Wednesday, 29 June 2011

Less is More?

Having been on an extended holiday and had a change of personal circumstances, I am no longer able to publish blog posts as frequently as I have done previously. To combat this, I have decided to be more selective in the quality of the opportunities that I look at.

I am therefore re-working my rules to screen the population (via Sharelockholmes) and spend time looking at the select few. My new rules have borrowed the thoughts of the great and good, including the likes of Greenblatt, Buffett, Graham and esteemed fellow bloggers. The emphasis is intended to be on 'quality first, price second'. I like the prospect of buying a share and tucking it away for the long-term...and watch it grow and grow.

Hopefully, less will mean more.

10 Ingredients

1 - ROC > 25% - ROC is a proxy for Greenblatt's ROA;

2 - Earnings Yield > 15% - Greenblatt has it as a relative measure, but I'm going for an absolute measure of 15% as this feels aligned with my target return of 15%;

3 - ROE10 > 15% - a Company needs to be be able to demonstrate enhanced shareholder value over the long-term, ideally over a ten year period;

4 - ROCE > 15% - I'm just being greedy now on my financial ratios;

5 - PER < 16x - a la Graham;

6 - PER on EPS10 < 20x - slightly higher to allow for an element of growth;

7 - Yield > 2.5% - I want to hedge my bets and at least get a return as I go along; 

8 - Gearing < 50% - a bit of debt is capital efficient, but I do not want too much;

9 - Piotriski >= 6 - a new one for me. Appears to be a interesting snap-shot for balance sheet health; and

10 - EPS 5 year growth >27.5% - this is the equivalent of 5% annualised growth over five years. EPS needs to grow to drive value over the long-term.

And More...

Once I've got my candidates, I will then be looking at:

- quality of earnings - past and future
- cash generation and what happens to it
- director buying and motivation
- relative valuations versus historic trends and peers


The First Cohort

Throwing all of the above ingredients into the mix comes up with five candidates which tick all of the boxes.

They are, in no particular order:

1 - Braemar Shipping
2 - Clarkson
3 - JD Sports
4 - RM
5 - Unilever

This is not a recommendation to buy these shares! I have a stake in Unilever at the time of writing, but I am intending to drill down into all of these companies, and more besides, in the coming weeks and months. On the face of it, these look like quality candidates, but time will tell.