What I define as value has been ridiculed and called speculation many times. Vice versa, what I deem speculation has been embraced by others.
I’ve gone over how to find the best value stocks and special situations, but the following are a few things I look for in any value stock investment.
Value Stock Criteria
Butt Ugly
I love the butt ugly stocks. The uglier it is, the more I like it. I consider myself an investment softie so if a company is neglected, rejected, abused and thrown to the curb by analysts and investors alike without good reason, I like to nurture it in my portfolio.
These are the types of companies that many people assume will go bankrupt, fail or never recover. A little deep analysis shows that they are far from ch 11. These companies are also cigar butt type net net stocks where there is always one or more good remaining puffs.
The thing is, most people just assume they know a company will do this or that without actually digging in. A majority of people just read the press release and news headlines to grasp an overview of the company.
Now this is your advantage, your playing field. You control the court and define the rules… Only because no one is there to play with you
Keep it Simple
Buffett has said to invest only in what you know. i.e. circle of competence.
Let me take it further to explain why I think I’ve been able to do so well this year.
Of course it’s a good idea to know what they do but you don’t have to understand every single detail about the company. The simpler the investment scenario, the less risky. The less risky, the more capital you will invest. The more money you put, the more conviction you have.
It all leads to higher returns. This is also what value investors define as concentration.
Most of my multi-baggers this year only required 1 or 2 questions before I made a decision to buy.
e.g. Q. Will the company go bankrupt?
A. No
e.g. Q. What’s the margin of safety?
A. A lot
This is why I don’t invest in growth and story stocks. Too many variables to figure out in order to make money.
Keep the ideas simple and don’t over complicate or cloud it with unnecessary facts.
Downside Protection
I like to look for companies where the downside is protect by the assets. The higher the liquidity and quality of the assets, the better the investment potential. It reduces the risk of a sudden erosion in the margin of safety.
e.g. if a company has a high amount of accounts receivables or inventory, there is a good chance that a substantial amount could be written off which immediately affects the margin of safety.
On the other hand, while cash can be burnt at a fast rate, cash can never be subject to impairment charges.
I prefer to keep the downside protection based off current and short term assets. Not long term assets such as patents or buildings and equipment.
Understand the Definition of Risk in Investing
Probability of losing all your money Having too many scenarios, too many variables and over complicating Not protecting the downside
Some Value Stock Ideas
What about these potential ideas for you to consider? They are all on my to do list. Need to find time to go through them.
TSR Inc (TSRI) Champion Industries (CHMP) Dry Clean USA (DCU) List of 20 net net stocks
Disclosure: Not positions in any stocks mentioned
Jae Jun
[www.oldschoolvalue.com]
Jae Jun is the author of Old School Value, a value investing blog dedicated to the Old School methodologies and teachings of the investment greats such as Graham, Buffett and Fisher. The blog deals with finding intrinsic value, fundamental stock analysis and special situations including spinoffs and merger arbitrage.
Rate This Article: |
  |