In this article we summarise the key points explored in the "𝙉𝙪𝙢𝙗𝙚𝙧𝙨 𝙒𝙚 𝙇𝙞𝙠𝙚 𝙏𝙤 𝙎𝙚𝙚" article to provide a short form guide to some of the quantitative measures I review as part of the Traditional Value Investing portion of the AVI portfolio.
Whilst no single metric should be used to measure the value or financial strength of a stock/business, utilised together with other metrics and fundamentals, they can be a powerful tool to interpret a stock/business's potential for investment.
Whilst these metrics are very useful, we must remember that investing is 𝙖𝙨 𝙢𝙪𝙘𝙝 𝙖𝙣 𝙖𝙧𝙩 𝙖𝙨 𝙞𝙩 𝙞𝙨 𝙖 𝙨𝙘𝙞𝙚𝙣𝙘𝙚, just because a stock doesn’t meet one of the criteria below does not mean it is uninvestable. I, myself have invested in a number of opportunities that fall outside these metrics however they can be used as a good guide for future investigation via qualitative analysis:
𝙋𝙧𝙞𝙘𝙚-𝙩𝙤-𝙀𝙖𝙧𝙣𝙞𝙣𝙜𝙨 𝙍𝙖𝙩𝙞𝙤 – below 16x
𝙍𝙚𝙩𝙪𝙧𝙣 𝙊𝙣 𝙄𝙣𝙫𝙚𝙨𝙩𝙚𝙙 𝘾𝙖𝙥𝙞𝙩𝙖𝙡 – above or equal to 10%
𝙍𝙚𝙫𝙚𝙣𝙪𝙚 𝙂𝙧𝙤𝙬𝙩𝙝 – greater than 0%
𝙉𝙚𝙩 𝙄𝙣𝙘𝙤𝙢𝙚 𝙂𝙧𝙤𝙬𝙩𝙝 – greater than 0%
𝘾𝙝𝙖𝙣𝙜𝙚 𝙄𝙣 𝙎𝙝𝙖𝙧𝙚𝙨 𝙊𝙪𝙩𝙨𝙩𝙖𝙣𝙙𝙞𝙣𝙜 – less than or equal to 0%
𝙇𝙤𝙣𝙜-𝙩𝙚𝙧𝙢 𝙇𝙞𝙖𝙗𝙞𝙡𝙞𝙩𝙞𝙚𝙨-𝙩𝙤-𝙁𝙧𝙚𝙚 𝘾𝙖𝙨𝙝 𝙁𝙡𝙤𝙬 𝙍𝙖𝙩𝙞𝙤 – less than or equal to 5
𝙁𝙧𝙚𝙚 𝘾𝙖𝙨𝙝 𝙁𝙡𝙤𝙬 𝙂𝙧𝙤𝙬𝙩𝙝 – greater than 0%
𝙋𝙧𝙞𝙘𝙚-𝙩𝙤- 𝙁𝙧𝙚𝙚 𝘾𝙖𝙨𝙝 𝙁𝙡𝙤𝙬 𝙍𝙖𝙩𝙞𝙤 – below 16x
𝘿𝙞𝙫𝙞𝙙𝙚𝙣𝙙𝙨 𝙋𝙖𝙞𝙙-𝙩𝙤-𝙁𝙧𝙚𝙚 𝘾𝙖𝙨𝙝 𝙁𝙡𝙤𝙬 𝙍𝙖𝙩𝙞𝙤 – less than or equal to 0.5
𝘾𝙖𝙨𝙝 𝙁𝙡𝙤𝙬-𝙩𝙤-𝘾𝙖𝙥𝙞𝙩𝙖𝙡 𝙀𝙭𝙥𝙚𝙣𝙙𝙞𝙩𝙪𝙧𝙚 𝙍𝙖𝙩𝙞𝙤 – greater than 1 (and remaining unchanged/increasing)
𝘾𝙖𝙨𝙝 𝘼𝙘𝙦𝙪𝙞𝙨𝙞𝙩𝙞𝙤𝙣𝙨 – investigate any significant or regular acquisitions
𝙋𝙧𝙞𝙘𝙚-𝙩𝙤-𝙁𝙧𝙚𝙚 𝘾𝙖𝙨𝙝 𝙁𝙡𝙤𝙬-𝙩𝙤-𝙋𝙧𝙞𝙘𝙚-𝙩𝙤-𝙀𝙖𝙧𝙣𝙞𝙣𝙜𝙨 𝙍𝙖𝙩𝙞𝙤 – greater than 1
𝙎𝙝𝙖𝙧𝙚𝙨 𝙊𝙪𝙩𝙨𝙩𝙖𝙣𝙙𝙞𝙣𝙜 𝙩𝙤 𝙋𝙀 𝘾𝙤𝙢𝙥𝙖𝙧𝙖𝙩𝙞𝙫𝙚 – investigate share buybacks (should be cheap) and issuances (should be expensive)
𝘾𝙪𝙧𝙧𝙚𝙣𝙩 𝙍𝙖𝙩𝙞𝙤 – between 1 and 1.5
𝙉𝙚𝙩 𝘿𝙚𝙗𝙩-𝙩𝙤-𝙀𝙦𝙪𝙞𝙩𝙮 𝙍𝙖𝙩𝙞𝙤 – less than 0.5
𝙍𝙚𝙩𝙪𝙧𝙣 𝙊𝙣 𝙄𝙣𝙫𝙚𝙨𝙩𝙚𝙙 𝘾𝙖𝙥𝙞𝙩𝙖𝙡 𝙫𝙨 𝙒𝙚𝙞𝙜𝙝𝙩𝙚𝙙 𝘼𝙫𝙚𝙧𝙖𝙜𝙚 𝘾𝙤𝙨𝙩 𝙤𝙛 𝘾𝙖𝙥𝙞𝙩𝙖𝙡 – ROIC is 2% greater than WACC
𝘾𝙖𝙨𝙝 𝙍𝙖𝙩𝙞𝙤 – less than 0.3
𝙏𝙤𝙩𝙖𝙡 𝘿𝙚𝙗𝙩-𝙩𝙤-𝘾𝙖𝙥𝙞𝙩𝙖𝙡𝙞𝙨𝙖𝙩𝙞𝙤𝙣 𝙍𝙖𝙩𝙞𝙤 – less than 0.3
𝙎𝙪𝙨𝙩𝙖𝙞𝙣𝙖𝙗𝙡𝙚 𝙂𝙧𝙤𝙬𝙩𝙝 𝙍𝙖𝙩𝙚 – have awareness for valuation purposes
Quantitative analysis is not the be all and end all of value investing. Whilst understanding the numbers behind a business is extremely important, they must always be backed up with solid qualitative analysis and a final thesis. Some areas of qualitative analysis are discussed in the article entitled 𝘽𝙚𝙮𝙤𝙣𝙙 𝙏𝙝𝙚 𝙉𝙪𝙢𝙗𝙚𝙧𝙨, however every investor must develop their own research and decision process to match their own risk/reward tolerance as investing is as much an art as it is a science.
For further information on any of these metrics including their strengths and weaknesses as a measure of a business please refer to the full 𝙉𝙪𝙢𝙗𝙚𝙧𝙨 𝙒𝙚 𝙇𝙞𝙠𝙚 𝙏𝙤 𝙎𝙚𝙚 article.