created by ben graham. Used by Warren buffett in his early years.
source: http://www.netnethunter.com/about-rawscreen/ Raw Screen Explanation We provide the Net Net Stock Raw Screen for those who want to do deep qualitative research on the remaining pool of net nets or want to supplement the information available on the Shortlist with the data presented on the Raw Screen.
We can’t capture all great net net stock opportunities with a standardized subscreen since sometimes deep qualitative research reveals great investment opportunities. Remember, however, that a lot of the characteristics that you would want to eliminate a stock for have been covered by our Shortlist so we don’t think that you can uncover much opportunity in this list unless you are doing deep qualitative research and/or looking for special situations.
Remember, you should only view the Raw Screen as a list of leads that may or may not lead to a promising net net opportunity. This screen is a quick and dirty auto-generated list of leads that we comb through based on additional sources to put together our Shortlist. Our hand-filtering will often dig up additional information, financial or otherwise, that will materially change the firm's attractiveness as an investment. This can include changing the assessed valuation, reassessing the firm's business activities, etc.
We never include a stock on (or exclude a stock from) the Shortlist based on the data on the Raw Screen. We use the Raw Screen as a list of leads only and always dig deeper using other sources to reassess before putting a stock on the Shortlist. Our hand-filtering will often dig up additional information, financial or otherwise, that will materially change the firm's attractiveness as an investment. This can include changing the assessed valuation, reassessing the firm's business activities, etc.
The "Status" column on our Raw Screen indicates what we have found, again upon further examination and not based on our Raw Screen data.
The data presented here is provided by Thompson Reuters, one of the best data providers in the world. The Raw Screen is updated at the end of the month, and is a static list of ratios and metrics.
We cover the following countries: The USA, Canada, Australia, Hong Kong, Singapore, Japan, the UK, France, Germany, Switzerland, the Netherlands, Belgium, Luxembourg, Austria, Czech Republic, Estonia, Finland, Hungary, Poland, Russia, Slovakia, Slovenia, Cyprus, Greece, Italy, Malta, Portugal, Spain, Austria, Denmark, Ireland, Norway, Sweden. Note that net nets do not exist in every country.
Shortlist Explanation Each month we spend 20+ hours combing through the Raw Screen by hand in order to come up with the best investable net net stocks to focus your research on.
We use the Raw Screen as a list of "warm leads" (a bulk list of stocks that may or may not turn out to be good buys) and then refer to 3rd party websites, such as Google Finance, The Financial Times, or a firm's own IR page, to arrive at a list of "hot leads" (the best firms to focus your own research on).
The criteria we use are grouped into a Buyability filter and an Investment Quality filter, a set of mechanical criteria initially based on our Core7 Scorecard. Note that a good company and a good investment are not the same thing.
Share prices, Market Cap, Price to NCAV, and Price to Net Cash are updated on a daily basis. The list of shortlisted stocks is updated at the end of each month. Please refer to the time stamp on the Shortlist page.
We cover the following countries: The USA, Canada, Australia, Hong Kong, Singapore, Japan, the UK, France, Germany, Switzerland, the Netherlands, Belgium, Luxembourg, Austria, Czech Republic, Estonia, Finland, Hungary, Poland, Russia, Slovakia, Slovenia, Cyprus, Greece, Italy, Malta, Portugal, Spain. Note that net nets do not exist in every country.
Caution: Even though this list is based on the best standardized data in the business (Thomson Reuters and Capital IQ), standardized data is limited in scope and can contain errors. Because of that, the Shortlist is not a list of buy recommendations and is not intended to do your research for you. It is intended to help you focus your research on the highest potential net net stocks. As an investor, you should still go back to the firm’s published financial reports to check over the numbers and look for additional items that could skew the ratios presented here.
Core7 vs. Shortlist: One key fact to keep in mind is that the Core7 Criteria and the Shortlist screening criteria are not entirely the same. Our Core7 Scorecard is more rigorous and includes a past profitability requirement, a past price above NCAV requirement, and a smaller Burn Rate which are not included on the Shortlist selection criteria. We included the column Stock Type and listed the firms that meet these 3 requirements "C7" (Core7). In addition, you should note that not all members care whether a net net is based in China or has Chinese operations so we have relaxed this criteria when calling a stock C7. If you're concerned about Chinese companies, we have also included a "Chinese?" column that you can cross reference. The difference in criteria is intentional since it allows us to focus on a really good group of stocks that you can research and flexibility for members who are using different net net stock sub-strategies.
Shortlist Criteria: We screen stocks based on…
Buyability...
There is no point including a stock on our Shortlist if you can’t buy it.
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Average Daily Dollar Volume - We aim for stocks with at least $1000 USD in daily trading volume to ensure that you can buy an adequate number of shares.
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Two Cent Minimum - We want to include shares that trade above $0.02 USD to ensure that there are no complicating factors when it comes to purchasing shares. This can include needing to buy in minimum segments such as $0.005 which can greatly affect the valuation.
Investment Quality Factors...
We want to pick the best possible stocks to focus your research on. We do this by filtering for stocks that meet the mechanical criteria listed below. Most of our Core7 Scorecard Core Criteria are covered. For two criteria on the Core7 Scorecard, Adequate Past Profitability and Past Price Above NCAV, we only note how each company measures up to remain flexible for members who want to run a more diversified (and less strict) mechanical sub-strategy. We also include one additional criteria.
- Price to NCAV per Share - Our valuation cut-off is 67%, to ensure that all stocks selected have a minimum 1/3rd margin of safety as specified by Graham. Note that there may be off Balance Sheet Liabilities that affect the firm’s valuation.
The formula is as follows:
NCAV = Current Assets - (Total Liabilities + Current Tax Asset + Face Value of Preferred Shares)
NCAV per Share = NCAV / (Shares Outstanding - Treasury Shares)
Price/NCAV per Share = Stock Price / NCAV per Share
Note that we exclude Current Tax Assets but include Current Tax Liabilities, an inconsistent but much more conservative measure of NCAV.
- Total Debt to Equity - We exclude firms that have more than 25% Total Debt to Equity ratios.
The formula is as follows:
Debt to Equity = Total Interest Bearing Debt / Total Shareholder Equity
- QoQ and YoY Burn Rate - We want to invest in firms with a stable liquidation value, so limit the Burn Rate Year over Year, or Quarter over Quarter, to -25%. Note that Burn Rate is merely a rate of change in NCAV between one period and another. A positive Burn Rate is a bit of a misnomer but means that the firm’s liquidation value is growing.
The formula is as follows:
NCAV T1 - NCAV T2 = Change
Change / NCAV T1 = Burn Rate
- Market Cap Between $1M and $100 Million USD - The stocks of tiny companies trading as net nets produce the best returns. The tinier, the better. As you move up the Market Cap Ladder from $1 Million returns drop off. At some point above $100 Million, net nets no longer provide excess returns.
We like small firms but shy away from firms trading below $1 Million USD because we feel that firms smaller than $1 Million have questionable operations and management quality.
For this measure, we simply take the Market Cap as stated on The Financial Times website for our calculation.
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Not Selling Shares - The stocks of firms trading as net nets that are selling shares have terrible returns. We check the firm’s Cash Flow statement to see if the company has been selling shares at any time over the previous 12 months.
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Not a Firm That Has Most of its Business in China - China is known for fraud in the investment world. There is significant fraud risk and Chinese Reverse Mergers that have been beaten down have a high bankruptcy rate. Because of that, we avoid these firms as well as firms that have most of their operations in China. This check is a rough and dirty assessment of their business based on the business description on various financial sites. Note that we include firms that have a minority of their operations in China but disclose this information on the Shortlist for those that want to avoid China altogether. We aim to be correct in our assessment 90% of the time.
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Existing Operations or Liquidation - It is nearly impossible to buy firms in liquidation cheaply but we exclude firms that don’t have significant ongoing operations. This is a rough and dirty check that involves looking at the firm’s Revenue over the trailing 12 months and comparing that to the firm’s assets.
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Not a Financial, Heavily Regulated, Real Estate, Resource Exploration Firm, Pharmaceutical, ADR, or Closed Fund – Some firm types make for lousy net nets and other legal structures haven’t been tested by net net stock studies. We avoid these to focus on the structures that have been tested and produce better returns.
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Current Ratio 1.5x or Greater - While not a Core7 Core Criterion, we also exclude stocks with Current Ratios of less than 1.5x. This is a legacy criterion that helps screen for stocks that have strong Balance Sheets.
Note: If you have any questions or comments regarding our Shortlist Explanation please let me know on the forum so I can improve the website for our community.
Thanks,
Evan