After finishing The Acquirer’s Multiple book by Tobias Carlisle, I decided that I wanted to give the valuation method a chance. It takes a bit of a different spin on valuation than what I had been used to. It moves away from using price as a cornerstone (i.e. does not look at price to earnings, price to book, price to etc.) and takes a look at balance sheet and earnings. It seemed like a very interesting take on the same desire to buy a $1 for .50 cents. After some research I figured out that running the screen for the Acquirer’s Multiple seemed damn near impossible for a person who wasn’t doing it for their profession, and since I wasn’t willing to pay for the screen it seems that I have moved towards a very similar idea called the Magic Formula (described in detail below). For future screens I am not sure how I got to the magic formula will be necessary.
It should be mentioned that I am not getting away from my desire to build a future dividend income stream, and as such, everything I did was going to have the dividend champion and contender list in the background.
What is the Magic Formula’s Goal
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. This differs from the Acquirer’s Multiple insofar as Mr. Carlisle uses a different denominator. Mr. Carlisle uses a different version of ‘earnings’ by looking at different variables.
In addition to the screen, the magic formula removes financial and utility firms. Considering how heavy I am in both sectors, I am happy to ignore both categories for the next six to 12 months.
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 June 20108 Dividend Growth Watch List
So after screening for those companies with a magic formula of less than 10, and a dividend yield of at least .01%, I was left with approximately 600 companies. Separately, there were about 165 companies that have increased their dividend at least 20 years. When we cross referenced the two lists I ended up with only 20 companies! Respecting the removal of financial and utilities from the formula I am left with the following companies to purchase in June:
- ADM – Archer Daniels
- T – AT&T
- CVX – Chevron
- XOM – Exxon
- NC – NACCO
- NUE – Nucor
- SCL – Stepan Companies
- TGT – Target
- TDS – Telephone and Data Systems
- UVV – Universal Corporation
- WBA – Walgreens
- WMT – Walmart
- CAH – Cardinal Health Care
- BPL – Buckeye
- ENB – Enbridge
I’d love to hear any thoughts on the Magic Formula, or any of the companies that I ended up with on my watch list