Ben Cohen and Jerry Greenfield abandoned their original idea of selling bagels. Once they found out how much it would cost them just for the equipment, they instead took a correspondence course from Pennsylvania State University on ice cream making.
The year was 1978 and the course was $5.
In April 2000 they sold the company that bears their name to Unilever for $326 million.
Not bad. You may be wondering just what this story has to do with today’s post. Well that’s easy. Ben and Jerry were entrepreneurs who were not afraid to abandon an idea when their research indicated that they should move onto something else. The point is that they actually bothered to conduct basic research in the first place.
How do you weed out the crappy stocks? How do you focus on the stocks that are more likely to be profitable? How can you build a portfolio that is low risk?
A written, tested value orientated strategy that is built around your own personality and tolerance for risk is a MUST. The process of finalising such a strategy took me nearly a year and a half which included virtual investing time. Part of my strategy includes using value orientated screeners to give me a list of stocks that I can conduct further research on. Here’s an example of the types of lists I work through:
Welcome to the bargain basement
Disclosure: data is from ADVFN, 22 February 2013. I do not own positions in any of these stocks and I am not paid by any company to promote them.
Notice anything about this list? Without going into too much detail these stocks are:
- small to mid cap
- paying a dividend
- domiciled in the United States
- priced below 9x earnings
- showing little or no debt and;
- showing balance sheet strength (current ratio)
They are stocks that are exhibiting value characteristics and are more likely than not to have a margin of safety than a list of stocks with just a low PE ratio, although that is not guaranteed. Only your research will tell you that. For one thing they are not sufficiently diversified across enough industries to reduce risk. Some of them are also trading substantially above tangible book value. Also be aware of where we are in the current market cycle. How much equity is made up of intangibles? These are cursory but important observations. You will need to dig a little deeper than that.
So what do you think? Are there any stocks on this list that have a large enough margin of safety? Will you check to ensure book values and earnings are sound? Let me know in the comments section below.
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