There are thousands of potential criteria to be used when formulating a successful value investing strategy.
Value investing means different things to different people, so we will focus on the most important criteria that will help you identify great companies whose stock is selling at a significant discount.
We also include a selection of dividend criteria for those seeking an income investing strategy.
Value Stock Screener: Risk & Valuation Criteria
- Intrinsic Value / Fair Value – The Intrinsic Value of a stock is an estimate of a stock’s value without regard for the stock market’s valuation. Two popular models are the Dividend Discount Model (DDM) and the Discounted Forward Cashflow (DFC) Model. There are multiple variations of intrinsic value, see our detailed article on intrinsic value. Criteria: Intrinsic Value per Share > Stock Price
- The Margin of Safety – If a stock price is significantly below the actual Fair Value of a company, that percentage difference is known as the Margin of Safety. Essentially the percentage that a company is undervalued by the stock market. Criteria: Margin of Safety > 30%
- Price to Lynch Fair Value – The price to Peter Lynch Fair Value ratio is based on the famed investor’s valuation formula. It divides the price by the PEG rate times the 5-year EBITDA growth rate times continuing earnings per share. Criteria: < 1.0 is considered undervalued.
- Price to Graham Number – The price to Graham Number ratio is a conservative valuation measure based on Benjamin Graham’s classic formula. The Graham Number is one of his tests for whether a company is undervalued and is computed as the square root of 22.5 times the tangible book value per share times the diluted continuing earnings per share. Criteria: < 1.0 is considered undervalued.
- Enterprise Value – The enterprise value is the total value of the company including market capitalization. Enterprise value is the price another company could pay for a corporation. A classic formula to calculate enterprise value is market capitalization plus assets plus cash and equivalents minus debt.
- Earnings Power Value – Popularized by value investor Bruce Greenwald and considers an improvement over Discounted Cash Flow (DCF) models because it avoids the speculative assumptions about future growth. The seven-step formula for EPV excludes future growth and growth cap expenses, making the assumption that future earnings will be like the historical average.
- PE Ratio – The Price / Earnings Ratio helps you identify Find companies with lower PE Ratios than competitors with similar growth prospects. The PE Ratio is only useful when comparing competitors in the same industry with similar business models. Criteria: PE Ratio < 4th decile in the industry segment
- Shiller PE Ratio – The Shiller P/E ratio or Cyclically Adjusted PE Ratio (CAPE Ratio) uses the 10-year inflation-adjusted average earnings to compute a P/E ratio that spans the typical business cycle. Criteria: Lower is better
- Price / Book Value – To a classic value investor book value is an appraisal of all a company’s assets. A good definition of book value is anything that the company can sell for cash now. Examples of book value assets include real estate, equipment, inventory, accounts receivable, raw materials, investments, cash assets, intellectual property rights, patents, etc. Price to book value compares a stock’s market value to the value of total assets less total liabilities (book value). This is also known as P/B or PB. A low P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. Criteria: Lower is better
- Price / Tangible Book Value – Compares a stock’s market value to the value of total assets less total liabilities and intangibles. A low ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. Criteria: Lower is better
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Value Stock Screener: Financial Strength Criteria
- Piotroski F Score – Named after Stanford Accounting Professor, Joseph Piotroski the Piotroski score determines the financial strength of a company based on 9 criteria. Criteria: A score of > 8 is considered strong and < 2 indicates a weak company.
- Beneish M-Score – A statistical model for determining if the company’s earnings have a high probability of accounting manipulation. An M-Score rating over -1.78 suggests possible earnings manipulation. Professor Beneish found that investing in low M-Score stocks and shorting high M-Score stocks would have outperformed the market by about 15% over the 7-year period he studied. Criteria > -1.78 Risky
- Altman Z- Score – This popular credit-strength measure aims to show how likely a company is to go bankrupt. Criteria: Risky companies < 1.8 and solid companies have a score > 3.0.
- Sloan Ratio – This identifies companies with high accrual ratios, or high non-cash income or expenses. Sloan found that over a 40 year period buying low accrual companies and shorting high accrual one generated a return of more than twice the S&P 500. The ratio is computed by subtracting operating and investment cash flow from net income and dividing by total assets. Criteria: If the result is between -10% and 10% the company is in the safe zone but if the result is greater than 25% or less than -25% earnings are likely to be made up of accruals. Accruals that continue across several quarters are a signal for doctored earnings.
- Debt / Equity – Debt/Equity is sometimes called D/E, Financial Leverage, or Gearing and it is the ratio of Total Debt to Equity. Criteria: A high ratio indicates a risky business and a low ratio makes a buyout more likely.
- Current Ratio – A measures of the company’s ability to pay short-term obligations, calculated as current assets divided by current liabilities. Criteria: safe investments have a current ratio > 2.
- Quick Ratio – Quick ratio is also called acid-test or liquid ratio and it measures a company’s ability to meet its short-term obligations with its most liquid assets. It is calculated as (Current Assets – Inventory) / Current Liabilities. Criteria: safe investments have a quick ratio < 1.
- Franchise Value – The franchise value is the value of a company’s name or reputation. The idea is that a good name or reputation will increase a company’s value, sales, and cash flow. Apple has a high franchise value because of its reputation for making dependable, innovative and high-quality products. This enables Apple to charge higher prices and sustain high-profit margins while maintaining a loyal customer base.
- Negative Enterprise Value – A company has a negative enterprise value when the cash on the balance sheet exceeds its market capitalization and debts. Criteria: Value investors look for negative enterprise value because it is a sign that Mr. Market is undervaluing a company.
- Net Current Asset Value Per Share (NCAVPS) – NCAVPS was one of Benjamin Graham’s tools for valuing a stock. You calculate the NCAVPS by subtracting a company’s total liabilities from its current assets. Graham considers preferred stock a liability. The idea is to learn how much money a company will have left after it sells all the cash assets and pays all obligations.
- Institutional Ownership – Indicates what percentage of the company financial institutions own. Low institutional ownership indicates companies that Wall Street has not discovered yet, therefore more potential growth in the future. Criteria: Lower is better
- Insider Ownership – The theory goes that the more a company’s management and employees own shares of a company the more committed they are to succeed. Criteria: Higher is better
- The Solvency Ratio – is a measure of whether a company generates enough cash to stay solvent. It is calculated by summing net income and depreciation and dividing by current liabilities and long term debt. Criteria: A value above 20% is considered good.
Value Stock Screener: Profitability & Earnings Criteria
- Greenblatt Earnings Yield – This variation of earnings yield compares Operating Income (a.k.a EBIT) to Enterprise Value. It is used by Joel Greenblatt in his bestselling book The Little Book That Beats the Market. Criteria: > 3%
- Yacktman Forward Rate of Return – The Yacktman Forward Rate of Return can be thought of as the return that investors buying the stock today can expect from it in the future. It is similar to earnings yield but uses the normalized free cash flow of the past seven years and adds in the 5-year growth rate. Criteria: Higher the Better
- Greenblatt Return on Capital – This variation of Return on Capital takes Operating Income (a.k.a EBIT) as a percent of NetPPandE plus Current Assets. It is used by Joel Greenblatt in his bestselling book The Little Book That Beats the Market. Criteria: Higher is better
- EPS 5-Year Average % – The average annual compound change in diluted continuing Earnings Per Share (EPS) over the last 5 years. EPS is calculated as net income less dividends paid on preferred stock divided by the average number of outstanding shares. Criteria >10%
- Return on Assets – A profitability measure calculated as net income as percent of total assets, also called ROA. Criteria: A high ROA shows an effective allocation of capital.
- Return on Equity – A profitability measure calculated as net income as a percent of shareholder’s equity, also called ROE. A high ROE shows an effective use of investor’s money but it does not account for any risks associated with high financial leverage. Criteria: Higher is better
- Return on Invested Capital – ROIC quantifies how well a company generates cash flow relative to the capital it has invested in its business. It is defined as Net Operating Profit after Taxes / (Total Equity + Long-term Debt and Capital Lease Obligation + Short-term Debt and Capital Lease Obligation). Criteria: Higher is better
- Operating Income or Loss: This figure tells you how much company made or lost on its operations. If you see a negative number like this; -$1.157 billion after the words operating income it means a company is losing money on its operations. Criteria: Higher is better
- Net Income or Net Loss: Do not buy an unprofitable company. If this number is positive it tells you how much the company made after covering its operating costs. If this number is negative, it tells you how much money the company lost after covering its operating costs. Criteria: Higher is better
- Free Cash Flow: Cashflow is King – ensure the company has plenty left over after operations expenses are covered. This number is important because it tells you how much cash the company had left over after covering all of its costs. Criteria: Higher is better
- Financing Cash Flow: This figure tells you much money the company makes in the financial markets. It can also tell you much money the company loses or makes by servicing loans and debts. Criteria: If this is high it might mean financiers see it as high risk.
Value Stock Screener: Dividend & Income Criteria
- Dividend Yield – The dividend value or yield is the amount of money investors can make a from a company’s dividends. They usually calculate dividend value by subtracting the annualized payout from the share price. The annualized payout is the amount of dividends generated by a share of stock in the past year. Criteria: > 3% < 12%
- Dividend 5-Year Average % – The average annual compound dividend growth for the last 5 years based on the last paid dividend and the corresponding dividend 5 years earlier. Criteria: > 3%
- Dividend per Share – The dollar amount paid per share in dividends each year based on the trailing twelve months dividend paid. Criteria: Higher is better
- Payout Ratio – The Dividend Payout Ratio is Dividend Per Share as a percent of Diluted Earnings Per Share based on the trailing twelve months (TTM) from the most recent quarterly report. The dividend Payout ratio can be used to measure the chance of a dividend increase or cut. For example, a company with a small Payout Ratio has room to increase its dividend. A payout ratio too high and the dividend might not be sustainable and may be subject to a cut. Criteria: Payout Ratio > 10 and < 60
- Dividend Coverage Ratio – The dividend coverage ratio is calculated by dividing the stock’s annual earnings per share by the annual dividend. Criteria: > 2
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