Richard posted a comment that requested Phil Town give detailed information about how to find a business that is on sale for 50% off. A stock's value is what I call the Sticker Price (and what Investools calls the "estimated target price" and what Warren Buffett calls "Intrinsic Value"). Rule # 1 investors buy at a Margin of Safety, or 50% off Sticker.
Good question, Richard, because this whole thing is academic if you can't find a wonderful business that you can buy cheap.
Finding wonderful businesses is easy. There are tons of them. But finding wonderful businesses that are on sale takes some digging.
Digging through tons of data is where Investools really shines. What used to take literally days now takes literally seconds. Amazing. (It's quite a lot slower to do the digging on MSN, so we'll start by assuming you have Investools, and then come back to MSN at the end of the post.)
- On Investools, go to Search. Click on Global Search.
- Where it says Phase I and II see MG-Zacks Score and select 3.25 in the drop down box.
- Where it says Price Pattern Score select 2.5.
- Click on Submit Search.
Investools' main frames now sort literally millions of pieces of data from a 13,000 businesses from OTC and NASDAQ, American, New York, Toronto, Montreal and Vancouver exchanges as well as over 1000 businesses from around the world.
In about two seconds it comes up with between 25 to 200 businesses that match what we're looking for.
What this particular search does is look for the businesses that have the best consistent past as well as the most promising futures relative to their current price -- according to the analysts -- and which also have the most consistent growth of the stock price. This is a great starting point for our 4M research because Investools quickly eliminates about 99% of the stocks in the database. That little step right there was impossible to do just a few years ago. My how things have changed!
Still, you have to pay for Investools.
MSN is free, so here's how to get into the ball park of some Rule #1 stocks using MSN Money.
- Go to Investing Home and on the left menu column. Select Stock Screener (under "Stocks").
- Where it says Field Name click in the blank box.
- A drop-down menu will appear. Select Investment Return then ROI 5 year.
- To the right there is another box that says 'Choose an Operator'. Choose the one that looks like this "=>".
- That means equals or greater than whatever number you put into the next box to the right where it says "click here to add a value". Put 10% in that box. That's one parameter that the MSN database will search for. But that's not nearly enough.
- Now click on a new 'field name' box and do this again for another parameter. Let's do EPS Growth Next 5 yr. Click that and then in the next box click => and then put in 10%. I'd love to put in something that would search back in the history of the business for a nice EPS growth rate, but the farthest back they let me do it is 1 year. Not enough to be useful for Rule #1.
- But we can add in one more parameter that helps narrow things down to businesses that might be undervalued. It's called PEG Ratio. Go to the first box and start a new parameter. Click on Advisor FYI, then click on PEG Ratio Below 1. This parameter tells the database to look for businesses that have a PE that is lower than the projected earnings for the next year. There isn't anything infallible about PEG Ratios. I normally ignore them but we're got to use what we're given here and this is at least going to narrow things down to some low priced businesses.
So these three parameters will narrow down the 8000 stocks that MSN Money is tracking to 25 that might have a gold nugget in the group. '
Once we get a list, we've got to look at the 4M's, starting with consistency. Pull up the financials and see if the last ten years are consistent and predictable in these four numbers: Sales, EPS, Book Value Per Share (or Equity) and cash flow (MSN only does 4 years of cash flow). And check ROIC to make sure its consistently better than 10% for the last ten years (MSN gives us five years). Then do a quick Sticker Valuation (which I discuss in other posts).
What you're going to find is that you have to do a lot of messing around with different parameters on the MSN Search engine and then keep eliminating stocks with the 4Ms.
The good news is that the MSN search engine is free. The bad news is that it only covers about 8000 stocks, it doesn't track enough parameters to do a comprehensive Rule #1 search, and the data is limited to five years in the search engine. But even so, this is a HUGE improvement over doing this without a computer at all – which is the way most of us old guys did it for most of our investing lives.
At the end of the day, you can get every bit of data you need if you are willing to dig it out. It just takes time. The saying "time is money" works both ways. If you don't have the money, then take the time and do the work any way you can do it.
Now go play.
