Prospecting from the "Dustbin"

One popular way of searching for value is to sleeve through the "dustbin"... namely the 52-weeks low stocks.

I have such a readily made screener in www.stocks.cafe. Parameters used are illustrated below:

I would explain some of the terms above for users unfamiliar to the stocks.cafe platform. "Close% from 52-weeks Low" is expressed as a percentage. Any stock's last closing price that is within 3% from the lowest in the last 52 weeks will appears in the results.

"Price/ Tangible Book" refers to the closing price divided by the book value, minus any "soft" items like goodwill, land rights, etc. It isn't that they do not have value... it is just hard to determine. The prudent value investors tend to ascribe a value of 0 to it. Now I will say this screener might not work too well on this, so you need to double check the annual reports for the prospect. I don't have any hard and fast rules about book value, but anything within 3 or so is still reasonable. I intend to write  another post regarding the book value investing approach later.

Debt/Equity is expressed as a number. If the figure is 0.3, it means that for every 1 dollar of assets, there is 30 cents worth of debt. Ideally this should be interest-bearing debt-- trade payables are usually not interest-bearing and should not be accounted as debt.

"Last Close > 0.1" is a personal choice-- I do not want to look at any penny stocks in SGX. These stocks are prompt to consolidation in the future. For the uninitiated, SGX has this weird rule that stock prices must meet the Minimum Trading Price of > 0.20 in X amount of years; stocks are traded in 100 units minimum in Singapore.

Since my capital is small, I will gladly forfeit some quality penny stocks.

EV/ EBIT_operating_income > 0 is a funny one. It basically means Enterprise Value (EV), which is Market Cap (all stocks multiply by market price) + Debt - Cash.

There are a couple of ways this can be negative. First, the company might have more cash than debt and market cap combined. These are the ultimate value stocks. Since I forced the screener for give me a positive value, this means I would miss such stocks. There is nothing to stop me from creating another screener to look for these value stocks The other reason why it will be a negative number, is that EBIT is negative (company is making a loss).

EBIT_operating_income is not a choice I preferred, but the only one that is available. For the uninitiated, this refers to profit that is available after all costs, except tax and finance cost (which is interest charges from borrowing), is levied. The whole idea is to evaluate companies from an equal footing.

Current Yield > 0 is the current dividend yield in percentage. A dividend must be present. You will need to wait for dustbin stocks to recover and I want to be paid for it.

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 Running this screener for just SGX this week, I have the following:

The data is copied and pasted into Microsoft Excel for easier viewing. I added a column call Price/FCF. A company which has unsteady cash flows will have a very high or low number... this is just for my viewing pleasure.

The next step is to cut away all stocks that:
Do not offer a dividend consistently for years. Capitaland has been offering increasing dividends over the years, which is delightful.

Large debts; a very high D/E (debt/equity) number-- unless this is a relatively big company. As silly as this sounds, banks do give institutions a bigger leeway. For the smaller companies, they are removed. This is not to say that they aren't good stocks-- I just want to sleep better at night.

The next step is to look at each and individual companies from stocks.cafe. There is an advantage here presented by Stock.Cafe, an extract of the Profile tab of YZJ Shipbuilding as follows:

First of all, the book value must improve over the years. Book value has increased 0.698 to 1.389. Whether this book value is reliable... let's just say we will check that later.

More of an interest to me is the earnings, and free cash flow per share diluted. I want to see positive numbers in free cash flows. Most companies are capital intensive, which means for every dollar earned, a large amount of it is re-invested into the company for both maintenance and growth.

I want to say something about growth-- a growth in earnings per share is not necessary a sign of growth. It is merely a hint of growth, and the company's ROIC should be investigated. An EPS growth of 10% that results from a substantial increase in invested capital is not growth. 

I have digressed-- let's get back to screening stocks.

Companies that have less than desired reputation are also removed.The net result is 7 companies for further investigation, out of a starting of 26. This is just the first step. I would not be surprised if none of them make the cut at the end of the day.

If you do dustbin-picking very frequently, you will recognize names that appear time and again. Reputed value investors (like John Neff) advocate paying more attention to new stocks that appear in the list. My personal opinion is that the market is usually efficient-- so long term, they can't be that wrong.