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 $10.00The 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 multiplechessburger
Last year I started this work on ROMV. I guess I think its pretty interesting although it hasn't sparked much attention. But hey -- each to his own.Here's an example of what I started doing.Cooper Tire & Rubber (CTB)Price $23.86 on 02/25/2014Source: Magic Formula (Gurufocus website)ROMV -- $3.58 (15%*$23.86)Estimate for 2014 was $2.54.Estimate at time TTM was $3.73Gurufocus showed $4.02 in Dec'11So it seemed that $3.58 was within the operational capability of CTB.So I highlighted CTB as worth doing more diligence.CTB now is trading at ~$41 and Dec'15 EPS is $2.99 and Dec'16 is $3.36.So Dec'16 isn't quite at $3.58 but the stock has already appreciated 50% from when initially found as a diligence candidate. Note that 10X * $3.58 = $35.8, which would have been 50% gain.This would have been a successful application of CTB if I had done diligence on Dec'16 EPS and verified it as reasonable estimate.Another example highlighted was Molina Health that turned out positive over that time frame.Examples that I flagged for additional diligence/watchlist.ARO: nope, more attractive today?BXC: nope, what about today?TITN: nope, what about today?GDOT: nope, what about today? looks like should review againIPAR: well a story worth following -- break-even-ish after material decline since initial screenOnes I panned after quick ROMV review; possible watchlist but no recommended diligence:DGSE: nopeGAI: nopeGMAN: nope, might have watched with intermediate continued price declineBONT: nopeWPRT: nopeAEPI: maybe -- ???GEVO: nopeFBP: nope -- financial, tend to stay away for nowBTH: nopeMRLN: nope -- but on the move nowATNI: nope -- but also on the move; interesting movement after initial screen; magic formula screenALDW: yes -- but rocky with huge move last Nov/Dec; interestingTFM: yes -- but rocky with continued downard slide through July/Aug 2014I'm not sure there is a huge takeway except that I was able to take various screens like 52-week-low or Magic Forumula and them run them through the ROMV process to identify companies worth additional due diligence. A couple of the more interesting names did pan out but many did not. Some got cheaper in the interim which would have been worth doing a follow up to recheck the assumptions.And note that one of the highlighted firms (made the diligence/watchlist) is owned by a value manager that uses the ROMV process. It is also one that hasn't worked out so clearly the diligence is a key ingredient and that just because a firm can hit the numbers to generate a buy signal -- doesn't mean it will be successful.chessburger
Be wary of cyclicals? What about factoring in some measure of confidence in EPS projections, which could include confidence derived from an evaluation of management and moat, in addition to financial metrics?
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