Attached is a recent list of stocks that passed value screens (e.g. below net current asset value, below tangible equity, etc.) but don’t meet our investment criteria - and our reasoning.
This may help you avoid some ‘value traps’, and stocks that aren’t sufficiently attractive compared to opportunities available today.
For reports of stocks that pass our quantitative and qualitative standards:
Some notes from a recent Bruce Berkowitz interview below:
5:00 Count the cash
Berkowitz simply counts the cash (flow) and current earning power to determine value. In particular, he focuses on distributable cash flows per share (free cash flows for shareholders) [also see 51:15].
We generally avoid stocks that haven't generated and distributed cash (in aggregate) for shareholders.
7:45 Time horizon
On average, a two to three-year time horizon is sufficient for a stock bargain to be fairly priced.
9:15 Qualitative factors
Berkowitz has evolved from a purely quantitative analytical approach to evaluating managements, business culture, and controlling shareholders.
As Buffett says, "you can't make a good deal with a bad person" - this is especially true in equities where you don't have the legal power to compel managements to act in your interests (as bondholders do).
27:30 Sears
Berkowitz focused on the real estate values behind Sears shares - but was throttled by a board that was slow in closing down loss-making retail operations.
Though liquidation value is a good proxy for a stock bargain, earning power is also important for minority shareholders - an aspect we pay particular attention to in our reports.
36:00 Long-duration bonds
Long-duration bonds (10 or more years) are generally a bad investment in an inflationary world. As most developed governments have adopted moderate inflation targets, such bonds are even less compelling.
43:15 Cash as financial valium vs. Cash drag
Berkowitz has stated that cash is financial valium during market downturns, and it allows you to exploit the best bargains in bear markets.
However, the investor has historically been better off being fully invested in stocks.
Individual investors with reasonable savings, and without major expense commitments (housing, childcare, healthcare, etc.) can be 100% invested in stocks, and live off even moderate dividends.
For reports on the best investment values in stocks worldwide: