Thoughts prior to the screen: We are in the middle of a shit show out there and I love it.
From CNBC on the night that I prepared this post (10/11/2018),
Stocks fell sharply on Thursday in a second straight scary day on Wall Street as investors dumped equities around the globe because of fears of rapidly rising interest rates, a possible global economic slowdown and overly ambitious tech valuations.
The Dow Jones Industrial Average closed 545.91 points lower at 25,052.83, bringing its two-day losses to more than 1,300 points. The S&P 500 dropped 2.1 percent to 2,728.37 and posted its sixth straight decline. The broad index also closed below its 200-day moving average for the first time since April. The Nasdaq Composite pulled back 1.3 percent to 7,329.06 and briefly entered correction territory at its lows on Thursday.
The Dow fell as much as 698.97 points at its lows of the day. The indexes bounced after a report said President Donald Trump and Chinese President Xi Jinping would meet at next month’s G-20 summit, briefly giving traders hope a full-blown trade war with the country could be avoided.
October, a month known for major market sell-offs in the past, has been a brutal month for investors so far. The S&P 500 has lost 6 percent during the month so far and is now higher by just 2 percent for 2018.
Yeah, it is going to hurt when I do my next net worth update but getting into a position after a pull back is awesome. If possible, this month, I would like to add to an existing position at a price lower than my current cost basis.
My Screening Method for Under Valued Dividend Growth Stocks
I used to use metrics based on the price of the stock (P/E, P/B, Yield, etc.), however, earlier this year, I finished Tobias Carlisle’s book, The Acquirers Multiple, and decided to give the valuation method a chance. The method was very different than what I had been previously doing for the past couple of years. It focuses a lot less on using price as the main metric and more on the balance sheet and earnings. Despite really enjoying the book, I decided to use a slightly different formula, the Magic Formula by famed hedge fund manager Joel Greenblatt. The reason I made that decision was not because I believed one guru over the other it was simply because of what I could obtain in a free screen.
What is the Magic Formula
The Magic Formula,
is a quant screen…that identifies great companies selling at a discount. The process is simple. To identify great companies Greenblatt screens for companies with a high return on invested capital (ROIC). And to identify companies that are “cheap” Greenblatt uses the company’s earnings yield.
The formula is basically Enterprise Value/EBIT. Enterprise Value is,
a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization. Enterprise value is calculated as the market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents
is an indicator of a company’s profitability, calculated as revenue minus expenses, excluding tax and interest. EBIT is calculated as:
EBIT = Revenue – Operating Expenses (OPEX)
EBIT = Net Income + Interest + Taxes
EBIT is also referred to as Operating Earnings, Operating Profit, and Profit Before Interest and Taxes (PBIT).
How Did I Screen for the Magic Formula?
After way longer than I’d like to admit I found an amazing, free site to easily screen for EV/EBITDA (rather than EBIT). The site is called FinBox and I would highly recommend it for anyone that is trying to screen for almost anything. The EV/EBIT is a premium feature on the site, and I may opt to sign up for the service in the future, but right now, I am just learning about this method of valuing companies.
My October 20108 Dividend Growth Watch List and Purchase
First thing I did was create a screen for those companies with a magic formula of less than 10, a dividend yield of at least 1.5% and a P/E under 20. This gave me a list of 347 companies (320 last month – my guess is that the pull back threw some companies under a P/E of 20). At the same time I wanted companies that have increased their dividends at least 20 years, so I turned to the dividend champion and part of the dividend contender list which provided 165 companies. Cross referencing the two left me with the following 18 companies:
|CBU||Community Bank System, Inc.|
|EV||Eaton Vance Corporation|
|XOM||Exxon Mobil Corporation|
|JW.A||John Wiley & Sons, Inc.|
|NC||NACCO Industries, Inc.|
|NFG||National Fuel Gas Company|
|TROW||T. Rowe Price Group, Inc.|
|WEYS||Weyco Group, Inc.|
|BPL||Buckeye Partners L.P.|
Cross Referencing that list with positions I already own leaves me with:
My next step is to check out the 5 day chart on these companies
My October 2018 Undervalued Dividend Growth Purchase
While NUE and T are below my current cost basis I am still going with a $750 lot of TROW when the market opens tomorrow. The current P/E is about 15 which is less than the historical average of 19 (according to GuruFocus at least). It also has a payout Ratio of 39% which indicates to me that the dividend isn’t at risk even if the stock comes down some more.