How do you find undervalued stocks?
Warren Buffett always uses the same approach.
Let's show you everything step-by-step:
Warren Buffett always uses the same approach.
Let's show you everything step-by-step:
Here are the 4 criteria Buffett uses to select stocks:
1) Invest in companies you understand
2) That can grow their free cash flow at attractive rates
3) Led by outstanding mangers
4) Trading at a fair valuation levels
1) Invest in companies you understand
2) That can grow their free cash flow at attractive rates
3) Led by outstanding mangers
4) Trading at a fair valuation levels
How can you find these companies?
Use a stock screener like Finchat to screen for great companies.
Use a stock screener like Finchat to screen for great companies.
Look for companies with the following characteristics:
- Revenue growth > 7%
- Earnings growth > 9%
- ROIC > 15%
- Profit Margin > 10%
- Free Cash Flow Realization > 90%
- Net Debt/Free Cash Flow < 3
- Revenue growth > 7%
- Earnings growth > 9%
- ROIC > 15%
- Profit Margin > 10%
- Free Cash Flow Realization > 90%
- Net Debt/Free Cash Flow < 3
The next thing you should do is to look at the company's history.
You want to invest in companies that performed well in the past.
Why?
- It gives an indication that the company is a great capital allocator
- Management thinks and acts like a shareholder
You want to invest in companies that performed well in the past.
Why?
- It gives an indication that the company is a great capital allocator
- Management thinks and acts like a shareholder
You can check the financials of the company over the past 10 years.
Use Finchat to do this.
- Did their revenue grow?
- Did their free cash flow grow?
- High ROIC
- ...
Use Finchat to do this.
- Did their revenue grow?
- Did their free cash flow grow?
- High ROIC
- ...
The next thing you should do is research the company
You should always stay within your circle of competence
Look at the company's annual report:
- How do they make money?
- Who are the main customers?
- What does the product solve?
- ...
You should always stay within your circle of competence
Look at the company's annual report:
- How do they make money?
- Who are the main customers?
- What does the product solve?
- ...
When you know that it's a great business, you should study management.
You want to invest in companies led by managers who love what they do.
Companies with skin in the game tend to do well on average.
You want to invest in companies led by managers who love what they do.
Companies with skin in the game tend to do well on average.
Now you've found these wonderful companies led by great managers, you should look at the valuation.
I always use an Earnings Growth Model to value a company.
Here' what you need to know:
I always use an Earnings Growth Model to value a company.
Here' what you need to know:
That's it for today.
If you liked this, you'll love the summary I made from reading all public writings of Warren Buffett (5,000 pages).
It's like a free book. Grab it here: compounding-quality.ck.page
If you liked this, you'll love the summary I made from reading all public writings of Warren Buffett (5,000 pages).
It's like a free book. Grab it here: compounding-quality.ck.page
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