For our second stock shortlist for December I adjusted the screener filters a little bit and focused more on the growth, but still keeping some solid statistics within value, financial stability and profitability.
For this I have used Investing.com and the screener filters are:
Sales (MRQ) vs Qtr. 1 Yr. Ago > 30%
Sales (TTM) vs TTM 1 Yr. Ago (TTM) > 30%
EPS(MRQ) vs Qtr. 1 Yr. Ago > 30%
EPS(TTM) vs TTM 1 Yr. Ago > 30%
For me it’s really important that both sales and profits are growing. 30% is a high figure.
P/E Ratio (TTM) < 40
Price to Free Cash Flow (TTM) < 40
Price to Book (MRQ) < 2.50
Price to Cash Flow (MRQ) < 40
I also really like my stocks to be of atleast reasonable value. This filter is targeting fast growing companies so i have been more relaxed. I will do other calculations on intrinsic values after I have found the stocks, using the above figures does this but isn’t too restrictive.
Current Ratio (MRQ) > 1
Just the 1 ratio here on investing.com this time. Financial stability is very important in my opinion and this is just a quick filter. This ratio shows whether a company can meet it’s short term obligations.
Net Profit margin (TTM) > 8
Operating margin (TTM) > 8
Margins are very important for profitability and the ability to survive and grow. Ideally I would like these to be over 15 or even 20.
Dividend > 0.01
Although I believe it’s alright to buy stocks which don’t pay dividends, they really are a nice thing for an all-rounder stock to have. Not only do they provide some income, they are also key to the effects of compound interest in your portfolio.
Stocks that come up in this filter certainly won’t be a buy without further investigation, but this criteria certainly sets us on the right path.
Analysis of the December filter
Having done a quick analysis of all the stocks within this filter, there are too many doubts for most of them. Looking at the cash flow statements and financial statements has turned up a few concerns. That doesn’t mean that someone else won’t find these to be good buys, if they can justify declining cash flows or low returns on assets.
Following on from the Part 1 filter, out of these new stocks, my favourite is Johnson Outdoors (NASDAQ:JOUT).
‘Johnson Outdoors Inc. produces outdoor recreational products such as watercraft, diving equipment, camping gear, and outdoor clothing. It has operations in 24 locations worldwide, employs 1,400 people and reports sales of more than $315 million.’ Wikipedia
If we now look on Guru Focus we can see there are some real positives.
It’s financially strong. Cash to Debt is well over 1 at 5.58, it has a strong Debt to Ebitda (the lower the better) of 0.33 and very strong interest coverage which is a ratio that determines how well a company can pay interest expenses on outstanding debt. The current ratio is also over 1 at 3.67 which is good.
It is a profitable company at the moment with strong returns on equity of over 22 and fairly strong profit margins.
In terms of growth it has 3 year EPS growth of 15.9%. The revenue growth figure is just 6.1%, so lets look at the yahoo Finance financial statements.
We can see that revenues have risen strongly in the trailing 12 months to over $750 million and profits have risen too. The cash flow statement shows that cash flows have risen strongly over the last few years and the TTM too.
In terms of value it has a low PE ratio and low Price to Sale ratio which is good and a PEG ratio of under 1 at 0.42 which is great.
Let’s now look at the intrinsic value. On Guru Focus if you click on the DCF tab we see the calculator. Playing with the values just a little bit can massively change the fair value. Guru Focus automatically puts a discount rate of 8%, but I have upped this to 10%.
First up the fair value for the stock is based on EPS without NRI. It has given a fair value for the stock price today of $264, so if we were to buy at the current share price of $100 we have a margin of safety of 62%.
Next i have changed to base the fair value on free cash flow which gives a fair value of $147 and margin of safety of 32%.
Both of these calculations give a margin of safety of over 30% at the moment which I consider to be strong.
If looking to invest in this company it’s important to do more research. The question you might like to ask is why has this stock price fallen over the last few months.
The only reason I have found is based around the Analyst predictions as reported on Nasdaq.com which says “Shifting to the future, estimates from the lone analyst covering the company suggest earnings growth is heading into negative territory, declining 6.9% over the next year. With the market predicted to deliver 12% growth , that’s a disappointing outcome.”
However if we look at CNN Business the Analyst target is $170.
Another stock that has been in the news and has come to my attention is Alibaba.
Analysis of Alibaba (NYSE:BABA)
Chinese stocks have been in the news a lot recently. The issues with Evergrande and potential delisting of Chinese stocks from the US stock exchanges, have caused quite a sell off of shares. The stock I am particularly interested in is Alibaba.
Alibaba is a Chinese technology company with a retail site alibaba.com. It is often called the Amazon of China.
Alibaba is facing delisting from the US stock exchange. In April it also received a record penalty fine of $2.8bn after a probe determined that it had abused its market position for years.
The stock has taken a real hit, in fact it has lost more than 50% of it’s value since it’s October 2020 high.
However if we look at the stats on Guru Focus we can argue that perhaps this fall is a little over the top.
It seems to be reasonably financially stable and profits are strong.
In fact revenues are up strongly by over 20% year on year.
If we look at the intrinsic value now.
The fair value on Guru focus based on the EPS w/o NRI is $239.90 and this gives us a margin of safety of 47.67%.
The fair value on Guru focus based on the FCF is $379.16 and this gives us a margin of safety of 66.89%%. Even if we up our discount rate to a very high 15% we still get a fair value of $241 and a margin of safety of 48%.
If $BABA does become delisted it means is that it can only be traded OTC (Over the counter). It does not mean that you lose your holding. An alternative to this is to buy the stock on the Hong Kong stock exchange. Here it trades under the ticker ‘9988’.
I must reiterate, that making this kind of investment, particularly of a falling stock can be deemed as risky, and it’s really important that you do not take this as financial advice.
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Links to resources:
In the video we referenced information from the following: