I promised that I was going to be adding more value investing features to this website. 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 8-19-11

I have attached a screen shot of part 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.

Related Posts:

• 3 Must haves for your Value Investing Notebook
• Best Value Investing Screeners
• Real Returns are the only Returns that Matter
• 80-20 Investing – the Portfolio
• Great Value Investing Strategies – Piotroski’s F-score Investing

What is Low Price to FCF?

Two of the most important words in evaluating a company are Cash Flow. Old School Value Investors 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 expenditures.  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 5^th. Here are the companies passing the screen:

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 ( like now) 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 back 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 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.

If you would like to download post you can here.

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• Greenblatt, Ackman & Value Investing Masters speak at the Value Investing Congress
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• Lessons Learned from Mike Burry
• Investing in Low Price to Book Stocks- Value Investing Series

I actually keep several investing notebooks for ChromaInvesting. I will outline what I like to keep in my Notebook below.

Value Investing Screener Results

I like to keep a list of stocks that have passed my value investing stock screening criteria.

I have several criteria I use and I keep a list for each one. For example, I have a custom screener that I use for 80-20 Investing.

I re-screen each week and then put the results in a blue 3 ring binder. Yes, I know there are newer ways to store information, but this is what works best for me. I set up the screener in Stock Investor Pro.

Another example of a stock screen I will keep in my investing Notebook is a screen of Magic Formula Stocks.

It is important to keep the screen results, because many of these companies will not pass further scrutiny and you will need to return your screener lists for further research.

Research on Potential Investments

Some companies will make it through your screening process and you will commitment a certain amount of time compiling your investment thesis and accompanying financials on this company. The first tool I use for this is OSV spreadsheets. You can quickly get a whole bunch of information on the stocks that pass your screens. It may not work for some ADR’s and OTCBB stocks. At this point Two things can happen.

First, while the company has attractive qualities in some area, you do not want to buy the equity now. It may that the price is too high, or the debt. Some factor that you can record in your notes on that company. If you return to that company later, you can refer to your notes and return to the reasons that you did not invest and see if circumstances have changed. Many of these stock will go on your Watchlist.

Second, You want to buy shares in the company in which case the research you have done becomes part of the

Stock Portfolio Notebook

To me it is important to keep this information separate. You always want to have your investment thesis and research handy for stocks you own. You can easily refresh your mind on what your expected catalyst is or what your risks are. Being able to refer to your investment thesis is important when your company’s stock price is being hit hard, or conversely rising. You will need to understand if the downdraft is a time to sell, reinvest or hold. If the stock rises suddenly, is that part of your investment notion, has it hit your fair value. If so, you might sell.

But to track all this information it is not enough to have a quick note in your brokerage account or on google finance. You need your Value Investing Notebook.

Disclosures: I do not have any financial relationship with aaii.com the maker of Stock Investor Pro but I am a paid member of the first and I purchased the second because I find them valuable as I hope you will. I loved Jae Jun’s Old School Value spreadsheet so much that I became an affiliate even though I am a mac guy. I like Jae’s product so much I got a PC emulator for my computer just to use it.

Related Posts:

• Greenblatt, Ackman & Value Investing Masters speak at the Value Investing Congress
• Value Investing Ideas – Companies Passing my Custom Screens
• Best Value Investing Screeners
• Underperformance in a Fund, Time to Invest?
• What are your Investing Goals?

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• Investing in Low Price to Book Stocks- Value Investing Series

The confirmed speakers are

Bill Ackman, Pershing Square
Leon Cooperman, Omega Advisors
James Chanos, Kynikos Associates LP
Adam Weiss and James Crichton, Scout Capital Management
Alexander Roepers, Atlantic Investment Management
Joel Greenblatt, Gotham Capital
Guy Gottfried, Rational Investment Group
Michael Kao, Akanthos Capital Management
Whitney Tilson & Glenn Tongue, T2 Partners

I can say that Michael Kao and Guy Gottfried were both very popular speakers at the last Value Investing Congress I attended in May. I am also curios to hear Jim Chanos speak, since he is a legendary short seller. Finally, Whitney Tilson is always good for the T2′s long and short actionable idea. If you decide to go be sure to use my Value Investing Congress discount coupon N11CI4

If you would like more information about this Value Investing Conference, or any other, please go to my Conference page which has the most up to date information on Value Investing Conferences.

Disclosures: I am a media sponsor of  the Value Investing Congress.

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Studies have shown that individual investors often under perform even when they invest superior performing funds. The reason is easy to understand. They buy high and sell low. When a fund manager has been doing well they buy in often at the top of that funds price and when he is doing poorly, they sell, selling at the worst time because the price is low.

The problem with this thinking is that the top performing managers will under perform the market, and sometimes badly. In the article, it speaks about Bruce Berkowitz of Fairholme Capital, and that one of their funds “fell 12 percent through June 9, ranking it last among 870 diversified U.S. stock funds with at least $500 million in assets.” The S & P 500 during the same period gained over 3%. Berkowitz was named Morningstar’s fund manager of the decade and here is dead last, opportunity anyone? In a theoretical sense it would be great time to invest in the Fairholme Fund. A manager with a great track record is getting hammered, so you might want to jump in now.

But herein lies the problem for me. Fairholme Fund has 74% of its equities investments in Financial Stocks. And I don’t trust the entire industry. It is too opaque to evaluate well, and nearly impossible to value assets, and what is on and off balance sheet. The fund seems overly risky to me. So, while I do believe trolling in the murky waters of the currently poor  performing fund managers should be part of the standard value investing bag of tricks. You still have do your due diligence and ask why is this beaten down, in the same way you would ask of a company who’s share price is in the toilet. Sometimes there are good reasons for the relatively cheap price.

You could easily say, dude, the man has outperformed the market in a really bad decade. And you would be right. But was he lucky? Was he taking risk that wasn’t apparent? He seems to me to be doing it now.

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• Greenblatt, Ackman & Value Investing Masters speak at the Value Investing Congress
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• More James Montier via EuroshareLab
• What is your Investing Edge?

Here is a gem I found on a link to a January 2011 Bloomberg article I had missed. “U.S. Treasuries are among the most overvalued assets and investors buying them are poised to lose money,” Montier was quoted as saying. He goes on, “You are not compensated for the long-term risk of holding bonds.”  If you love Montier or behavioral finance, check it out.

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• 3 Must haves for your Value Investing Notebook
• Greenblatt, Ackman & Value Investing Masters speak at the Value Investing Congress
• Underperformance in a Fund, Time to Invest?
• What is your Investing Edge?
• Value Investing Strategies for Beginning Investors – John Templeton

If you would like more information about this Value Investing Conference, or any other, please go to my Conference page which has the most up to date information on Value Investing Conferences.

Disclosures: I am a media sponsor of  the Value Investing Congress.

Related Posts:

• Value Investing Ideas – Companies Passing my Custom Screens
• Value Investing Criteria that Works- Low Price to Free Cash Flow (FCF)
• 3 Must haves for your Value Investing Notebook
• Free Value Investing Resources- Graham and Doddsville
• Greenblatt, Ackman & Value Investing Masters speak at the Value Investing Congress

Today is the last day to save $1400 to attend the Value Investing Congress. Tomorrow the Price goes up. If you are thinking of attending click through and sign up. Also, if you are planning on attending and want to get together for a drink to talk value investing, send me a note at chroma at chromainvesting dot com.

If you would like more information about this Value Investing Conference, or any other, please go to my Conference page which has the most up to date information on Value Investing Conferences.

Disclosures: I am a media sponsor of  the Value Investing Congress.

Related Posts:

• Value Investing Ideas – Companies Passing my Custom Screens
• Value Investing Criteria that Works- Low Price to Free Cash Flow (FCF)
• 3 Must haves for your Value Investing Notebook
• Free Value Investing Resources- Graham and Doddsville
• Greenblatt, Ackman & Value Investing Masters speak at the Value Investing Congress

What if I told you could do just that on May 3rd and 4th. Would you be interested in saving nearly 32%? If you act by March 15th you save $1400 off the full price for the Value Investing Congress. I am cheap. That is part of why I am a value investor. I don’t want to pay full price for my stocks, and I certainly don’t want to pay full price to learn to be a better investor. Here are some of the fund managers/gurus who have spoken at one of the seminars just in the last two years, Bill Ackman, Monish Pabrai, David Einhorn, Bruce Berkowitz, Paul Sonkin, Eric Sprott, Joel Greenblatt and Whitney Tilson. Most of the biggest names are added to the speakers list after the price goes up and the discount I am sharing with you ends.

I have written about the Value Investing Congress previously here,  and here and linked to it here. I did so because I believe that the right kind of information is power.  Not all information, mind you. Too much information can be crippling. Just ask anyone who is coming off a five hour binge of internet. In the past I did not benefit from the recommendations, nor could you. However, now I am able to offer my readers a special deal to the Value Investing Congress. To save $1400 you can click on the link or the banner ad.

As always here are my caveats. If you are just starting out and have a very small amount of money, say $2500, this is not the event for you. You will consume too much capital going to the event and not retain enough to actually invest. This is also not an event if you already think you know everything about value investing. But If you think you are the latter, you might want to consider that you are failing the hubris test and read a book on behavorial finance.

Finally, if you will be attending the Value Investing Congress please let me know. I would like to have a meet up, perhaps after the 2nd day for drinks. I would like to try to link up with other value investors as well. Email me at chroma@chromainvesting.com if you are interested.

If you would like more information about this Value Investing Conference, or any other, please go to my Conference page which has the most up to date information on Value Investing Conferences.

Disclosures: I am a media sponsor of  the Value Investing Congress.

Related Posts:

• Greenblatt, Ackman & Value Investing Masters speak at the Value Investing Congress
• Value Investing Conferences – Investing Resources
• Value Investing Congress Discount Ends
• Value Investing Ideas – Companies Passing my Custom Screens
• Value Investing Criteria that Works- Low Price to Free Cash Flow (FCF)