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Finding Top Discount Cash Flow Stocks Using Affluenty

Technology has given us an immense amount of power. It used to be that a solo investor, prior to the internet, would have to sift through 10K’s they ordered and waited on, then there was a good chance that those 10K’s revealed an equity not worthy of investment. Patience really was key.

Today, we can hop on the internet and find anything we want to about a public company in a matter of minutes. We even have the power of automatically sifting through the world of investments to sift out names we wouldn’t traditionally go to, but that deserve a look anyway. And that is exactly what Affluenty.com does for you. In this article we’ll take a look at some of those stocks.

First, we have to decide what we’re looking for. There are endless ways to value a piece of equity, and hundreds of different possible metrics that investors abound would advise you should be the first things to look at.

The sift this time around is:

  • Discounted Cash Flow with 8% discount rate exceeds the current price
  • A solid cash return on invested capital (CROIC)
  • A Piotroski Score > 6 for the most recent year
  • Reasonable analyst growth forecasts
  • EV / EBIT < 12

This search across all listed U.S. equities returns a list of nineteen stocks. It’s still a considerable amount to sift through, but not an unmanageable task.

From this point, I would typically sort the list provided by free cash flow divided by the sales (FCF/S) and begin working my way through some analysis. Let’s explore these “top” stocks and see if there is any merit to investing.

Vedanta Ltd (VEDL)

Prior to writing this article, I had never heard of Vedanta, so this is a great starting point. The company showed up on the radar because they met all listed criteria.

Vedanta is a natural resource company with fairly diversified operations including iron ore mining, power generation and copper production. I should point out here that if there’s one area I tend to steer clear of when doing automated sifting, it tends to be Basic Materials. The sector has a lot of commodity volatility which could make automated numbers look amazing one year, and bad the next, which means we would have to put in some extra due diligence on a company like this.

Let’s take a look at Vedanta’s numbers. They’re a $10.5B company who happens to be ~50% off of their 52-week high. Their most recent year Piotroski score is 7 and it’s been in the “good” range (7-9) for a couple of years.

2014201520162017
5587

Running a DCF of Vedanta and verifying reasonable growth forecasts is a little difficult given their relatively scarce coverage. In these scenarios I like to assume a fairly low growth rate and verify that they’re not actually sustaining negative growth by glancing at the income statements of the last few years. For a company like Vedanta who is diversified across the Basic Materials space, 5% annual growth seems appropriate.

With a 5% annual growth rate and an 8% discount, Vedanta is valued at $18.24, that’s a 60% margin of safety at the current price. A discount rate of 12% would leave a margin of safety around 10%.

With numbers like these, Vedanta enters my “thorough analysis” list. A list that I will explore in lots more depth and begin asking qualitative questions of.

NETSOL Technologies (NTWK)

NETSOL comes up second in our list. This is a much smaller company, and it may be smaller than any readers are willing to invest in, but let’s take a look anyway. NETSOL is a technology company, we’re already becoming diversified, that builds software solutions for asset financing and leasing in a wide range of industries.

The company is currently trading with a value of just $85M and is 30% off of their 52-week high. The 27% cash return on invested capital catches my eye, as does the solid ‘8’ on the Piotroski score. Another item of the note, the book value. Price to book is just 1.3, which is pretty nice for a technology company.  

There are some obvious and glaring lowlights for a tech company though, namely the return on equity which is just 9.2%.

Peaking in at the balance sheet, the company carries no long-term debt, and has been building a nice little pile of cash over the past few years. It’s a great sign to see a profitable tech company not loading up on debt to finance operations. 

Much like Vedanta, there are no analysts offering estimates on this stock, so again I settled on 5% growth for my discounted cash flow. Using an 8% discount rate we get $18.07, which is a 150%, yes 150%, margin of safety. A more reasonable 12% discount rate (and 5% growth) would leave us with an 84% margin of safety.

With numbers like those, NETSOL is another company I’d push into the qualitative analysis pile. Either there is something inherently wrong at the company causing it to not reach full potential, or there’s an opportunity here with this microcap.

Tivity Health (TVTY)

Finally, I’d like to take a look at this healthcare stock, and one with fairly obvious prospects in the future. Tivity provides fitness and health improvement programs that target, for the most part, older adults.

Aging populations, and the desire to remain mobile into the golden years means lots of potential for a company like Tivity. In fact, analysts expect this $1B company to grow at roughly 12% per year which gives investors a 60% margin of safety on an 8% discount rate.

Tivity has been profitable for a couple of years now and has been consistently growing their revenue for the past five years, a good sign. The company also boasts a 25% return on equity, or 17.47% if you prefer DuPont ROE.

A couple of things I do like to see are a growing, or consistent, CROIC and Piotroski scores. This company has both.

Piotroski Score 2014 2015 2016 2017 TTM
4 4 4 8 7
CROIC 2014 2015 2016 2017 TTM
0.02 0.06 0.08 0.24 0.25

Obviously a Piotroski score of 4 is something we’d choose to ignore but getting things up there into the 7-9 range is a sign of a growing company with a sturdy foundation.

The CROIC is also showing some great growth. In 2014, this company would have been speculative and avoided, but now it’s showing potential with a solid 25% cash return on invested capital.

Tivity is 88% off its 52-week high, so it has been through a bit of a rough patch stemming from a proposed merger with Nutrisystem (NTRI).

Summary

There are many ways to sift through the universe of investable equity, but technology has made things much easier. In this article, three stocks were presented that mathematically look investable. From here, a thorough qualitative analysis should be performed, as well as verification of the numbers prior to investing.

If you’d like to discover stocks the easy way, you can do that right now with an Affluenty account. We’re currently, (at the time of publishing, Feb 2019) charging just $9/month for access to investing metrics, strategies and screeners that will make your investing life much easier.

Affluenty – Save time, invest better.

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