1. Read what other investors are recommending and buying
2. Identify countries, industries and companies that are currently out of favor
3. Focus on your niche area of expertise
4. Run a quantitative screen to filter the investable universe down to a more manageable list
5. Maintain a watch list of companies that you would like to own at the right price Continue reading “Sourcing Investment Ideas”
1. Calculate historical economic value added
2. Value company by discounting economic value added by the WACC
3. Establish justified market multiples using assumptions for growth rate, return on capital, and cost of capital Continue reading “Economic Value Added Valuation Model”
1. Calculate historical free cash flow to equity from accounting data
2. Calculate the historical debt ratio
3. Estimate the short-term growth rate
4. Estimate the long-term, sustainable growth rate
5. Project how long the initial period of high growth will last before transitioning to the final stable growth phase
6. Forecast future free cash flows to equity
7. Determine the firm equity value by discounting future cash flows at the cost of equity Continue reading “Free Cash Flow to Equity Valuation”
1. Calculate the eight variables of the Beneish model
2. Determine the M-score and avoid companies with values greater than -1.78 Continue reading “Beneish Model”
1. Analyze revenues by segment
2. Calculate EBIT margins for each segment
3. Calculate the proportion of capital expenditures to the proportion of total assets by segment Continue reading “Business Segment Analysis”
Stock Investment Strategies
James O’Shaughnessy’s What Works on Wall Street looks at the most effective long-term investment strategies on Wall Street. It shows that selecting stocks using rational methods can beat the simple strategy of indexing to the S&P 500. Empirical evidence reveals that stocks selling at deep discounts to cash flow, sales, and earnings consistently beat the market in the long run. Few investors however are capable of rigorously sticking with such a strategy during market turmoil. The key to long-term success is an unwavering disciplined implementation of an investment strategy. That is why the S&P 500 consistently beats 70% of traditionally managed funds. While managers change their style over time and rotate between funds, the S&P 500 never varies from its systematic bet on large capitalization stocks. Continue reading “What Works on Wall Street”
1. Liquidity ratios include the current ratio, quick ratio, cash ratio, and the defensive interval ratio.
2. Activity ratios include inventory turnover, receivables turnover, payables turnover, working capital turnover, fixed asset turnover, total asset turnover, and the cash conversion cycle.
3. Solvency ratios include debt-to-assets, debt-to-equity, financial leverage, and interest coverage.
4. Profitability ratios include gross profit margin, operating profit margin, EBITDA margin, net profit margin, return on assets, return on equity, and return on capital.
5. Market ratios include price-to-earnings, price-to-cash flow, price-to-sales, price-to-book, basic EPS, diluted EPS, cash flow per share, EBITDA per share, and dividends per share. Continue reading “Financial Ratio Analysis”