10/17/2010

Good Companies (High ROIC) selling at bargain Prices (High Earnings Yield)

in combination and only those below 50 million. This post will be a twist on Joel Greenblatt’s Magic Formula. I attempted to use (hopefully) a more normalized earnings for this adjustment on the magic formula. Earnings were based on the historical average EBITDA from 2006 to 2009. This earnings calculation was then used to measure how effective they were in using their operational assets to create earnings. Joel Greenblatt uses EBIT (earnings before interest and taxes). But for tonight I will use EBITDA until I update my data mining models.

Assets used to run the business was calculated as follows; [(current assets – current liabilities) + Net PPE (property plant and equipment)].The balances for the TTM was used.

The rational that started this search was twofold. The excellent MagicFormulaInvesting.com site focuses only on companies greater that 50 million. Joel Greenblatt has admitted smaller companies perform on average better than larger more closely followed larger stocks. The second idea was to use average historical EBITDA (earnings before interest taxes depreciation and amortization) from 2006 to 2009. The thought process was that using the TTM EBITDA would eliminate some ideas if they had temporary losses and the average prior (06-09) may indicate more normalized earnings.

I will expand the approach, audit for accuracy, improve the data mining techniques and closely review for alternative approaches that may also uncover ideas based on the “cheap and good companies” philosophy.

Some additional constraints added to the search were; stable share count over the past 4 years, sound balance sheet with little debt, trading near 52 week low.

I didn’t have time tonight to post the supporting decision making financial data but believed the ideas were worth a look.  The supporting data should be posted latter this week.

Please click to get quotes on the 4 ideas below


VSNT $11.53

AIRT $8.75

These two ideas are profitable but more of mean reversion with a margin of safety boosted by a relatively strong real estate holding.

HSKA $.46 - .49 (10/15/10)
“production facility located in Des Moines, Iowa, consists of 168,000 square feet of buildings on 34 acres of land, which we own. We also own a 175-acre farm used principally for testing products, located in Carlisle, Iowa.”

VII $4.06 (10/15/10)
“The Company principally operates from an 80,000 square-foot facility located at 89 Arkay Drive, Hauppauge, New York, which it owns. The Company also owns a 14,000 square-foot sales, service and warehouse facility in southern England which services the U.K., Europe and the Middle East”

No comments: