⚑ 06# How to find Undervalued and Great Companies?
⚾2 Value stocks Idea + 📚 3 Lessons from Margin Of Safety Book by Seth Klarman + ✅ Actionable Advice
⚑ What you will Find & Learn?
→🗞️ Value Investor’s news
→📖 My readings of the week
→📚Lessons from Margin Of Safety Book - Seth Klarman
How to find undervalued and great stocks?
How to approach the risk?
When is the better time to be Value Investor? ⏱️
Actionable Advice✅
→⚾Value stocks Idea
→⚫Latest publications
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⏱ Reading time : 10 minutes
Hey Value Investors!
I hope you are doing well!
Before commenting on this edition, I wanted to inform you of the release of “Value Investor’s Screen Template ". It is a free checklist to find undervalued companies with low risk. I have built this checklist that follows Benjamin Graham value investing strategy and Warren Buffet's fundamentals.
It’is the first step I take before doing a full deep dive.
Let's go to the news!
🗞️ Value Investor’s news
🏭Buffett said geopolitical tensions were "a consideration" in the divestment. He described TSMC as a well-managed company but added that Berkshire had better places to deploy its capital.
🗾Japanese stocks climbed after a statement from Warren Buffett that he is considering increasing his holdings in Japanese companies. Berkshire has brought its stakes in Mitsubishi, Mitsui & Co, Itochu, Marubeni, and Sumitomo up to 7.4%. Moreover, He was considering increasing that percentage further.
🏦Warren Buffett says that more US banks are likely to fail, like SVB, because of poor asset management. However, he reassures that US bank deposits are safe and that depositors should never worry.
📦Seth Klarman strengthened its position in Veritiv Corporation
📖 My readings & listenings of the week
I share here the articles or videos that I found interesting this week. The goal is to provide you with stuff to become a better value investor step by step and expand your circle of competence.
📚Book Review: Margin Of Safety - Seth Klarman
⚑ Sum-up :
Do your own research to make the best decisions
Value investing works very well when the market decline and in an inflationary environment.
Always use a margin of safety to correct your errors in estimating its value
Be conservative in your assumptions of future cash flows
Value investing is about buying great and low-risk companies.
1) Do Your Own Research 🔎
As a value investor, you predict that the market being wrong.
The market is in fact an emotional machine that guides certain stocks up or down. This is what value investors call Mr.Market. Volatility represents the emotions of buyers and sellers.
Wall Street buyers focus only on their interests and not those of their customers and businesses. Their business model is designed to take a fee between each transaction. If there are no trades, there are no fees and therefore no money for Wall Street.
A patient investor with a long-term strategy is not interested in them.
Your main role is to research companies that you understand and generate cash flows. If a company generates cash. It will be valued at its fair value (Intrinsic Value).
The problem is that this can be done in 6 months or 3 years. Hence the purpose of investing in the long term and being patient.
Moreover, in the valuation process, you have to assume 2 or 3 scenarios of what could happen to your business.
Don't try to predict Macro-economics events. Not even the top economists can do that. However, focus on the risks that can happen and make sure that the company never reaches its intrinsic value.
(A recent example is Warren Buffet who sold BYD massively because the risk between China and Taiwan was too great).
The benefit of doing your own research and predicting what would or wouldn't drive the stock up is that you can have peace of mind when these events occur. You will feel in control of your investment and not the other way around.
2) Always use a Margin of Safety 🔐
Value investing is the discipline of buying securities at a significant discount from their current underlying values and holding them until more of their value is realized.
Buffett described the margin of safety concept in terms of tolerances:
“When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing.”
The margin of safety will depend on your investor profile.
Are you prepared to absorb high volatility?
There is no real rule for estimating it, but you have to remember one thing. The value investor is an observer (he does not take risks). An example to illustrate this is the fact of not taking into account the "Intangible Assets" in the valuation of the company's assets. Since this is a fuzzy accounting area, it is preferable to ensure that it does not exist.
Exemple :
I want to invest in Apple 🍏. The share price is $100. With a DCF model, I estimate that Apple is worth $200 per share. If I apply a MoS of 50% on my valuation of $200.
$200 x 50% = $100. The price of my valuation and the share are therefore equal to (or lower than) the current price. Apple is therefore undervalued. If the rest of the fundamentals match my long-term strategy, then I take a position.
Benjamin Graham understood that an asset or business worth $1 today could be worth 75 cents or $1.25 in the near future. He also understood that he might even be wrong about today’s value.
Therefore Graham had no interest in paying $1 for $1 of value.
3) When is the better time to be Value Investor ? ⏱️
The most beneficial time to be a value investor is when the market is falling. This is when downside risk matters and when investors who are worried only about what could go right suffer the consequences of undue optimism.
The best time to find good companies at a low price is when the market is crashing. History shows us that Warren Buffet made his best moves when a company had a scandal or a macro event.
The most recent one was his entry into Taiwan Semi-Conductor following the hot moment of 2022.
However, this requires a lot of discipline because everyone will tell you that this is the end. You're going to have a contrary opinion with 99% of the people on the planet.
But that's also why so many people don’t beat the market.
A notable feature of value investing is its strong performance in periods of overall market decline. Whenever the financial markets fail to fully incorporate fundamental values into securities prices, an investor’s margin of safety is high.
In addition, Value investing works very well in an inflationary environment.
If for fifty cents you buy a dollar of value in the form of an asset, such as natural resource properties or real estate, which increases in value with inflation, a fifty-cent investment today can result in the realization of value appreciably greater than one dollar.
(Bonus)
Being an investor is a full-time job.
Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon.
Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mindset to succeed.
Dividend Yield is bad indicator.
Stocks should simply not be bought on the basis of their dividend yield.
Investors buying such stocks for their ostensibly high yields may not be receiving good value. On the contrary, they may be the victims of a pathetic manipulation. The high dividend paid by such companies is not a return on invested capital but rather a return of capital that represents the liquidation of the underlying business.
Don’t use EBITDA
Because D&A is a real expense to the business, so why would we use something that’s basically subtracting out real expenses?
Wall Street buyers focus only on their interests and not those of their customers and businesses. Difference between using EBIT (Earnings Before Interest Taxes) and EBITDA (Earnings Before Interest Taxes Depreciation & Amortization).
Valuation has to be conservative
At the valuation stage, always use conservative estimates of the growth and discount rate that you apply to estimate future cash flows and calculate their intrinsic value.
✅ Actionable Advice:
1) How to find undervalued and great stocks?
The first and perhaps most important step in the investment process is knowing where to look for opportunities.
List of sources:
Check Value Investing Club
Check firms listed on Magic Formula Investing
Check the position of smart value investors on Gurufocus or EDGAR and try to understand why they bought and why they sold out.
Check Research Services Newsletter (Ex : MBI Deep Dives, Fairway Research, StockOpine...)
Always double-check and be careful about biases. Where are the interests of whom?
2) How to approach the risk?
Find a stable and predictable business
Use conservative assumptions of growth rate & discount rate when you want to estimate future cash flows.
Apply 40-50% of the margin of safety on your intrinsic value
Find reasons to short the stocks and include them in your valuation
Read the risk section in the 10-k.
Screen company with only positive earnings for each of the past 10 years and long-term debt < net current assets.
3) How to use the time to your advantage?
We buy stocks when the market is down and we sell stock when the market is up"
Check interest rate, If it's low, make some cash and use it to find great businesses, if it's high, find undervalued companies in your great businesses.
Pay attention to macro events to deploy cash
Look at the operations of smart value investors to understand their positions. What did they do in a similar cycle to the current one?
⚾Value stocks Idea
Here are 2 stocks that pass the first stage of my screen. However, this does not mean that I will or should invest in them. The next step is to do more research on the company and its business model. For example, how they deploy their capital to generate revenue and how to estimate their future cash flows.
For those interested in my checklist for identifying a potential value investment, you can download it here.
I. 🌳Boise Cascade
Boise Cascade Company is a manufacturing and distribution firm that specializes in engineered wood products (EWP) and plywood.
With segments operating under Wood Products and Building Materials Distribution (BMD), they have established themselves as prominent players within the construction materials industry.
The Wood Products segment focuses on creating particleboard, plywood, ponderosa pine lumber, studs and engineered wood products which are sold through BMD.
$2.59B market cap
Trading at P/E = 2.99
EV/EBITDA = 1.61
P/Book value = 1.25
Total Cash = $998.34M
ROE = 50.29%
ROA = 24.89%
Current ratio = 3.78
59% Growth revenues 5 Years
To read: 10-K
II.🗾 6890.T Ferrotec.
Ferrotec is a Japanese company that makes components for different industries. They make products for the computer chip industry, solar power industry, and electronic devices industry.
For example, they make materials and machines used to make computer chips, equipment used in making solar panels, and devices that help control temperature. They also make saws, tools, and materials used for surface treatment.
So overall, Ferrotec is a company that makes different products for different industries to help them create the things they need.
$1.1B market cap
Trading at P/E = 4.7
EV/EBITDA = 3.7
P/Book value = 0.75
Total Cash = $875M
ROE = 21.52%
ROA = 12.06%
Current ratio = 2.14
46% Growth revenues 5 Years
/!\ Disclaimer : The Art of Invests makes use of information sources that are considered reliable, but the accuracy of such information cannot be assured. The contents of this publication are not meant to provide personalized investment advice and do not take into account your particular financial situation.
The viewpoints expressed by the publisher in these publications may change at any time without notice. It is recommended that you consult with your financial advisors to determine the investment options that are appropriate for you and to assess whether any investment is suitable for your specific needs. Occasionally, the publisher may hold positions in the securities that are covered in the articles on this website.
Do Your Own Research.
⚫Latest publications
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