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You keep reading online that the best investors in the world have achieved extraordinary returns because they understood how to find undervalued stocks. You keep reading that investing it's all about learning how to find value stocks trading at a discount to their real value. You keep reading that you can beat the market by doing that.
But the question is: How do you actually find value stocks? What is the process and how can you be sure that this will help you to beat the market and achieve extraordinary returns? What stock screener criteria should you use?
Don't worry, in this article, you will learn how to find value stocks with time-tested stock screener criteria. You will learn how to find value stocks that actually beat the market by a large extent almost 100% of the time. Are you ready? Let's start.
Value Stock Screener Criteria #1: The Acquirer's Multiple
Did you ever hear of the Acquirer's Multiple Strategy? If you didn't, chances are you missed the opportunity of getting great returns on your investments.
Indeed, by investing in this strategy from January 1, 1973, to December 31, 2017, you would have obtained a compounded annual return of 17.9%, turning $10,000 into $14,9 Million. Do you know what $10,000 would have been if you just invested in the whole market? $741,737.
Yes, you read that correctly. You would have achieved 20 times the market return.
What's more, the Sharpe Ratio of the strategy is 0.61 compared to 0.33 of the whole market. This makes the Acquirer's multiple a better choice even from a risk-adjusted return perspective.
The strategy was developed by Tobias Carlisle and it's all about finding value stocks that are trading at discount to their real value by using the EV to EBIT multiple. All you have to do is select the 30 stocks with the lowest EV to EBIT and a minimum market cap of $1 Billion.
How to find value stocks using the Finbox Screener
Are you ready to learn how to find value stocks that beat the market with this strategy? All you have to do is following these simple steps:
Create an account for free at Finbox
Launch the Finbox Stock Screener.
Add a metric by clicking on the "+'" button
Add the “Market Cap” metric, and filter for stocks with a minimum market cap of $1 Billion.
Press the green "+" button
- Add the EV to EBIT metric.
- Sort the stocks by clicking on the Enterprise Value / EBIT tab.
- Pick the 30 stocks with the lowest EV to EBIT multiple
Value Stock Screener Criteria #2: The Trending Value
If you like the idea of getting a 17.9% CAGR with a simple strategy, you'll be happy to know that there is another quantitative investment strategy that is even better. This is the trending value, a strategy developed by James O' Shaughnessy and published in his famous book What Works On Wall Street.
By investing in this strategy from January 1, 1964, to December 31, 2009, you would have obtained a compounded annual return of 21.19%, turning $10,000 into $69,098,587. That is 52 times the market return. Indeed, if you had invested in the whole market, you would have got just $1,329,513 with an 11.22% CAGR.
It's unbelievable, isn't it?
Guess what. Even in this case, it's all about learning how to find value stocks. There are just two differences: the first one is that instead of using just one ratio, we'll use a composite one; the second one is that we'll combine value to momentum to get the best result.
As you can guess, this time the process is a little bit more complicated. We need to export the screener results to Excel and rank stocks through the percentrank.inc function. But don't worry, I've prepared a detailed step-by-step guide to help you do that.
Before we start, let's review the strategy's rules:
Universe: We'll consider US + ADR stocks with a minimum market cap of $250 Million.
Value: The first thing we're going to do is select the 10% of stocks in our universe with the best value score. In this case, we don't use just a single ratio for that, but multiple ones. We'll pick the 10% of stocks with the best value according to the following value factors:
- Price to book value
- Price to sales
- Levered Free Cash Flow Yield
- Earnings Yield
- Shareholder Yield (Dividend yield + Buyback Yield)
Momentum: Once we found our group of undervalued stocks, we'll select only the 25 stocks with the best 6-month momentum.
How to find trending value stocks: a step-by-step guide
In the video below you can find a step-by-step guide to using the strategy. I've also written a checklist under the video with the link to the pre-built screener and ready-to-use formulas.
Go to this screener and export the results to Excel
Delete foreign stocks duplicates
Get the reciprocals of PB, PS, and EV/EBITDA
Make sure to give the new columns the same name I used so that you can just copy and paste the formula
Format as table
Use the percentrank.inc function to rank stocks. You can copy and paste the following formulas:
=PERCENTRANK.INC([Book / Market];[@[Book / Market]])+PERCENTRANK.INC([Sales / Market Cap];[@[Sales / Market Cap]])+PERCENTRANK.INC([EBITDA / EV];[@[EBITDA / EV]])+PERCENTRANK.INC([Free Cash Flow Yield];[@[Free Cash Flow Yield]])+PERCENTRANK.INC([Earnings Yield];[@[Earnings Yield]])+PERCENTRANK.INC([Net Payout Yield];[@[Net Payout Yield]])
Select the first decile of stocks for value
Pick the 25 stocks with the best 6-month momentum
It may be helpful to view the spreadsheet I got after the entire process. You can download it by clicking on the following links:
- Excel Open the file, then click on File, Save As, Download a Copy
- Google SpreadSheet Open the File, then click on File, Make a copy