006 Value Investing: Implementing A Powerful Buffett Undervalued Stocks Strategy | LST PRO | Barry Moore | Skillshare

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006 Value Investing: Implementing A Powerful Buffett Undervalued Stocks Strategy | LST PRO

teacher avatar Barry Moore, Certified Finaincial Technician IFTA

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

6 Lessons (34m)
    • 1. Introduction To Value Investing

    • 2. Value Investing Strategy Stock Selection Criteria

    • 3. Stock Screener Setup And Importing Value Criteria

    • 4. Analyzing Researching Selecting Value Stocks

    • 5. Value Stock Qualitative Analysis & Summary

    • 6. Class Summary

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About This Class

Hello and welcome to my class on implementing a successful Warren Buffett Style Value Investing Strategy.

There are 3 core investing strategies, dividend income investing, growth investing, and value investing.

This class is all about value investing. Essentially value investors buy undervalued companies.

 This lesson takes learnings from Mary Buffett's Books called The New Buffettology, and I will show you how to directly implement a first-class value investing methodology and start to build your value stocks portfolio.

What Will You Learn

After taking this class you will understand important concepts like discounted cash flow, fair value and the margin of safety. You will be able to find undervalued stocks that represent real value.

You will practically implement this strategy into a powerful stock screener which you can use to research and select stocks.

This lesson gives you a great understanding of value investing.

About Your Instructor

Barry Moore a certified financial technical analyst, I have been independently researching and investing in the stock market for over 20 years. Since 2010 my company liberatedstocktrader.com has helped train over 40,000 people so they can take control of their own investments.

Meet Your Teacher

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Barry Moore

Certified Finaincial Technician IFTA


Hi, I'm Barry, a Certified Financial Technician, with the International Federation of Technical Analysts. I have been independently researching, trading, and investing in the stock market for over 20 years.

Back in 2010, I founded liberatedstocktrader.com a business that has helped educate over 40,000 people so they can take control of their own investing decisions.

I have also authored numerous original high-performing investing strategies, and an Amazon 5 star rated book called “The Liberated Stock Trader a complete stock market education”.

I help people by providing honest, unbiased investing education, so they can make better investing and trading decisions.

My classes are serious education for investors and traders based on over 100 years of ... See full profile

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1. Introduction To Value Investing: Hello and welcome to my class on implementing a successful Warren Buffet style value investing strategy. There are three core investing strategies. Income investing, growth investing, and value investing. Today, we, we're discussing value investing. Essentially, value investors buy undervalued companies. This lesson takes learnings from Mary buffets book called The New buffets ology. And I will show you how to directly implement a first-class value investing strategy and methodology. My name is Barry more, certified financial technical analysts, and I've been independently researching and investing in the stock market for over 20 years. My company liberate stock traded.com, has helped train over 40000 people so they can take control of their own investments. But enough about me. Let's talk about you and about this class. After taking this class, you will understand the important concepts like discounted cashflow, fair value, and margin of safety. You'll be able to find undervalued stocks that represent real value. You will practically implement this strategy into a powerful stock screener, which you can use to research and select stocks. This lesson gives you a great understanding of value investing. So let's get started. 2. Value Investing Strategy Stock Selection Criteria: Now in this class we're going to look at implementing a value investing strategy. So first I'm going to go through some of the key criteria in a value investing strategy. And then we can do some hands-on implementing a value investing strategy into a powerful stock screener. So you can immediately get an overview and start to build your value investing portfolio. So let's take a look at what is value investing strategy. Value investing strategy is a method of investing based on finding stocks trading at a significant discount to the value the stock market places on the share price. Using discounted cash-flow, future earnings, the margin of safety and fair value in a stock screener enables you'd find stocks selling at a discount. Don't forget value investors or bargain hunters. Probably buffets. Most important measure to decide whether to invest in the company is the margin of safety. This is the percentage difference between a company's fair value and is actual stock price. This metric is the single most significant valuation metric in our arsenal as a value investor. And it's the final output of the detailed discounted cash-flow analysis. So let's take a look at the fair value and margin of safety of a Warren Buffett strategy. We call it a Warren Buffett strategy, but it's actually a classic value investing strategy that has been popularized by Warren Buffett himself. These are the key criteria. Let's take a look at them. First and foremost, we have the margin of safety. And here we see margin of safety of greater than 20 percent. So let's take a look about Warren Buffet describes the margin of safety like this. If you understand the business perfectly and the businesses future, you would need very little in the way of a margin of safety. So the more vulnerable the business is, assuming you still want to invest in, in the larger the margin of safety you need. If you're driving a truck across a bridge that says it holds 10 thousand pounds and you've got a 9,800 pound vehicle. If the bridge is six inches above the crevice it covers, you may feel okay. But if the bridges over the Grand Canyon, you may feel you want a larger margin of safety. So that's Warren Buffett's words. If a business is stable and growing and is a leader in its industry and market, then maybe you don't need such a high margin of safety between the actual stock price and the intrinsic value of the business itself. But what Buffett is saying here is that if the business has some weaknesses or is vulnerable in the marketplace, you will be looking to buy it at a bigger discount so that if the stock price does go down in the future, you still bought it at a significant discount because the business itself is valued much more than the stock market, values it through its stock price and its market capitalization. So the margin of safety is the percentage difference between accompanies fair value and its actual stock price. This metric is the single most significant valuation metric. The next one we're going to look at here is fair value. So the fair value of the business needs to be higher than the share price. Warren Buffett basis his intrinsic value and fair value calculations, the future free cash flows. To explain, Buffett thinks caches accompanies most important asset. So it tries to project how much future cash a business will generate and then discount those future earnings against inflation. And this is called the discounted cashflow method. Now we don't need to go into the intricate details of discounted cashflow. Suffice to say the screener we will be using will automatically calculate that for us. Next, a strong earnings per share history and growth rates. The screen a calculation we're going to use is the yearly EPS, earnings per share growth year on year is greater than 5%. So it comes as no surprise that earnings per share is an important metric for buffet and for Wall Street. But if it looks for companies with a consistent track record of earnings growth, particularly over five to ten year period. The next criteria we're going to use is a consistently high return on equity. Calculation is return on equity. Roe is greater than 15%. So the return on equity is a profitability measured, calculated as net income as a percentage of shareholders equity. A high ROE shows an effective use of investors money to grow the value of the business. Next is the return on invested capital. The calculation is a 10-year ROIC, which is return on invested capital. The average of that is equal to or greater than 12 percent. The ROIC quantifies how well a company generates cashflow relative to the capital it has invested in its business. Stay with me here. It will all become clear as we go through the hands-on demonstration of how to actually implement this into stock screener and get this strategy working for us. Next, the solvency ratio. So this calculation is the solvency ratio is greater than 20 percent. So is the company conservatively financed the solvency ratios a measure of whether a company generates enough cash to stay solvent. It is calculated by summing net income and appreciation and dividing by current liabilities and long-term debt. That was a long sentence. But what we want to make sure is that the company is financially healthy and is not going to go bankrupt anytime soon. So this is the solvency ratio. A value of above 20 percent is considered good. The final calculation we will use here is earnings yield. So that the earnings yield we want to be greater than 3%. If a company cannot make a profit per share higher than the return of a safe asset, like treasury bonds, you should not invest in there. This is a straightforward calculation and we will use the earnings yield. Earning shield is the earnings per share for the most recent 12-month period divided by the current market price per share. 3. Stock Screener Setup And Importing Value Criteria: To start the hands-on portion of this training, we need to get a very good stock screener. I've been using a testing stock analysis software for over 20 years and the best OT research tool I found is stock Rover. Are you stuck wherever everyday to research, monitor, and manage my stock portfolio. I've also partnered with stock robot because I love their products so much. In all the sections on stock screening and strategies, whether it's our dividend or income strategies we'll cover in the next class. This value investing strategy, or our growth strategies, or have very powerful growth strategies developed, which I'll cover in a future class, we will be using stock rover is literally the only software that can handle the calculations that is easy to use and is available for free or for the premium version. It's actually very, very cost-effective, much cheaper than the competition out there. You can sign up for free and just give your email address, give a password, and you'll have access. And then we can go through this training. So you may want to pause here, get the software, and then we're going to fully implement a buffet stock screening strategy. So in this training course, I will show you step-by-step how to implement your own screen based on the criteria that I provide, but also then give you the knowledge to create your own criteria based on your hypotheses of what makes great stocks to buy according to the strategy. However, what I also do for simplicity sake is the three core strategies of growth investing, value investing, and income investing, and the multiple income investing strategies. I also have exploited all the settings, criteria, and views so that you can simply download the text files and import them back into stock rover to speed up the creation process are highly recommend going through the hands-on implementation process. But if you want to speed things up, you can connect to liberate its stock traded.com, forward slash stock minus rover, minus screeners. And you can see the URL here. And that will take you to the liberates stock trader website download page that accompanies the liberated stock trade approached training. So here you can see you will arrive on this page, liberate stock trader.com, four slash stock minus y-bar minus screeners. And you can see here as you scroll down and explanation of these. So let's say we want to download the Buffett value stock screener and there's an accompanying view with that, you can simply click here. It will download a text file with text files for a straightforward with the settings in it, as you can see here. And then we can import that into stock river by jumping effort to stock driver. Okay, then we select screeners. And I'm going to import the screener. And I'm going to select the stock rover file, which is here, stock screener and it imports the file. Yes, these are the calculations we want and import. And here we go. So there we have the LSD Buffett value stock screener. Okay, and I can put a view by going over to here right-clicking on the view panel. And then I'm going to import and I'm going to select a stock rover fi file. And if I jump back to the pre-training download the file. Here's the view file in my downloads, I press Browse, download the rover view that will import the view. Or these are the, these are great columns which you can use to really assess value investing and assess the criteria, rate, and rank each of the companies based on margin of safety, fair value, discounted cash-flow, and their earnings like import. And now we can see the Buffett screener column view is available here. I'm going to just view the table. And I can see stock valuations, price market capitalisation, fair value, dividend yield, and the EPS growth and the margin of safety. So that is how to import the views that gives us the columns we need them to interpret. If these companies are going to be great value stocks that we want to target for our longer term buy and hold strategy. 4. Analyzing Researching Selecting Value Stocks: So I'm going to minimize this. Let's take a look at the table first. So we have 51 companies to choose from. I'm organized this view so we can see the stock rover value score and grade school for the company seeks see they're all looking good. Everything is more or less in a green status. We can see stock price, the market capitalization, and the fair value. So the demonstrated the price and the fair value, that's obviously the margin of safety. If a fair value is less than the stock price, that gives us a margin of safety. So this one and terrorists farmer, for example, stock price of $3 80, but the fair value as determined by the discounted future cash flow. So 10 years of cashflow discounted against inflation is the amount of cash that company will accumulate in the next 10 years. Rates the company with a fair value of $4, 83, which means we have a margin of safety 27 percent because this is above it. So stock screener, all of the stocks are going to have a good margin of safety. So let's take a look at these companies and sort them on margin of safety by clicking here this column. So we can see here. So we can see here for example, is take a quick look here. Value score as imagined by a solutions. So what is this company is a sizable company, $3 billion in value, and it has a margin of safety of 78%. So this company is compared to its estimated future cash flow is massively discounted. So is this an anomaly or is this something we really want to have a look into? So as we go along Here, we have the solvency ratio. So let's just remind you what the solvency ratio is. We're going to explain solvency ratio is a measure of whether a company generates enough cash to stay solvent. This calculated by summing the net income and depreciation divided by current liabilities. Long-term debt value above 20% is considered good. This is good. We can see the earnings per share. We see that's been growing maybe two years out, we expect in a slight decrease in earnings per share. But considering how undervalued companies, that is very impressive, return on equity 25 percent, return invested capital, 17%, and the earnings yield of 12 percent. So as we look at a interesting to note that the company hasn't performed as well as the S and P 500 index over two years, five years or ten years. So sometimes be aware of price earnings relatively low, 8.3% and the five-year estimated growth is at 9.2%. So let's suppose we want to take a look at this. How are we going to deep dive into that more? We're going to take a look at the insight panel. Now. I'm using a slightly smaller screen here on a bigger screen than you belt to see all of this information really well. So I recommend getting a large screen to work on when you're looking through a lot of stocks to find to you to build your future portfolio. So we can see the five-year returns of imagined bio solutions. Stock price fluctuation between 15, $24 is currently an all-time high. So stock prices start to see momentum started to increase. Which is a good thing, especially as we're buying file you something so undervalued that maybe it started to be recognized by Wall Street and the price is being bed up to a more fair value level. So this could be potentially a very good value stock. To evaluate that, we'll jump over to the insight panel, which is this over here, which is going to maximize the insight panel and do a quick evaluation on this company. So we can see this is a healthcare company. It's a drug manufacturer and it offers public health products to government and health care providers. So we've seen a huge value margin of safety. Stock price is $59. The fair values are a $106. So it's got high valuation score from stock rover, The Grove School strong because the price is found to move now. And the quality score so that the quality of the fundamentals is in good shape. Unless consensus is a bi. We're going to have a look closer because we're gonna go to analysts. So we've got six analysts covering this. So it's got a good coverage by Wall Street. And they're rating it strong BY, is currently three people. Alice, right? It's wrong by 40 hold, there's no cells of strong cells there. So you say analysts sentiment, pretty positive. Let's have a look at the visuals. So EBS does not pay a dividend or seven look at earnings. This is the yearly earnings. So we can see here this is sales. Blue, is sales, sales growing. We can see a oranges, the EPS. So seeing a stable EPS, but now more recently got EPS growth and cashflow. There was a dip in cashflow here, recovered here. So looking at overall top-level. So we'll look at some recent news for the company. The client law firm announces a lead plaintiff filed on behalf of the Madden csa. Their their logic, logic class action against another company. For example. There's some grace. This is the band singer report about the upgrades. Okay. So that's some news. Does that affect our long-term investment? Probably not. So have a look at this. Any financial warnings for this company. A high sharp sensor, 8.1% of the shares are being shorted. That may be about decision on this, on the side of the shorting market participants, because this has stock price growth is very undervalued. It's generating revenue. So so that is all good. Downward a EPS revisions. So analyst's estimates for the next quarter has been revised down. So we saw that in the EPS output on the previous screen. So they're expecting a decrease in earnings per share over the next few quarters. And executives may be getting paid too much compensation yield of 1.7%. And this essentially means management, lead ship, CEO, maybe a drawing out too much in terms of their own earnings than the industry benchmarks. We can have a look at research report, generate an on-demand research report from stock rover. And we can see everything we need to say. Overall. Now this is interesting. So EBS, this is the blue line here, has been really, really, really well besides the health care sector. So it was beating the S and P 500 and the sector itself and more recently is not. So it's not experiencing as strong growth as the industries themselves. Overall, the value scores are good, but sentiment is somewhat negative with this company at the moment. And this is simply a one-year Chao. Most of the financials and movement in the right direction. And it doesn't pay dividends as we noted earlier. So this has essentially to evaluate what we found, the companies we found in this screen. Now, let's go back to the table. What I like about this is there are so many undervalued companies here that are potentially very good bys. So let's take a look. We can scan this and we can see, okay, we're sorted on margin of safety, but we want to see companies that have continually increasing earnings. So here's one. Here's one of many advanced energy industries. Bringing say, value scores, good, grass goes good. The, it's currently undervalued by $20 per share. It's got a margin of safety of 24 and decent, decent set of earnings here. So again, we can jump over to the Insert Panel. Reasonable stock price movement more recently, down. Yet margin of safety, we see here 24 percent. We have a buy rating over all. And we'll have a look at how many analysts to cover mess. So 79 unless covering it. Strong buyer and buys five hold is for essentially at the moment, so very positive from the analyst's perspective. We can see how they rated versus their pairs. Let's take a closer look at that. The rating section rank stocks versus competitors in the same industry group. It seeks to find the best performers within each industry grep, independent of how that group compares with the overall market. So if you're interested in how it is performing with, against companies that are very similar to it in the same industry, then we can see how this rates, which is really nice piece of functionality in stock rover k, We can have a look at the visuals. Cause they have just started paying a dividend. That's interesting. So we've got a dividend health $0.20 here. And we can see here in green is the cashflow, oranges EPS. So cashflow recovered, EPS recovered and not bad, not a bad looking company at all. Let's jump back to the chart and we're going to look at that in a five-year basis. Let's look at maximum here, which are, speaks for itself, solid increments and some volatility here and then back onto an output string. So I potentially could stop. You may want to look at investing in. So jump back to the table. Don't forget, we want to have the Buffett screen of view. We want to have the Buffett screening criteria available. And what I like about the way I've set this view, we can look at value growth. We instantly say if they're paying a dividend, what the margin of safety is and the trend of their earnings. The EPS, ELA. We see how solvent they answer these is a 0 companies that are in good shape. And we can see those companies that are beating the S&P 500. So for example, let's take a look at all of these, all of these companies meet our criteria for value stocks. But let's see which ones are experiencing strong price worth. So I can saw on the two-year stock price return versus the SP 500. So this is a value stock that is actually grown in stock price as well. So let's take a look at this Stamps.com. Now this is a company that provides online, essentially stamp service for posting letters and parcels, et cetera. That margin safety, 53 percent. Solid earnings growth, but a stock price that is blowing away the S and P 500 by 276% over the last, over the last two years. So let's take a look at the charge to confirm that. While. So this is the two-year chart, $35 to $200, five-year chart. You can see, Wow. 2018 was the small impact on the stock market. 2018 made a massive difference. This company taken it from tuners 76 to do dollar. Now it's recovered up to 300 and is currently resting about $175 a share. So there is some volatility hair, but it is very undervalued and its finances looked to be in good shape, which is the goal of this strategy. Potentially a very good bye now stock that has the potential to also not just grow in value, but as she beat the S and P 500 stock market returns. So I hope this has given you a good overview of the Buffett screening strategy, finding value stocks, stocks that are undervalued against their fair valuation. And how you can use stock rover to go in and do deep dive analysis on each of the companies to decide if they're a target for your investing portfolio. 5. Value Stock Qualitative Analysis & Summary: So now we have experienced stock rover and learn how to use it and implemented the core part of the value investing strategy into stock rover. So we have our list of companies and we have the fundamental valuation metrics available to us. But there is another part to this. So there is certain logic that is used in value investing that is not really included in the balance sheet, the income statement, and the financials overall. So let's have a look at, as described in the book bef ecology. We're going to have a look at the rest of the valuation criteria. That is not Financial. There are certain factors that Buffett considered that are not found in the balance sheet or financials. They are the business and competition related questions that need a further deep dive. Now that you have your potential targets, stocks in your screener window. Take a look at a stock that you like the look of and ask yourself the following questions. Number 1, does the company have an identifiable, durable, competitive advantage? The competitive advantage over others in the industry might be better technology, better products, patents, or even a captive market. Does the company's industry have high barriers to entry? Eg, a chip maker, or a telecoms company, for example. Also, do not forget, is a competitive advantage durable? Meaning will this competitive advantage last for one year, two years, or longer period? Is this a competitive advantage that will last for 10 years? The next question is, famously, Buffett states, do you understand how the product works? Buffett always said that if he doesn't understand how the product or service works, then he will not invest. The idea is that if you cannot understand the business, you will not be able to accurately assess potential threats or competition. He wants to an investment in companies he can understand. So if the company does have a durable competitive advantage and you understand how it works, then what is the chance that it will become obsolete in the next 20 years? Does the company allocate capital exclusively in the realm of his expertise? This means is it diversified into so many areas that it's uncontrollable, not as effective and profitable as it could be as in the recent case of General Electric, selling off huge parts of its business because it is sprawled into a multinational conglomerate that is essentially uncontrollable anymore. And it's getting back to basics to generate core revenue and core value for its shareholders. Another question is, is the company free to raise prices with inflation? If the company has severe competition, which pushes product or service prices downwards, this may be a stock to avoid. If product prices cannot increase with inflation or even ahead of inflation, you may need to factor this in to the valuation and the margin of safety. Another question to ask are, are large capital expenditures required to update the plant and equipment? This question is aimed at companies that have to invest heavily in plant and equipment to remain competitive. For example, carmakers or telecoms companies. These infrastructure upgrades can take a huge toll on debt and free cashflow. Is the company's stock price suffering from a market panic or business recession or an individual calamity that is curable. This is the key, this is the magic question and the question that leads to Buffett's famous quote, which is be fearful when others are greedy and be greedy when others are fearful. If the market is going through a panic, a stock with excellent fundamentals, low competition, and a durable competitive advantage could still see stock price fall dramatically. This is a great time to buy, as you will see a much higher margin of safety. And another question is, is the company buying back its shares? One side to look for is companies buying back their own shares. This usually means that the company's management sees a bright future and also believes the stock market seriously undervalues the company. This is often a good sign. Okay, so let's wrap up this class. So now you know how to build value stock investing strategies and implemented in the only stock screener software that manages the fair value margin of safety and discounted cashflow calculations. This is stock Romer. This was an important lesson that will open up an entire avenue of thought and scale, enabling you to make a considerable step towards professional stock selection. So thank you for listening to this class and look forward to talking to you in the next class. 6. Class Summary: Well, I hope you enjoyed this class. Don't forget if you like the class, please leave a review in Skillshare. Also, don't forget, I've provided a detailed project for you to complete. This is a practical project so you can build investing experience, upload your project. And I promised to give you feedback.