Comments on: How Do I Screen For Investment Opportunities?

By: timisme16

timisme16 — Mon, 26 Jul 2010 15:40:19 +0000

No problem. I want to make sure my caveat in my post was clear though: if a stock has a low P/FCF it is definitely cheap, but there may be a reason for that. Maybe a new regulation was passed that will cause next year’s FCF to be halved. Maybe the company is going out of business. Just wanted to make it clear that just because this ratio is low doesn’t make something an automatic buy.

As for other ratios, the other ones are all something to look at but if you’re looking for something that’s really cheap I often like to look at P/S. If it is very low you may have a bargain. Hope this helps.

By: spongebob

spongebob — Fri, 23 Jul 2010 04:57:22 +0000

Thanks alot timisme16.
So screening for low FCF’s is the way to go. What would be the next most important measures to suggest a stock may be worth more investigation?
eg,p/s,roe,net profit margins? (when screening)

Thanks again.

By: timisme16

timisme16 — Thu, 22 Jul 2010 15:39:31 +0000

If you have found a stock that trades at 2 or 3 times FCF or Owner Earnings (whatever your preference is) AND you think that those levels are at least sustainable (at best, they will grow!), you have no reason to do a DCF; you have found a cheap stock. I would even say that at 5 or 6 times FCF the stock could still be quite cheap.

That being said, just like low PE ratios, low P/FCF ratios can be a mirage so make sure you check for any one-time additions to FCF that might be skewing your ratio. Hope that helps!

By: spongebob

spongebob — Thu, 22 Jul 2010 06:19:48 +0000

Hello,when screening for stocks using multiples is low p/fcf the most important? More so than p/e,p/s etc.

Also when looking at your screen results is there a quickway you can check to see that a stock is probably undervalued on a DCF basis,eg if the p/fcf ratio has been declining over the last 5 years,or can you just do a rough DCF by averaging the free cash flows over the last five years & discounting them in your head? (a quick check to see if a stock warrants further investigation)

Thanks for any help.

By: Sergiovlc17

Sergiovlc17 — Fri, 16 Jul 2010 10:02:33 +0000

Quick question Joe,

Do you use the CCC as another tool to analyze or compare companies? It just seems a good tool to me.

Anyone?

By: Joe Ponzio

Joe Ponzio — Thu, 09 Jul 2009 17:14:28 +0000

lynne bartells,

Welcome to F Wall Street!

By: lynne bartells

lynne bartells — Fri, 03 Jul 2009 04:57:52 +0000

Today is the first time I have accessed fwallstreet.com. My pension and other investments took a tremendous dive, as did others. I’m interested in getting new ideas for investments. I am rertired and need to build up my portfolio so I can enjoy life again.

By: Xavier Fuller

Xavier Fuller — Tue, 30 Jun 2009 06:22:01 +0000

I use factset and use many of the criterias explained above, with few variations.

By: Joe Ponzio

Joe Ponzio — Fri, 26 Sep 2008 16:14:06 +0000

Eliot Murray,

In this article, I mention the “Ongoing Enterprise Value” as the value of the future cash flow, discounted at an appropriate rate. I use that term as the opposite of “Break-Up Value” — the value of the company if it were shut down and sold off in pieces.

This image shows the intrinsic value of a business — somewhere between the floor (the rock bottom, break-up value) and the ceiling (the future cash generated from operations):

If you know your business will shut down tomorrow, you buy at a discount to the floor. If you know it will go on forever as an “ongoing enterprise,” you buy at a discount to the ceiling. I never pretend that the business will go on forever; so, I value ongoing enterprises between the floor and the ceiling.

Make sense?

By: Eliot Murray

Eliot Murray — Wed, 24 Sep 2008 08:22:52 +0000

Joe, excellent as usual.

I’ve got a request. Could you explain what you mean by “Ongoing Enterprise Value”? Is this a term you came up with? I know about Enterprise Value and I’m fascinated with this measurement. I’m finding a lot of companies (especially in China right now) that have unbelievable Enterprise Value relative to their market cap.

Just as an example, say I found a company with a market cap of $500M, but it’s enterprise value is like $30M. Cash on hand is $470M, and no debt. Normalized FCF is, say, $20M per year. Theoretically, if I could buy the entire company, I would pay $500M, pocket the $470M of cash, leaving a net investment of only $30M. Let’s say the rest of the year the company makes $10M in FCF, and the next year it makes $20M – as usual in cash flow. So, I have made my investment back in 1.5 years. This is all if I purchased the entire company. Is there anything I need to be wary of when buying individual stock of this company? Obviously I wouldn’t have controlling interest. I guess the management could make an egg-headed move and buy a worthless asset with all that cash, and then my investment would decline, right?

Like I said, I’ve seen a few companies like this. Am I missing anything that would deflate my excitement a little bit?

Naturally, these get me pretty excited, but am I overlooking something?