Screening For Value

Gross Margin: I like a gross margin of at least 20%, this ensures that the company has the ability to alter pricing in order to push through competition and difficult times. Inventory/Sales: Industry specific, but you don't want the inventory turns to be too low, especially if you are placing a significant value on tangible assets - the longer the inventory sits for, the more uncertain its value will be. Net Cash from Continuing Operations: While GAAP earnings may be negative, these companies can still possibly be cash flow positive. I would be wary of any business that does not show positive cash from operations as they will just be eating into their cash asset and you can't predict for how long. Current Ratio: Must be greater than 1 otherwise the company does not have the ability to meet its current obligations. In a market like this where funding is increasingly difficult to raise this is a situation companies should be trying to avoid. Price to Earnings Ratio: I like P/E to be less than the long-term market average of 15. This is a good indication that the company may be undervalued, but the specific industry also needs to be considered. Price to Book Ratio: I keep this under 2, depending on what I am searching for, just to screen out those companies that are most likely overvalued. There are companies that warrant a premium price/book but these companies will also have a high return on capital, so you will tailor your screen to look specifically for those. Price to Tangible Book Ratio: Interesting companies can be found if this criteria is set to less than 1. These will also most likely be companies in distress however so they should be approached with caution. Return on Invested Capital: You can set this to be below your estimate of average cost of capital to find those with turnaround potential. Another option is to set this variable greater than your estimate of average cost of capital and combine it with a screen for companies with low Price to Book in order to find companies that are likely trading below fair value. Long Term Debt to Total Capital: I set this to a max of 60% and then I evaluate based on the specific company I find. Some industries, those with steady cash flows, can safely service high levels of debt. Then there are those with more variable cash flows that should keep debt to a minimum. Over 60% however is likely getting close to the upper limit of safety for any company. Sector: If you want to incorporate a top down view into your investments then screening by sector can be a rewarding way to significantly narrow the options. Institutional/Insider Holdings: I usually don't set restrictions for these variables but I do like having them available so that I can get an idea of share ownership. For example, when looking for stocks with turnaround potential I would be hesitant to invest in a company with low institutional and insider holding as no one has an incentive to get the job done.