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The following is the process I intend to use to simplify the process of tracking, purchasing, and selling companies in the portfolio.

It comes from another value manager's system so I'm not reinventing the wheel here but it is being used in the real world with success.

ROMV stands for Return on Market Value.

Purchase candidates:

EPS projection in 3 years must be at least 15% of current price.

For example:

Project in year 3 diluted EPS of $1.50 then purchase price is $10.00

The goal is to earn 15% return on investment.

Compounding 15% for 3 years is approximately ~150% of original price.

For our example the sell price is ~$15, which would equate to a P/E multiple of 10X.


It's that simple. What is not easy is the conviction on the projected 3 year EPS. But that's where we come in and focus our energy. Note that this requires some degree of modeling. For instance the same manager above notes they use the following levers for determining and updating their 3 year EPS number:

Revenue; Gross Profit Margin; SGA expenses; debt; interest paid on debt; tax rate; shares outstanding; p/e multiple





chessburger
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