Before we get into multi-stage analysis, let’s contrast young and mature companies. We shouldn’t look only at how many annual statements a company has filed to determine this; instead we should also use a company’s characteristics. There are plenty of companies that have reinvented themselves and gone from old age to infancy in terms of their growth rates.
In 2005, Joel Greenblatt published a book called The Little Book that Beats the Market. Its explicit aim was to “explain how to make money in terms that even my kids could understand (the ones already in sixth and eighth grades, anyway).” Although it used language and examples that were aimed at children, it was widely read by folks of all ages. The first five chapters, before Greenblatt gets into his investment strategy, comprise an excellent introduction to value investing. Clearly written, easy to understand, it’s principled and right.
There are a number of reasons why you might be interested in the future sales/revenue growth of a company. For instance, in order to perform…
Benjamin Graham, who has often been called the father of value investing, published The Intelligent Investor in 1949 and revised it several times, most recently in 1972. In that last and fourth edition, published in 1973, he included three different sets of guidelines, which could be called “checklists” or “screens.” The first was for the “defensive investor,” and it’s the most famous. The second was a rule for investing in “Net-Current-Asset (or ‘Bargain’) Issues.” And the third was for the “enterprising investor.”
It has long been established that stocks with low variability in prices tend to outperform stocks with high variability. I’ve explored this in a few…
For the past few years, investors have noticed what we call a “value inversion,” which appears to be getting progressively worse. Theoretically—and normally—stocks with low price-to-sales ratios (cheap stocks) outperform those with high price-to-sales ratios (expensive stocks). Such was the case over the majority of the current century, and indeed, as James O’Shaughnessy has shown in What Works on Wall Street, for most of the twentieth century too.
In this piece, I want to drill down deep into a ratio that I find useful in assessing potential investments: the ratio of net operating assets (NOA) to total assets (the lower, the better). It’s my favorite balance sheet ratio.
Every business has a strategy, a plan for beating its competitors. It’s a good idea for an investor to assess that strategy before investing in the company. But doing so is complicated.