Value Investing Stock selection criterion

Here are a few value type criteria to screen for potential value stocks.  Use results for a watch list for further analysis before investing in any of the results.

Market cap

Market capitalization less than $5 billion - Lynch generally avoids large, well-known companies in favor of small-cap stocks that still contain significant upside potential. Most fund managers define small-caps as companies with market capitalizations under $1 billion. Institutional investors often use market one investment criterion, requiring, for example, that a company have a market capitalization of $100 million or more to qualify as an investment. Analysts look at market capitalization in relation to book value for an indication of how investors value a company’s future prospects.

PEG ratio < 1.2

PEG ratio below 1.2 – The PEG ratio is a valuation metric that compares a company’s price-earnings ratio with its projected growth rate. Small, high-growth stocks generally trade at higher PEGs compared to the big-caps. If the PEG ratio is around 1, the company is considered fairly valued. A PEG ratio that is much higher than 1 indicates an overvalued company, and a PEG below 1 indicates an undervalued company. While the PEG ratio can effectively provide insight in certain evaluations, it is limited by its overriding focus on earnings growth. Revenue growth, cash flow, dividends, debt, and numerous other factors are also critical in determining value. Additionally, while PEG is useful for smaller companies it may be misleading for big-caps, since sustained growth is less important to their total returns. PEG is most useful when supplementing a thorough discounted cash flow analysis or relative valuation.

Earnings growth 15–30%

Five-year earnings growth between 15% and 30% per year - In investments, earnings growth refers to the annual rate of growth of earnings, or the amount of profit a company produces during a specific period, usually defined as a quarter (three calendar months) or year. Earnings typically refer to after-tax net income.. When the dividend payout ratio is same, the dividend growth rate is equal to the earnings growth rate. Earnings growth rate is a key value that is needed when the DCF model, or the Gordon's model as used for stock valuation. Companies that exceed a 30 percent earnings growth rate are confronted with two fundamental problems: (1) sustaining a high growth-rate over the long term is extremely difficult; and (2) stocks growing that rapidly are usually already being actively covered by Wall Street analysts, and Lynch prefers less well-known names and avoiding competition.

Institutional ownership 5–65%

Institutional ownership ranging between 5% and 65% - Institutional investors are organizations that trade large volumes of securities. Percentage institutional ownership is the fraction of shares outstanding owned by mutual funds, pension plans and other institutional investors. Most well-known stocks have at least 40% institutional ownership. Usually more than 70% of daily trading on the New York Stock Exchange is from institutional investors. Peter Lynch, among many other investors, uses institutional ownership to gauge market interest. He believes stocks with low institutional ownership have the best return potential. When mainstream Wall Street analysts identify a stock, price growth can be dramatic with the support of institutional money. Lower levels can be associated with greater price volatility.

Return on Equity > 15%
Indicates high profitability and potentially a competitive advantage

Debt-to-Equity ratio < 0.5
Implies that the company does not heavily depend on outside capital to finance its growth

Current ratio > 2
Makes sure that the company is able to pay its short term obligations

Differing Outlooks on the Market

Below are excerpts from an article on Seeking Alpha from a poster known as “Chowder”.  It matches a lot of what I use to try and keep my investment choices in perspective since my personal allocation is based on differing time frames.  The dividend portion of my portfolio is 10 plus years and I have taken into consideration his comments below about which ones to invest in. 

Excerpts from:  http://seekingalpha.com/article/3244406-differing-outlooks-on-the-market

Many individuals, when faced with a simplistic analysis of the markets, tend to lean towards the belief that everyone in that market is thinking and acting as one, with common beliefs in terms of future price movement. Needless to say, things are not as simple as they appear.

The market is a battlefield where very different groups of individuals and institutions collide. Each one of these actors will bring with themselves very diverse outlooks on the market, trading or investing it within different time frames, often with very different goals and objectives, and thus, with oftentimes opposing views. Day traders, swing traders, core traders, hedge funds, mutual funds, ETFs, short-traders, individual investors, banks, insurance companies and others won't necessarily share the same investing ideas in terms of the amount of time they plan to hold their positions, or even the direction the market is bound to take.

This doesn't mean that the different groups can't profit from the market at the same time, it's that the different time frames and various goals and objectives will inspire them to manage their portfolio's differently.

Stick to trading or investing in the timeframe your plan calls for, sticking with the relative points of your business plan. If the plan calls for buying high quality companies at a 10% discount to fair value, and the opportunity presents itself, don't let market conditions or others talk you out of it. You've planned your work, now work your plan, always keeping your time frame in consideration. Different time frames require different tactics. Know yours!

Don't allow others to distract you, or tell you your goals are meaningless, or try to place obstacles in your way.

Obstacles are those frightful things you see when you take your eyes off your goal. --Henry Ford

Over the years, I have found that the best approach to investing in companies is to be sure you have the full faith and confidence that the investment will rise. If you do not, then during the tough times you may force yourself to sell. Any investment that offers a threat to long-term confidence, that may be appealing to sell at the bottom, rather than appealing to buy at the bottom, is not the right long-term investment. The right long-term investment will be, ironically enough, one that becomes more attractive to you as it declines. The opportunity to add more to your investment becomes as attractive as the actual gains you are seeking. From a psychological standpoint this will always be the best investment or investment strategy, because a strong holder and one who can buy declines will always stand a better chance of success than one whose investment life is governed by the fear of loss.

Put another way, a good investment is one in which paper losses are tolerable.

According to Lowell Miller, the author of The Single Best Investment , the best long-term investment is one that is easy to hold, and easy to buy in moments of decline. The best long-term investment has something about it which builds confidence in the long-term future - even though the current moment may include aspects that have frightened other investors.

We don't need to get more than we need in an investment! We don't need to strive for maximum return or shoot for the biggest number. The best long-term investment is one in which we can achieve reasonable long-term goals. Reasonable goals are attainable. Fantasies are not.