Thursday, June 10, 2010

What Is Intrinsic Value? – 1st Level Analysis

My definition of intrinsic value boils down to “a wonderful company fairly valued”. In previous posts I’ve defined 14 value elements that describe what I mean by “a wonderful company fairly valued”. During the process, however, I found some of them redundant or combinable. So, I’m taking another look at my system to find a better & simpler way to present it.

The 14 Elements Value Elements Are:
(1) Strong Cash Flow
(2) Strong Earnings Growth
(3) Dividend Consistency
(4) Consistent Dividend Increases
(5) Profitability
(6) The Formula: E(2R+8.5)*Y/4 = Intrinsic Value per share
(7) Good returns on equity
(8) Little or No Debt
(9) Business Model I Understand
(10) A Durable Competitive Advantage
(11) Measure Risk
(12) Reliable Long term Dividend Income Stream
(13) Increasing Annual Dividends Faster Than Inflation
(14) Expect at least a 9% Total Return Compounded Annually

I’ve designed my stock analysis as a three level hierarchy. When a stock passes one level more data is needed at the next level for a deeper analysis. But the higher analysis isn’t done on a stock unless it passes the previous test. In this way I minimize my time spent acquiring and refreshing data.

Collecting the Data
First level data is pulled from two web pages, both are accessed from MSN Money’s Investing/Stocks landing page, which I’ve set up as a “favorite” in my browser.

When I set up a stock in the 1st Level tab, I enter the US ticker symbol into the “Name or symbol(s)” field in the upper left corner of the landing page and press the “Get Quote” button. I also enter the ticker in my spreadsheet.

As I write this, I’m working through the steps so I won’t leave anything out and I’m looking up ABT, Abbott Laboratories. After pressing the “Get Quote” button, the site brings up the most recent price quote with some summary data.

Next, I copy & paste into my spreadsheet the company’s name as shown on the web page; in this case, “Abbot Laboratories (ABT)”. Then, I scroll down and take note of “The Motley Fool CAPS Rating”. Today, ABT’s CAPS rating is “5”, that is. 5 gold stars are displayed; and I enter “5” in the “CAPS” field of my spreadsheet.

Then, I scroll to the upper right corner of the page and record the annual dividend and the dividend yield from the “fyi Dividend & Yield” field, the EPS from the “Earnings/Share” field, and the “Forward P/E”. I enter all of these in the 1st Level analysis tab. I also enter today’s date so I’ll know when the data was refreshed.

Lastly, I press the “Company Report” link located on the left edge of the page about a third of the way down from the top. This takes me to a page with a general description of the company’s operations and location. It also displays an “Industry” field that defines an industry sector. For ABT, the “Industry” is “Drug Manufacturers – Major”. I use this information to classify the stock by sector and I record the sector in the spreadsheet.

That’s all the data I need at the 1st Level. When, eventually, I refresh the data the ticker, company name, and sector will seldom need updating so, normally, I just collect the CAPS rating, dividend, yield, EPS, and forward P/E from the “Quote” page and, of course, enter the new date.

1st Level Analysis
The analysis is very simple and contained in two cells per stock record (one line on the spreadsheet).

In one cell I calculate an EPS based Dividend Payout Ratio. In the other cell I screen the data elements.

The screening formula requires:
(1) The CAPS rating to be greater than “3”
(2) The Dividend Payout Ratio to be less than “100%”
(3) The EPS to be greater than “0”
(4) The Forward P/E to be less than “16”
(5) The Dividend Yield to be greater than “2.00%”

Exceptions are made for stocks with a “Sector” classification of “Fund” or “MLP”. Ticker symbols with these classifications automatically pass the 1st Level test.

Individually, these screening requirements don’t seem very strenuous but, taken together; they eliminate about 80% of the stocks I consider.

Next I’ll look at the 2nd Level Analysis.

Link to Other Topics in the Get Rich Slowly Report: What Is Intrinsic Value?

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