Value Library
The following is an excerpt from the ABC Perspective -
July 2011 - Pg. 16
ABC Funds' Ten Commandments of Deep-Value Investing
With the present fickle financial markets, erratic trading and dissipating investor confidence, I find it particularly useful to review our analytical disciplines and to remind ourselves of the primacy of patience. Especially relevant in this unpredictable environment is the fact that while share prices may change, fundamental valuations do not. Many exciting opportunities exist in the current marketplace for investors with strong financial discipline, focus and stamina.
- Low P/E Multiples. Companies with improving earnings, which provide low forward price/earnings valuations.
- Low Price/Cash Flow Multiples. Improving free cash flow enables companies to strengthen their balance sheet, pay down debt, invest in new opportunities, and increase their potential for mergers and acquisitions.
- Discount to Book/Net Asset Value. Companies that trade at a significant discount to their intrinsic or break-up value are the basis of ABC Funds’ strategy of Buying Toonies For Loonies®.
- Hidden Assets. Examples of hidden assets may include, but are not limited to: tax loss carry forwards; real estate; potential spin-offs; IPOs; and favourable litigation.
- Effective/Ineffective Senior Management. Companies with solid, aggressive management and a credible plan of action often make attractive investments. However, companies with poor, directionless management could have increased potential for a proactive acquisition, reorganization or merger.
- Products/Services in Tune with 2011 and Beyond. These companies are often poised to participate in expandable, growing markets, improve their competitive position, and/or increase margins.
- Value Catalysts. Examples of value catalysts include, but are not limited to: newly appointed senior management with a fresh approach; a sale or purchase of a meaningful asset; an unsolicited takeover bid; or proactive shareholders.
- Discounted Valuations Compared to its Peers. Companies that trade at discounted price/earnings, price/cash-flow, and/or net asset value may represent an accretive acquisition for a relatively expensive Canadian or foreign competitor that wishes to establish or expand its market presence.
- Contrary Opinion and/or Under-followed by Investment Analysts. These companies may be out of favour by analysts and/or investors, or have limited investor exposure. Companies in this category often provide minimal buying competition when accumulating the security.
- Discipline. Stay on track and adhere to the strict discipline of low price/earnings and cash flow multiples, and credible valuations. Do not submit to the trap of buying the flavour of the day. Combine patience, focus and persistence to attain superior investment performance. Patience! Patience! Patience!
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Irwin A. Michael, CFA
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