • Price/Book Ratio: Below 1.0
    • Debt/Equity Ratio: Below 1.0

    Results are ranked (sort-order) by lowest Price/Book ratio first.

    Note that the resulting list of stocks do not imply any investment or trading opportunity. Rather, the stock screen functions as a filter, narrowing down a universe of over 5,000 stocks into a handful of companies that meet a specific set of qualifying rules, which investors can practically focus on, subject to further research, analysis, reasoning, and due diligence.

    The goal is to identify good businesses with solid, continuing growth fundamentals, undergoing a temporary correction, rather than a business with systemic/structural issues, which can be identified and set aside through disciplined research/analysis.

    Stock Screen Results:

    Pre-Open Monday 13th October 2014

    (click to enlarge)Free Stock Screener

    Investors/traders can view the latest stock screen at any time, based on the same rules above, or apply their own...

    This includes any number of free stock screening rules, such as quarterly and annual sales growth, ROA/ROE/ROIC growth, margins (gross, operating and net), margin growth, and multiple value ratios, including price/earnings, price/EBIT, price/free-cash-flow, price/book and price/tangible book. Intraday price and volume based technical indicators are also included. The stock screener is 100% free.

    By Shiraz Lakhi

    Oct 13 9:10 AM | Link | Comment!
  • Undervalued Tech Stock Kulicke & Soffa Industries Boasts 13.9% Free Cash Flow Yield & Ultra-Low PEG Ratio
    By Shiraz Lakhi - Many investors who follow my articles and trade ideas here on SA will know I look primarily for strong free-cash-flow-yield metrics, as a basic starting point for potential plays - preferably within a 'sector' which has become technically oversold.

    One such company which appears on my radar today, is Kulicke & Soffa Industries (NASDAQ:KLIC). This semiconductor equipment and materials company currently generates leveraged-free-cash-flow of $89.43 million on a trailing 12 month basis. The last trading session valued the business (Enterprise Value) at $641.44 million, hence returning a significant free-cash-flow-yield (FCF/EV) of 13.9%.

    KLIC Stock Chart & Trend Signal Indicator

    Additional metrics in favor of KLIC include: a low PEG ratio of 0.39, a quick-ratio of 3.24 (strongly bullish), and a current-ratio of 3.82 (strongly bullish). KLIC currently trades at $11.41 per share, around 116% above its 52 week low.

    With fundamentals in favor of KLIC, I look to time my entry into the stock. Here, a simple rule is adopted - to trade when the sector for the specific stock (in this case, the technology sector (NYSEARCA:XLK) becomes oversold, and exhibits multiple technical buy-long signals.

    A simple sector based technical analysis indicator, such as the Technology Sector Trend-Indicator, freely available at tradepilot, is applied - where for example, if I am looking at selective stocks within this sector, I wait for the Trend-Indicator to become oversold, and to signal a fresh reversal/new green-bar long signal.

    The timing method effectively reconciles 'both' fundamentals and technical analysis into a disciplined stock selection and entry process - knowing 'which' stocks to focus on, and 'when' to buy them.

    By Shiraz Lakhi - Indenpendent Investor/Entrepreneur

    Enterprise Value/Free-Cash-Flow Data Sourced From Yahoo Finance. Stock Data & Performance Analytics Sourced From TradePilot.com.
     
    Jul 05 1:07 PM | Link | Comment!
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