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The book Buffettology describes a screen that is similar to how Warren Buffett looks for stocks to buy. I have found this screen to be a good starting point and often offers stocks that we may otherwise miss from a stricter valuation oriented screen.
Buffettology screen places a great deal of emphasis on the quality factors with companies. Therefore, it selects for consistent profitability, revenue growth and earnings growth, solid return on equity and ROIC as well as low leverage. This doesn’t filter for the cheapest valuations. As Buffett says, sometimes you have to pay up for the best quality enterprises.
But of course, this screen is not the final word – we can still add the valuation filter to the screener results.
This screen was run in Stock Rover. Learn more about why this could be the only investment research tool you would ever need.
Mid Cap - Buffettology Inspired
This screener is based on criteria described in the bestselling Buffettology book. The company should have a 10-year track record of generally increasing EPS with no negative earnings years; long-term debt not more than 5 times annual earnings; average ROE over the past ten years at least 15%, average ROIC over the last 10 years at least 12%, and earnings yield should be higher than the long term Treasury yield.
Criteria:
Earnings Yield > 3
Equation: "EPS [Now] " > "EPS [Y5] " and "EPS [Y5] " > "EPS [Y9] "
Equation: (( "Return on Equity [Now] " + "Return on Equity [Y1] " + "Return on Equity [Y2] " + "Return on Equity [Y3] " + "Return on Equity [Y4] " + "Return on Equity [Y5] " + "Return on Equity [Y6] " + "Return on Equity [Y7] " + "Return on Equity [Y8] " + "Return on Equity [Y9] " )/10)>=15
Equation: "Long Term Debt [Now] " <=(5* "Net Income [Now] " )
Equation: (( "ROIC [Now] " + "ROIC [Y1] " + "ROIC [Y2] " + "ROIC [Y3] " + "ROIC [Y4] " + "ROIC [Y5] " + "ROIC [Y6] " + "ROIC [Y7] " + "ROIC [Y8] " + "ROIC [Y9] " )/10)>=12
Equation: "EPS [Now] " >=0
Equation: "EPS [Y1] " >=0
Equation: "EPS [Y2] " >=0
Equation: "EPS [Y3] " >=0
Equation: "EPS [Y4] " >=0
Equation: "EPS [Y5] " >=0
Equation: "EPS [Y6] " >=0
Equation: "EPS [Y7] " >=0
Equation: "EPS [Y8] " >=0
Equation: "EPS [Y9] " >=0
Exchange
Market Cap ($M USD) > 2000 < 5000
Country = USA
This screen returned the following stocks:
The following are my brief observations and next actions on these stocks.
AB – AllianceBernstein Holding
High dividend yield and payout ratio but that is not necessarily bad. AB is a Publicly Traded Partnership (PTP) and the financial statements are different from C-corps. Its source of income is AB limited partnership interest. I will need to look into the AB L.P financials (subsidiary) to make a call, and for that reason I am adding this to the watchlist.
ACLS – Axcelis Technologies
It is a semiconductor equipment company, and I consider this sector as over heated and prone to market risk. The stock is at fair valuation but if the semiconductor market dips, it should become available at much better valuation.
APAM – Artisan Partners Asset Management
Great asset manager trading at 11.2 P/E and 0.6 forward PEG. 7.5% dividend yield is nice but on the high side. The payout ratio is around 82%. I would like to dig deeper and compare this to AB. Adding to the watchlist.
AX – Axos Financial, SFBS – Servisfirst Bancshares
I do not cover or invest in regional banks as this is not in my circle of competence.
BCC – Boise Cascade
The company produces engineered wood products and building materials. The stock has lost tremendous value in the recent years as the real estate market in the US has declined. At 15 times earnings, the multiple is good, so the question is primarily whether we anticipate a recovery in construction spending any time soon. I will add this to the watchlist for deeper research, and a look into the prospects of the construction/real estate cycle recovery.
It speaks to the strength of the business that despite the recent declines in business and stock price, the stock still made it to the Buffettology screen.
CVCO – Cavco
Makers of manufactured housing, the stock has done well in the last year up about 20%. The P/E ratio is close to 25. No further interest as I don’t see value.
FHI – Federated Hermes
Another asset management company, perhaps even cheaper than APAM. P/E ratio is 10.9. Dividend yield is 2.6% and has a low payout ratio. Adding to the watchlist.
FIZZ – National Beverage Company
The stock appears to be fairly valued today but cheaply valued based on its own historical benchmarks. It has high margins and the risk of further stock value loss appears to be small. Its peers trade a much higher valuation. Not sure if this is a good prospect for the portfolio but I will add to the watchlist so I can research the industry.
GRBK – Green Brick Partners
GRBK is a homebuilding and land development company. The financial ratios paint a picture of undervaluation, although this is typical of the companies in this sector today. I am not convinced that we will see a recovery in the real estate market anytime soon, so I will pass for now.
LOPE – Grand Canyon Education
It is a publicly traded education services company that supports its non-profit university partner, Grand Canyon University. The stock is expensive.
MATX – Matson
Provides ocean shipping, rail and truck transportation, logistics services, warehousing and distribution services. Matson’s ships are US built, registered and operated, and this can be a benefit in today’s global economic environment. The stock seems to be well priced and may be worth a deeper look. However, we already own a competitor in our Inner Circle portfolio and we do not wish to increase our exposure to this sector unnecessarily.
MGRC – McGrath RentCorp
They make modular buildings such as one you see on construction sites. These buildings are rented or leased. They also lease other equipment. The stock appears to be fairly valued.
MMS – Maximus
Maximus Inc designs, develops, and delivers programs enabling people to access vital government services. In some ways, the demand for their services is only increasing today. The business is projected to enjoy robust growth in the next 5 years while the stock is cheap at a 15 P/E and 0.6 PEG. The company pays a 1.4% dividend yield. Adding to the watchlist.
MZTI – The Marzetti
The Marzetti is in the packaged food industry. The stock is expensive.
SKY – Champion Homes, TREX – Trex
Both companies are exposed to the residential real estate markets that I am avoiding for now.
WDFC – WD-40
There may be 100 uses for WD-40 but the stock today sells at 30 times earnings and 10 times book value. At these prices I will avoid for now.
This was a good productive screen with 6 stocks added to the watchlist. None of this implies any of these stocks are good buys. I still need to review the stocks in the watchlist deeper to see whether they are good potential buys. As usual, do your own due diligence.
Shailesh Kumar, MBA is the founder of Astute Investor’s Calculus, where he shares high-conviction small-cap value ideas, stock reports, and investing strategies.
His work has been featured in the New York Times and profiled on Wikipedia. He previously ran Value Stock Guide, one of the earliest value investing platforms online.
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