The DIY investor has a bewildering range of styles to choose from, ranging from day trading to buy and forget. He or she has a decided advantage over the professional money manager. The private investor has flexibility whereas money managers are generally restricted to a particular style-box. The style-box, as far as I can tell, is no more than a marketing gimmick. Money managers have the additional pressure of meeting quarterly expectations.
The successful private investor chooses a strategy that works for them. Some folks like the action of momentum investing and others are much more risk averse and stick with large cap, dividend paying names. The market is big enough for everyone.
The approach that works well with us focuses on quantitative measures. We are not too interested in the “story” behind a name or management’s explanations or expectations. We rather let the numbers do the talking.
Our approach emphasizes valuation, cash flow generation, profitability and price momentum. Valuation and cash flow generation appear to be the most important drivers of excess returns.
One of our favorite valuation ratios is enterprise value to EBITDA. In the long run, no company succeeds without strong cash flow generation. The measure we look at is cash return on invested capital. There are several measures of profitability. Many investors are attracted to companies reporting high return on equity. The potential for excess returns is diminished if the market does not recognize the opportunity offered by a particular company. By combining low valuation as measured by EV/EBITDA, successful execution by the subject company (ROE and CFROI), and price momentum, we have the opportunity to generate excellent returns.
The companies listed here satisfy our criteria and are worth a close look.
| 01/07/11 | ||||||
| Ticker | Company | Price | CFROI | EV/EBITDA | ROE_12m | 52w Range % |
| ALK | Alaska Air Group, Inc. | 62.72 | 12.13 | 6.53 | 22.30 | 98.78 |
| AGP | AMERIGROUP Corporation | 46.83 | 15.84 | 4.29 | 22.40 | 98.74 |
| ASMI | ASM International N.V. (USA) | 34.45 | 19.21 | 6.85 | 25.30 | 86.63 |
| CBPO | China Biologic Products Inc | 16.06 | 25.45 | 5.40 | 62.00 | 85.60 |
| CLW | Clearwater Paper Corp | 81.20 | 23.38 | 7.06 | 21.60 | 92.77 |
| CLD | Cloud Peak Energy Inc. | 22.46 | 16.54 | 6.12 | 78.30 | 87.00 |
| SOLR | GT Solar International, Inc. | 10.50 | 17.45 | 6.91 | 64.80 | 97.22 |
| IPXL | Impax Laboratories, Inc. | 20.68 | 44.31 | 2.25 | 110.50 | 88.74 |
| KS | KapStone Paper and Packaging C | 16.10 | 22.89 | 6.63 | 21.00 | 96.72 |
| NSR | Neustar, Inc | 26.99 | 18.23 | 7.42 | 20.40 | 97.28 |
| PZZA | Papa John’s Int’l, Inc. | 28.14 | 14.38 | 7.31 | 27.50 | 90.45 |
| SNDK | SanDisk Corporation | 52.37 | 19.47 | 7.64 | 25.90 | 96.35 |
| TEO | Telecom Argentina S.A. (ADR) | 25.65 | 26.23 | 6.95 | 30.70 | 87.86 |
| TSP | Telecomunicacoes de Sao Paulo | 24.27 | 15.68 | 4.09 | 24.50 | 83.27 |
| TER | Teradyne, Inc. | 13.70 | 27.76 | 5.41 | 40.00 | 86.79 |
| USMO | USA Mobility, Inc. | 18.33 | 42.53 | 3.12 | 25.20 | 90.12 |
| WTI | W&T Offshore, Inc. | 18.04 | 27.61 | 4.69 | 39.20 | 83.46 |
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