An overlooked metric to help identify value

We all know the P/E ratio or the price to sales multiple but how often do we hear about price to the GP multiple.

A stock trading at a deep discount based on a low price or EV to gross profit can help provide insight into an overreaction to negative news or other non essential long term negative event.

Not only was I looking for companies generating large gross profits relative the price paid but the stocks had to also clear these hurdles

Dilution factor: Average shares outstanding over 3 years/TTM shares outstanding

Smart money: avoid stocks heavily shorted, Shares shorts as a percentage of the float <5 br="">
Avoid companies with a large decline in sales. Quarterly year over year revenue growth > -5%

Management greed test: Selling and general administrative cost less than 30% of revenue

A few of the stocks worth introducing tonight

Link to the ideas

Quadra Med Corp

Price: 6.42 (not sure why i looked but noticed all cash takeover 12/09 for 126 M or 8.50 per share)

Average ROA past 4 years: 11.61

Significnat Positive Direct insider buying

Large company Share Buybacks: 4.474 million expended on share buybacks over the past 12 months

5.50 million paid in dividends to shareholder over the prior 12 months

Annual SGA/REV = 26.35%

NTA per share = 7.36

EV per share = 13.12

Industry:Business Software & Services


Daniel M. Ryan said...

Good idea to feature the gross profit ratio: it's often forgotten.

ShadowStock said...

Thanks for commenting!

It’s nice to know someone other than me looks at this data.

I thought it would be useful to not only find stocks selling at a discount to the gross profit but more importantly stay away from greedy management. Most the companies were eliminated once I filtered on SGA less that 30% of revenue. Some companies generate healthy gross profit but expend this on selling and administrative costs. I also wanted companies that haven’t experienced a significant decline in sales coupled with maintaining a stable capital structure.

Good luck

Anonymous said...

"the management greed" filter is a great one that i've included in all my screens now.

PS: what do you think of WCG? larger cap but still interesting.

PPS: great GREAT blog! thanks for your work!

Anonymous said...

Sorry for my bad english. I would like to get updated with you new posts as I love to read your blog. Add me to your mailing list if you have any.

ShadowStock said...

Sorry, no mailing list at this time but if you just check out the blog and twitter you can get the latest posts.

Good luck with the market