Value Investor's Worksheet
In her book,
Value Investing Made Easy, Janet Lowe reports that value
investing invariably falls out of favour during bull markets. Benjamin Graham's
son, who owns the rights to his father's books Security Analysis
and The Intelligent Investor reports that the
books generally sell poorly during roaring markets. But after a market
correction, the book sales pick up again.
Since the market has been
palgued by periodic bear markets since the year 2000, let's revisit Value
Investing with a tool you can use to assess stocks according to value investing
principles. In her book, Lowe lists ten attributes of an undervalued stock. The
first five criteria measure risk. Criteria 6 and 7 show financial soundness and
the last three factors show earnings history. According to Graham, any company
that meets 7 out of 10 of the criteria is an undervalued stock.
Now rather than just list
the ten attributes, I've created a worksheet. After the article is a link to a
printable version. You can then use it to analyse a company of your choice.
Company____________Stock Symbol_____ Exchange_____
Earnings to Price Yield_____ AAA Bond Yield_____
to price yield should be double the AAA bond yield. Earnings to price is the
reverse of the P/E ratio. If a company has a P/E of 20, its E/P is 1/20 or 5%.
If its P/E is 50, its E/P is 1/50 or 2%.
Current P/E Ratio_____ Highest Ave. P/E (last 5 years)_____
P/E should not be more than be 40% of the highest P/E in the last five years.
Dividend Yield_____ AAA Bond Yield_____
yield should be two-thirds of the AAA bond yield.
Stock Price_____ Tangible Book Value_____
price should be two-thirds of the tangible book value of the company. Book value
= (total assets - liabilities - stock issues ahead of common stock)/number of
Stock Price_____ Net current asset value_____
price should be two-thirds of the net current asset value or net quick
liquidation value. Net current asset value = Current assets - current
Tangible Book Value_____ Total debt_____
should be lower than tangible book value.
ratio should be 2 or more. Current ratio = Current assets/current liabilities
Total debt_____ Quick liquidation value_____
should be less than the quick liquidation value.
Current earnings_____ Earnings 10 years ago_____
should have doubled in the last ten years.
Earnings history (list EPS for each of last ten years)
Year 1_____ Year 2_____ Year 3_____ Year 4_____ Year 5_____
Year 6_____ Year 7_____ Year 8_____ Year 9_____ Year 10_____
should have declined no more than five percent in no more than two of the last
Some Elaboration on the
above, Lowe says a company should meet 7 out of 10 criteria to be considered
undervalued. But, she notes, "they should not be followed like a cookbook
recipe". The criteria one wants to abandon depends on their goals. Investors
looking for income should pay closer attention to items 1-7, and particularly
criterion number 3. Those looking for a balance between safety and growth can
ignore criterion # 3 and focus on the other 1-5 and numbers 9 & 10. Meanwhile,
those looking for exceptional share price growth can ignore criterion # 3, give
lighter weight to 4, 5 & 6, and give heavy weighting to numbers 9 & 10. She says
that in this way, "investors can select those elements that best achieve their
goals and compromise on those that do not".