Value investing chart setI would like to share the set of charts I use to find and analyse candidates for value investing.
It is a rather dense and telling setup where you can find a lots of information. Please allow me to explain them one by one.
(The chart is made on the company Nippon Tel. It is not a recomendation for anybody to buy Nippon Tel, I use this chart for educational purposes only)
So: what can you see in this chart? A LOT! You can, in a glance asses if a company would qualify for value investing or should be avoided. From bottom up here are the panes, charts, indicators explained:
There are 3 panes in this setup.
In the lowest pane you will find the dividend information. There are 3 indicators telling a lot about the company's endurance and discipline. We can see that in our example
- the company has never been missing a dividend payment over the last 15 years (even during the 08 crisis)
- the company has been constantly raising the dividends over the last 15 years
- the company has made an ever growing diluted EPS (earnings per share) over the last 15 years
- the investment in the current price levels would yield 3,69% (bottom right scale)
- the company has been very disciplined to pay out about 50% of the earnings per share and retain the rest within the company resulting growing book value
In the middle pane you can see the net income (green territory) of the company and the number of common shares outstanding (blue line). We can see that in our example
- the company has been constantly making profit over the last 15 years (even during the 08 crisis)
- the company constanly buying its shares back thus helping the existing shareholders to keep/grow the equity per share
Now the top, main pane tells the most about the company and its share. Here is what you can read from this chart:
- the yellow line will show the Debt to Equity ratio
What this is telling you is that the company is ran by vigiliant leaders who are keeping a close eye on the company's long and short therm debt and resist the temptation of today's really cheap loans. As Peter Lynch use to say: it is almost impossible to go bankrupt for a company without excessive debt. The ratio Ben Graham and Warren Buffet (also Peter Lynch) finds healthy here is a 1 to 2 debt to equity ratio. In other words, it is assuring if half of the equity covers all the debt of the company.
In the case of our example the current value of this ratio is 0,415 which is a very good level of debt. (Industry specific figure!) The company has been constantly paying it's debt back over the last 15 years and although the figure has been growing during the last 2 years it is still under a acceptable level.
- the light brown line is the book value or the shareholder1s equity per share
Needless to say the for a value investor it is imperative that the book value is steadily growing, just like in our example from 8,8 to 21. What is even more important is that the current price is below the book value per share or in other words a buyer in these price levels gets a 1 on 1 value for his bucks. Just to give you a comparison: today this value for Apple (AAPL) is 30 to 1! So you pay $ 30 for $ 1 of equity when you buy Apple stock.
In our example the book value of this company is steadily growing and the price is currently below the book value.
- the pink line on the pane is my "invention" as this is the intrinsic value graph which is calculated by the script I have posted already here. I would not explain in details here, please check out my post and all the comments below it for details.
This line shows you what would be a fair value of the stock if you take all the dividends and the book value growth that will happen in the next coming 10 years and discount it back to today's value using the 10 years US Note's yield. This is called the intrinsic value of the company and calculating it is rather art than science, says Buffett.
In the case of the example company the Intrinsic Value is around 43 while the price is a bit above 20 which means that a value investor has a 100% margin of safety when buying this stock.
- the green/red line is another calculated line: Warren's limit price
Ben Graham and Warren Buffett uses a rule of thumb saying that the PE (price earning ratio) multiplied by the Price to Book ratio can not result a higher value than 22.5 to be considered a cheap stock. Here I use the Diluted Earnings figure to calculate the PE ratio to take all the convertible securities (options, prefered stocks, warrants, etc) into consideration.
This line shows if the stock can be valued as cheap or overpriced.
In the case of our example the current price is under the limit price and can be considered an underpriced stock.
As you can see there are lots of fundamental informations you can visualise and asses with this chart setup in order to pick your winning stocks for value investing.
