Value Investing

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Quadalupe
Posts: 79
Joined: Fri Jan 23, 2015 4:56 am
Location: the Netherlands

Value Investing

Post by Quadalupe » Fri Dec 07, 2018 8:35 am

I was wondering if and how people on this forum are applying Value Investing. I've finished the Intelligent Investor recenly and am looking for ways to apply it. I don't yet want to buy stocks, just see if I can get some analysis done.*

In the books he describes some criteria a defensive investor should look at before buying stock in a company:
1. Adequate size of the enterprise
$100 annual sales (in 1970 money). Nowadays: 2 billion

2. Sufficiently strong financial condition
asses = 2x liabilities (don't count goodwill!). Long term debt < net current assets ('working capital')

3. Earning stability
earnings > 0 for 10 years

4. Dividend Record
Uninterrupted payments for at least the past 20 years

5. Earnings Growth
earnings per share growth of 33% in 10 years (3 year averages at start and end)

6. Moderate P/E ratio
P/E <= 15 as average on past 3 years

7. Moderate ratio of P/B ratio
Price < 1.5 book value last reported. OR: P/E times P/B < 22.5 (e.g. 15 * 1.5 = 22.5 so a-okay)
I've tried to use Finviz.com to screen stocks on these criteria (I couldn't find them all though). See here. One example of a stock that seems like a good buy would be Aegon. Low P/E, very low P/B, good dividend yield.

Now, my question is: what am I missing? I know that good next steps would be to read the annual reports of several years (and first some books about interpreting annual reports), are there any other steps you would take?

* Of course, I need to read and work at a lot more on this subject before I can actually can use it to buy stocks.

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Gilberto de Piento
Posts: 1123
Joined: Tue Nov 12, 2013 10:23 pm

Re: Value Investing

Post by Gilberto de Piento » Fri Dec 07, 2018 9:56 am

Knowing little about value investing but having read a number of dividend investing books I was surprised to see criteria 4, "Dividend Record
Uninterrupted payments for at least the past 20 years" on the list. It makes sense, but I wonder how much overlap there is with lists like "dividend champions," "dividend aristocrats," and the like (even though if I remember correctly those lists are based on dividend growth rather than just not missing a dividend).

arcyallen
Posts: 57
Joined: Sat Jan 20, 2018 11:20 am

Re: Value Investing

Post by arcyallen » Fri Dec 07, 2018 10:44 am

Quadalupe, I have no special advice for you but congratulate you on studying hard BEFORE you take the test. People usually start buying stocks, and then long after start doing actual analysis beyond a quick google search.

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Bankai
Posts: 273
Joined: Fri Jul 25, 2014 5:28 am

Re: Value Investing

Post by Bankai » Fri Dec 07, 2018 9:29 pm

I'm also not a fan of dividend record. Companies which get into difficulties sometimes reduce dividend to a token amount to artificially maintain their track record. More worryingly, some companies heading for a crisis often refuse to stop paying dividend & instead redirect cash flow to reduce debt & sometimes even will take more debt on only to maintain dividend payments, which is exactly the opposite what they should be doing.

What do you expect to discover by reading annual reports that have not been spotted by hordes of accountants & analysts also reading them & is not already reflected in consensus price?

arcyallen
Posts: 57
Joined: Sat Jan 20, 2018 11:20 am

Re: Value Investing

Post by arcyallen » Sat Dec 08, 2018 9:35 am

Bankai wrote:
Fri Dec 07, 2018 9:29 pm
What do you expect to discover by reading annual reports that have not been spotted by hordes of accountants & analysts also reading them & is not already reflected in consensus price?
I think it's more a matter of understanding WHY the consensus price is what it is. When I started reading headlines "Housing Market May Never Recover" I bought DHI, the nation's largest and strongest homebuilder, If everyone is convinced something is going to crash and burn, and you're convinced it's big and strong, that's a buy signal to me. I've did that with some banks during that same time, too.

Value investing requires having an unpopular opinion. You likely won't uncover any special data that no one else found, but it will help you form those unpopular opinions if you read with a clear mind.

Lucky C
Posts: 272
Joined: Sat Apr 16, 2016 6:09 am

Re: Value Investing

Post by Lucky C » Sun Dec 09, 2018 9:49 am

When looking at an apparently good value stock, you have to figure out if it's a value trap. It could be at a low price with a high dividend yield because insiders and professional investors know that it's likely to cut its dividend or go bankrupt. Getting caught in a value trap and losing a significant amount only 1 in 10 times could wipe out a few percent of excess return out of your other 9 out of 10 value bets.

You also have to figure out if value is still a viable factor for generating alpha. It could be that at the time of the Intelligent Investor, it was easy to get excess returns with a simple value strategy, but now it could be significantly more competitive, including competition from algorithms.

I don't seem to have a natural aptitude for figuring these things out compared to other investing strategies. All I know is that it is generally difficult to find U.S. value stocks in 2018. Value screens will probably come up with a greater proportion of international/emerging stocks at this point in time.

Regarding Aegon, why is its total return down over 60% from its pre-financial crisis peak in 2007? Why is its total return down over 85% from its January 1999 levels? It greatly lagged the S&P500 since the 2009 bottom as well. It's been a terrible investment even when including its dividends for nearly 19 years and currently appears to be crashing. So even though it looks like a great value, how likely is it that now is going to be the time that it starts outperforming the average stock? Maybe it's still a great buy for the dividend alone (if it's sustainable), but I wouldn't want to jump right into a stock that's down 18% the past month just because it looks good on a value screen.

2Birds1Stone
Posts: 382
Joined: Thu Nov 19, 2015 11:20 am

Re: Value Investing

Post by 2Birds1Stone » Sun Dec 09, 2018 11:49 am

I don't try to outsmart the market, therefor avoiding individual stock pics.

In regards to companies cutting dividends, heck it even happens with VTI/VXUS! If there was a proven method of generating alpha through value investing, hedge funds, endowment funds, etc would have long done it. Instead, they tend to underferform the passive 2-3 fund portfolio.

frommi
Posts: 71
Joined: Sat Jun 29, 2013 4:09 am

Re: Value Investing

Post by frommi » Sun Dec 09, 2018 1:27 pm

I would start with stable ncav stocks, because ncav is the easiest way to value a business. When i value a business on earnings i try to find 3 different valuations and take the average. Forget all the naysayers and index huggers, achieving alpha is possible but it is not easy.

Dream of Freedom
Posts: 235
Joined: Wed Aug 29, 2012 5:58 pm
Location: Nebraska, US

Re: Value Investing

Post by Dream of Freedom » Sun Dec 09, 2018 3:17 pm

Paper trading is a good idea. TD Ameritrade offers a free think or swim paper trading account.

Date a few strategies before just marrying yourself to value investing. Try growth, income and technical analysis too.

Dream of Freedom
Posts: 235
Joined: Wed Aug 29, 2012 5:58 pm
Location: Nebraska, US

Re: Value Investing

Post by Dream of Freedom » Sun Dec 09, 2018 3:36 pm

frommi wrote:
Sun Dec 09, 2018 1:27 pm
index huggers
:lol: I love it.

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