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Affluenty, Discount Cash Flow, Metrics, Stock Valuation

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.

Metrics, Stock Valuation

Stock Valuation with the Graham Formula

Stock valuation is as old as the financial markets and there are infinite ways that we can go about valuing equity in a company. In this article, we will explore a formula for stock valuation by Benjamin Graham, the father of value investing.

In his 1962 edition of Security Analysis, value investor Benjamin Graham described a formula. The formula is simple, seriously simple. Graham also recommended that people not take it too seriously, but to instead use it for exploratory purposes (more on that later). Let’s take a look at the revised Graham formula (Graham revised it for his 1974 edition of The Intelligent Investor).

Graham Growth Formula for Stock Valuation - V = (EPS * (8.5+2g))/Y
V = (EPS * (8.5+2g))/Y

At Affluenty we use this formula and provide you the value of every US stock using it (with the exception of negative EPS companies as they don’t play too well). We also have some tweaks that help make this a little better for modern day stock valuation, we’ll cover these shortly.

Let’s jump into the formula a little. ‘EPS’ is the earnings per share over the last twelve months. You can typically find this on financial sites under EPS (ttm) and we list it in our information for each stock.

The static value 8.5 is a P/E ratio for a company with no-growth, and g is the reasonably expected growth rate.  This is where things get a little tricky, growth rates. At Affluenty, we trust the analysts for the most part. I say for the most part, because some companies might have ten-year growth rates listed at 50%, and it is simply foolish to assume any equity can grow at 50% per year for a decade. Sure, it has happened, but better to under assume and be shocked than to value things with astronomical growth assumptions. In those cases, we will eek the growth rate down a little.

Next up, 4.4. This was the average yield for high grade corporate bonds in 1962 when Benjamin Graham introduced the formula. We still use the 4.4 in our model at the time of writing.

Finally, Y. Y is the current yield on 20-year AAA rated corporate bonds. We update this occasionally. A quick Google search can get this rate for you, so there’s not much in the way of math there.

Microsoft Stock Valuation with Graham Formula

Alright, let’s take a look at a few examples of how we can use this formula in stock valuation with Microsoft (MSFT).

Step One, gather information. Microsoft’s EPS over the last twelve months is $2.11. If we look at what the analysts expect the growth to be, we get 13.68%, it’s pretty specific, but also reasonable for a company in Microsoft’s position. Again, be as reasonable as possible. Microsoft has many prospects ahead of them so 13% wouldn’t be outrageous, but if you do want to be more conservative, drop it down a little.

The final piece of information we need is the 20-year AAA bond rate. The St Louis Fed has a chart that covers that and gives us 4.61% at the time of writing.

Plugging in the numbers we get:

V = (2.11 * (8.5 + (2 * 13.68)) * 4.4) / 4.61

V = (2.11 * (8.5 + 27.36) * 4.4) / 4.61

V = (2.11 * 35.86 * 4.4) / 4.61

V = (332.92) / 4.61

V = 72.22

So, in this scenario, with these particular constraints the Graham Formula values Microsoft at $72.22. At the time of writing, Microsoft is trading at roughly $107 per share, so we would consider that overvalued.  If we were strictly basing our investment decisions on the Graham Formula, Microsoft would not be a buy.

And Another… Generac Holdings

We can’t leave this article at a “no buy,” can we? Let’s try Generac Holdings (GNRC). I kind of cheated in finding this one, it was atop a list of Affluenty stocks that have a Piotroski score of 9 and are undervalued per the Graham Formula.

Generac has an EPS of $2.56 and growth is forecast at 8.5%. I’m sure we can all agree that 8.5% does not seem unreasonable, no matter the company.

V = (2.56 * (8.5 + (2 * 8.5)) * 4.4) / 4.61

V = (2.56 * (8.5 + 17) * 4.4) / 4.61

V = (2.56 * 25.5 * 4.4) / 4.61

V = 287.23 / 4.61

V = 62.31

$62.31 is our answer, and a quick check of the price at the time of writing ($54.74) shows that we have a margin of safety of 13.8%. We’d ideally look for around 25%, but simply finding a stock that is “undervalued” is a good starting point.

Hopefully this article covered stock valuation with the Graham Formula well. If you do have any questions, we’re all ears and you can contact us via our site Affluenty.com.

Affluenty stock valuation site image
Affluenty

Welcome to Affluenty

This post has been a long time coming, but I am personally glad that it is finally here, Welcome to Affluenty.com.

Affluenty is a financial site that helps you navigate the markets and manage your money. At the beginning, our focus is on U.S. equities, but as time goes on, our scope will continue to grow. Today, we open up signups, allowing anyone to sign up for a completely free 7-day trial, and if you’re happy, sign up for $9/month as a “Founding Member” of the site. We’re expecting this will go up to $29/month as we continue to add new features, so lock in your much lower rate now.

So, what will you get for that $9/month? Right off the bat we’re launching with stock portfolios and watchlists. These will update daily to keep track of your money, or your play around portfolios.

You can also add alerts. Want to know if a stock in your watchlist has a sudden drop to a price you’ve determined good value? Set up an alert and we’ll let you know. The same goes for your portfolios, we’ll alert you to rapid price changes, and send you weekly emails to let you know how your portfolios are doing.

Then comes the stocks themselves. We have more pre-calculated metrics than any site I’ve seen. CROIC, ROIC, EV/EBIT, FCF/S, Piotroski scores for the last 5 years, asset turnover, DuPont ROE, Tangible Book Per Share and FCF Per Share. That’s just naming a few, and we continue to add more. If there’s a metric you want, we’ll add it to all stocks site wide.

How about valuations? We have Graham Formula and Discounted Cash Flow out of the bag. If a stock can be valued using these two methods, we’ve got a value listed. We will be improving this functionality as time goes on so that you can modify the growth rates and discount rates to suit your own tastes. As it stands now, it is a good glancing value (we use 8% discount rate for all stocks shown).

Finally, we have what we’re calling “Strategies”. These are investment strategies from all over the place. We have book inspired strategies like “Greenblatt’s Magic Formula” and “Acquirers Multiple” and then we also have metric inspired strategies like “Top CROIC Stocks” and “Improving Piotroski & Max Score”. We continue to add strategies weekly to see how they perform against the market as a whole.

Here’s a roundup in bullet form:

  • Stocks with more metrics than any other place (plus request more)
  • Stocks with pre-calculated Graham Formula value, and Discounted Cash flow
  • Watchlists & Portfolios
  • Stock alerts
  • Strategies across the investing universe tracked daily

Now for what’s coming:

  • Stock screener across all metrics and valuations
  • Better charting
  • Charting of metrics (view different metrics over time)
  • News and alerts based on news
  • An investing community (chat and share valuations amongst all Affluenty members)
  • …and anything our community may request

We hope you like what we’ve built, and that you’ll join us on this journey to building more wealth and keeping a better eye on our investments. If you have any questions, please reach out (hello@affluenty.com) and we’d be happy to help. Also, if you have a feature request, or something that’s keeping you from signing up, we’d love to hear about it too.

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