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Value Investing

In May 2022, I reviewed 3 books on value investing which I summarize in the link:

From reading these books, the following distinctions occurred to me:

  • there is a simple 2D value/price qudrant, with Graham stocks in top left, dogs on bottom left, MSFT on top right and Tesla/Zoom on bottom right.
  • there are 3 ways to values stocks: 1) net assets, 2) earning power, 3) growth value, the first one only becomes relevant in distressed situations where management destroyed earning power.
  • BV needs adjustment: RE * 1.25, Equipement * 0.5, Intangibles: 3 year of SGA?, Options
  • Growth value is intangible
  • Franchise/Moat is required to preserve earning power

I put some notes on IB financial statement items to go beyond earnings, growth, management.

In Nov 2022, I reviewed Equity Valuation, models from investment banks edited by Jan Viebig et al. The book starts witha description of DCF models and various metrics, a MC model, followed by a discussion of EP (Enterprise Profit) or EVA approaches vs Holt CFROI.

The CFROI computes a IRR based on all cashflows that were invested into the business, using inflation adjustments to reflect the time value of money. This in theory requires the accounts of the company for all years as well as expected terminal values of investments. The measure inclues all cash paid in, so that idle cash and impaired goodwill will reduce the CFROI.

The EP measure is just a NOPAT/assets - wacc. Note that the tax rate applied is not real since interest charge is not applied, and there is a choice to make between NOPAT inclusive of depreciation divided by NetAssets vs NOPAT / Assets grossed up by all amortization.

The author remarks that EP does not include goodwill, so that the overpriced aquisition of 3G licenses does not bear on Vodafone EP, whereas it weighs on its CFROI.

Here are some considerations on accounting norms GAAP vs IFRS

Update April 2023

I reviewed the following books:

Update May 2023

  • Wealth Creation a 2010 book by Bart Maddeb
  • ValuFocus Investing the description of a systematic approach at evaluating financials (was US only with 5 of data) the system no longer exists but the methodology is interesting.
  • Dividends Still Don't Lie another book on dividends that does not really do its homework

Here is a link to CFA Financial Statement Analysis

Update August 2023

The 10 quality criteria of Hiboo

  • 2 size of quote sd viz regression line
  • 5 target PE of the value
  • 4 compound rate of 10y VA
  • 1 compound rate of 10y EBITDA / VA
  • 2 compound rate of 10y NEarnings / share
  • 2 avg 10Y agility (cashflow / (ppe + goodwill + intangible)
  • 1 last solvancy score (cashflow / debt)
  • 1 avg 10Y retun on invested capital
  • 3 resilience of the growth of the net income per share
  • 1 strategic position (market share)
  • 2 weighted average of previous 10 criteria noted as ordinals from 1 (best) to 5 (worst)

Update Oct 2023:

Yellow Flags:

  • cash and eq less than total debt
  • acct rcv rising faster than revenue
  • inventory rising faster than earnings
  • short and long term debt more than cash and eq
  • goodwill more than 50% of total assets
  • intangible more than 50% of total assets
  • there should be no preferred stocks
  • negative retained earnings