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Chroma
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I am film and television producer who writes a value investing oriented blog called Chromainvesting.com. I try to explore the Deep value orientation of Graham, with an updated perspective that includes the work of Behavioural Finance gurus such as James Montier.
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  • Value Investing Ideas - Companies Passing my Custom Screens
    New Chroma Investing Feature

    I promised that I was going to be adding more value investing features to ChromaInvesting.com One of them is going to be a weekly list of companies that pass a few of my custom value investing stock screeners. Each week I will highlight a different custom Value Investing screen I use when deciding to do further research on a company. This week I will highlight the 80-20 Screener;

    80-20 Value Investing Screen
    80-20  value investing Screen
    80-20 value investing Screen 8-19-11

     I have attached a screen shot of a portion of my custom 80-20 Value Investing stock screener using Stock Investor Pro screen which is comprised of the following value investing elements:

    Low Price to Book Value

    1. Price to Book ratio in the bottom 20% of stocks screened. I have documented the low price to book strategy in the past.

    High Piotroski F-score

    2. a Piotroski F score of 7 or better. ( I will be high lighting this study in an upcoming article, that will be a must read article!) This helps weed out some of the worst companies.

    Low growth in assets

    3. The annual growth in total assets should be in the lowest 20% of companies screened (currently negative double digit asset growth). Studies have shown that companies with the lowest 20% of growth in assets outperformed the market as a whole.

    Pass the Z-score

    4. A passing score on the appropriate Altman Z score. That means above 3.o for Manufacturing companies and 2.6 for other companies.- This is for downside risk protection since the Z score helps warn of potential bankruptcies.

    Good Net Current Asset Value

    5. Net Current Asset value equal to or greater than 1.25 times market cap. I am looking for companies with assets close to NCAV.

    Current Price Earnings Historically Low

    6. Ratio of current P/E to 7-10 year P/E is less than 1.  I borrowed the next two criteria from James Montier.

    Low Price to Sales

    7. Price to Sales ratio  less than 1.

    The purpose of this to aggregate multiple value investing criteria

    Value Investing Ideas

    I have not yet investigated any of the stocks on this list, but I intend to begin to evaluate at least one of the stocks a month beginning in the next couple of weeks, so please return.

    Highlights of this weeks value investing screener.

    Benchmark Electronics BHE is a new entry to this list and worth a look.

    Several of these stocks trade with almost no volume or have very very limited financial information. Some of those include Chai-na-Ta Corp. CCCFF, Elegant Illusions EILL, Sonics& Materials SIMA.

    Satyam Computers SAYCY is an Indian company that had a very large accounting scandal, so unless the issue of assets has been resolved satisfactorily, may be a false positive to passing the screen.

    Good luck on your research, if you choose to take these companies to the next level of research. If you do, please report the results here.

    Disclaimer: I do not currently have any holdings of any of the companies listed on the screener. I may without notice buy one of these equities, if I find it fits my investing needs. Nothing in this post or this website should be construed as investing advice. I am merely expressing my opinion and sharing what interests me in the value investing arena. Please do your own research.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Aug 24 1:40 AM | Link | Comment!
  • Finding the Best Value Investing Stock Screener

    Stock Screeners are software that sort through a number of facts about companies using specific criteria. This sifting or "screen" acts as a sieve to filter out undesirable companies. To busy investors a good value investing stock screener is essential Investing software. They help cull the herd and target what an investor is specifically interested in. For example, in last weeks Value Investing Criteria that works Low Price to Free Cash Flow I wrote about a back tested theory that used Dow Jones Industrial Average Companies that have a Price to Free Cash Flow of less than 15. If you set up a custom value investing screener for those criteria, the only companies that would pass the criteria  are displayed.

    Some stock screeners  have just a few items to choose from. For these to be useful they should have at least one very compelling criteria that is not available elsewhere. Other value investing screeners have a multitude of inputs and customizable screening inputs and calculations that enable you to create completely custom screens. Any stock screener is just one of many ways to find potential investing candidates. The important thing to remember is that Stock screening is just the first step. It is not a magic bullet. You will need to do additional research and most importantly double check that the screen worked correctly and that the companies that passed are up to your investing standards.

    My favorite Value Investing Stock Screeners:

    I have broken these down into categories. Let's start with the cheap and the easy and move toward the expensive and complicated.

    Free Value Investing ScreenersGeneral Stock Screeners

    Bing Finance -

    Bing took over for MSN and their screener has several preset Value Investing screeners, including Value, Contrarian, Dogs of the Dow etc. The main advantage of this stock screen is its simplicity. A great one to get your feet wet, but you will quickly run into its limitations.

    Morningstar

    There was a time I relied on Morningstar for my preliminary financial data.  Until I realized that they did not always have accurate data and their customer response to complaints on this front was underwhelming in the least.  They still have a basic free stock screener, which might we worth a look at since, you can utilize some of Morningstar's evaluations on financial health, growth etc. I do not recommend their premium screeners or information.

    Specialized stock screeners

    Motley Fool CAPS

    The Motley Fool Caps has a very simple stock screener. You can't do a whole lot with it, but I like it because you can incorporate the CAPS rating system into their screen, which is interesting since a study showed that is a useful ally in outperforming the market. The whole wisdom of the crowds idea.

    Magic Formula Screeners

    Magic Formula

    The Magic Formula website has its own screener. The parameters are essentially the market cap. That's it! Starting with $50 million and sliding up. It spits out companies that pass the Magic Formula screen. Interesting when coupled with other criteria, although I don't use it by itself. As I have written about in the past some of the companies that pass the screen can be speculative in nature. That is why you need to take the results and apply another screen to it or evaluate using different criteria.

    Alternate Magic Formula -

    this is some version of an alternate  magic formula that someone set up that has higher liquidity and market cap requirements than the official Magic Formula site. I think it is interesting and if liquidity is really important to you this might be helpful.

    NCAV - Net Net Screeners

    Graham Investor screener is another free set of value investing screeners that are definitely flawed. The Piotrowski screener does not follow the F-score study suggestions, so is likely less than optimal. They have two Net Net Screeners based on shares outstanding and float. I use it occasionally since interesting companies show up on these screens, but many are not really Net Nets, so be careful and do your own follow up work.

    Super Low Price Value Investing Stock Screener

    American Association of Individual Investors stock screens - Not all the aaii screens are value investing screeners, but many are. For more detail see my post on value investing screeners. Free to members. $25 yearly fee. Highly recommended for beginning value investors. The screens are all pre-set and you can't customize unless you buy the premium software they also sell Stock Investor Pro.

    Premium Stock Screeners

    Stock Investor Pro

    SIP is a premium screening software package that the AAII offers to its members for $198/year and $248/yr for non members. It is an amazing piece of software. It is very customizable and I have more than a dozen custom screens I have developed using this Stock Investor Pro. There are two drawbacks. The data is updated once a week on Saturday, from the aaii site. The bigger problem for me was that it is PC only. I have to run a PC emulator known as vmware to run the program on my Mac. I have gotten over it, but the interface is very inelegant and PC looking and has no real design. All that said, since I started using SIP I almost don't use any other screeners.

    Gurufocus

    Gurufocus has several value screeners that are part of their premium $249/yr. services. These are largely value investing screeners including NCAV screener, low price to book, low price to sales, and Undervalued Companies, they do offer one free screen called 52 week lows. I use their premium services for their newsletters more than their screeners, but if you subscribe to the newsletters you have the stock screeners for free.

    Value Investing Europe

    This premium value investing screener has several interesting screens including Piotroski F score screen, The Graham Investor has one as well but it is implemented incorrectly (doesn't screen for low price to book first before looking at F score), Value Investing Europe does screen correctly, their screens are not limited to Europe, they also include the United Kingdom,  US and Japan as well. The price, just for the screeners is 249 Euros/yr. They also offer newsletter services.

     Ultra Premium Stock Screeners

    Capital IQ-

    This ultra expensive but terrific stock evaluation software is so expensive that it is not appropriate to small time value investors, and the only beginners that it would be appropriate for are investors with large portfolios.

    No matter what your budget and your needs their is some value investing screener out there that will fit. More information on value investing please go to chromainvesting.com.

    Disclaimer: I do not currently have a financial relationship with any company described in this article.

    Aug 24 1:33 AM | Link | 5 Comments
  • Using Value Investing Criteria that Works - Low Price to Free Cash Flow

    In Value Investing we do not use only one set of criteria, clap our hands and say Eureka, I have it! We have several metrics that we can use in our Value Investing toolkit, sometimes in conjunction with each other to evaluate a company and discover if it is a bargain.

    What is Low Price to FCF?

    Two of the most important words in evaluating a company are Cash Flow. Old School Value Investing focused on Earnings. That is so 1950’s. I am not going to go into the details of Free Cash Flow. Please see the Chroma Investing Value Investing Terms FCF for a fuller explanation than I give here. The short version is that Free Cash Flow is what a company really has left over at the end of the year. It is the amount that you can turnover to investors in dividends, buy back stock, pay down debt or just let sit on your balance sheet.

    Low Price to Free Cash Flow (P/FCF) is a measure that value investors find useful to analyze companies finances in relation to it’s current stock price. It is a stricter measure than the price-to- operational cash flow ratio as it backs out capital expenditure.  Here is the simple equation:

                                        Price to FCF = Market Cap / Free Cash Flow

    A high ratio indicates that a company is expensive relative to its Free Cash flow. A low ratio shows that it is cheap in relationship to FCF. Like most of these value investing metrics you can reverse these and you will get the Free Cash Flow yield which is expressed as a percentage. With a Free Cash Flow yield, higher is better.

    Simply put, Free cash flow is a measure of a company’s ability to generate cash, which is a starting point for stock pricing. Or, as Warren Buffett said, “Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.”

    An easy formula for free cash flow is, FCF = Operating Cash Flow – Capital Expenditures. The numbers needed for the calculation are found on the Cash Flow Statement of the Financial Reports that a company issues in its 10K or 10Q.

    How to use P/FCF in an Investment

    Let’s say you agree that using FCF can help you make your value investing decisions,  how might you go about it? Here are a few suggestions.

    1. You can buy stocks in companies that are low in Price to FCF as compared to the market as a whole. That is you can compare the P/FCF of a company to that of the overall market. For example you could compare the FCF ratio of General Electric to the S & P 500. Although, I could not find this information on Standard and Poor’s own website.

    2. You can compare Free Cash Flows to some arbitrary number, say 10 or 15. You may want to do this if you can come up with some historic norm for Free Cash Flow.  If you can review historical data of FCF over a long period of time, it is possible to come up with a normalized ratio. You could use that number as your comparison.  Again, this will be difficult since historic data for Free Cash Flow is difficult to obtain very far back.

    3. You can buy a stock using P/FCF either as a solo investing criteria(not recommended) or in combinations with other factors. For example you might use FCF ratio with such metrics as low price to book, a high acid test ratio, high ROIC, etc.

    4. You can buy a stock when a company has a Low P/FCF in relationship to its own 5, 7 or 10 year financial history. I always like to compare current ratios to historic ones to get a relative idea if this metric is cheap for this particular company.

    5. You can buy the stock of a company who Price to Free Cash flow is low relative to its industry. In other words you take a look at Exxon’s FCF ratio and compare it to the oil industry as a whole to get a relative industry ratio.

    6. You can buy a fund that specializes in Low Price to FCF. This may be an index mutual fund or an ETF. I don’t know of any pure play funds on Low P/FCF, since most value funds use a combination of factors, but perhaps there is one that has escaped my notice.

    So, why is low price to free cash flow so important, that it is worth investing?

    Importance of Low Price to FCF

    Low P/FCF has been a good indicator in the past of what makes a successful investment moving forward. Let me give a few examples.

    Peter George Psaras wrote a study called “Back-test showing the power of Price to Free Cash Flow in the Investment Process” where he back tested buying Low Price to Free Cash Flow stocks from the Dow Jones Industrial Average for 1950 to 2007. His criteria was simple: buy every stock that had a Price to FCF ratio less than 15 and sell it after a year. The results were remarkable. The performance was 22.77% on average over the 58 years. The average gain for the DJIA was only 7.82% for the same period.  Quite an outperformance

    I asked myself the question, what does this mean right now. So I created a stock screen with Stock Investor Pro using data from last Friday August 5th. Here are the companies passing the screen:

    DJIA Low Price to FCF.png

    I am not recommending any of these companies, but it does give you some idea why some high profile value investors are interested in Microsoft, Pfizer and Cisco to name a few. Perhaps a few of these companies are worth some further research.

    Other investing studies have used the less stringent  Low Price to Cash Flow ratio (P/CF). Let’s see if there was a similar outperformance.

     

    Does Low Price to Cash Flow work in shorter time Frames.

    In their study, “Contrarian Investment, Extrapolation and Risk, Josef Lakonishok, Robert W. Vishny and Andrei Shleifer reviewed all the companies on the AMEX and NYSE from 1968 to 1990. They divided up the companies in to ten selections called deciles by Price to Cash Flow. They formed portfolios that they kept for five years. What they discovered is that the lowest Price to Cash Flow stocks outperformed the highest  Price to cash flow stocks on average during a holding period of 5 years. The average return for the  low P/CF stocks was 20.1% per year and amongst the high P/CF stocks it was only 9.1% with cumulative 5 year return of 149.4% to 54.3%. Perhaps not as exceptional as the Psaras study, but significant none the less.

    This is one of those studies that is useful only in the abstract. Realistically an investor is not going buy the lowest  10% of p/cf companies on any exchange.  But it does continue to show that when you are considering value investing metrics that P/FCF should remain in the toolkit.

    Low Price to Cash Flow Internationally

    All this may be well and good in the United States, but do these kind of value investing metrics work abroad? A. Michael Keppler looked at this in his study “Further Evidence on the Predictability of International Equity Returns: The Importance of Cash Flow in Country Selection.” While he did not use FCF specifically, it is instructive. He found that from 1970 to 1989 in the eighteen countries studied that the lowest price to cash flow country indexes produced a result of 19.2% on average in local currencies compared to the highest Price to cash flow country indexes with a return of only 4.7 % in local currencies.

    Since this was based on buying index funds this study has an actionable element. But it would require a little research. You don’t think I am spoon feeding you everything, do you? An investor could research index funds based on different countries stock markets. They would need to have P/CF information on each index (preferably FCF). Compare the indexes and pick a small basked of low cost to cash flow indexes.

    If anyone does this research please report back.

    Why does Price to FCF work as a Value Investing Metric?

    No one knows for sure but here are a couple of my guesses.

    1. Companies with low prices related to any value metric, Earnings, Book Value, Sales etc. are unpopular. Otherwise their price wouldn’t be low. Something is bothering the market, bothering it so much that it MAY be undervalued. Low Price to FCF investments are a contrarian investment by definition, and mostly people want to say they own Apple or Netflix, not Aeropostal or Microsoft.

    2. Cash Flow may be more honest than earnings, a commonly used measure of a companies performance. As Damodaran said in his book Investment Fables,Accountants measure earnings by subtracting accounting expenses from revenues. To the extent that some of these expenses are non-cash expenses … and because accrual accounting …does not always yield the same results as cash accounting, accounting earnings can be very different from cash flows.” (Italics are mine)

     

    Having a healthy Free Cash Flow gives a company options. It is a sign of a financially sound company thriving in its industry. Free cash flow is often used for stock buy backs, dividend payments and in reducing debt.

    Finding such companies is usually easier in a bear market or when a company misses earnings, makes a mistake which leads to bad press, all of which can temporarily depresses its stock price. Investors finding such opportunities should, as they say, “strike while the iron is hot”.

    Please come to ChromaInvesting.com each week as we write about various Value Investing Criteria to help you build your Value Investing arsenal. Add your comments if you have any thoughts about using  Low Price to FCF in investing. Finally, if you haven’t already done so, please sign up for our email list (I promise I won’t spam you.) or like ChromaInvesting on Facebook.

    Disclosures: I do not have any financial interest with aaii.com or Stock Investor Pro, but I am a paid member of the first and I have purchased the second for the past two years. I am making no recommendations on stock purchases or sales, just expressing my opinion on what I am exploring right now. I am not a professional investment advisor but a Film and television producer, thus everything here is for entertainment purposes only.

    Copyright 2011 ChromaInvesting

    Aug 16 3:40 PM | Link | 2 Comments
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