How To Set Up and Manage a Deep Value Stock Portfolio (Simplified)

Johnny HopkinsPortfolio Management1 Comment

We get lots of emails asking about the simplest way to set up and manage a deep value stock portfolio like mine, which I’m currently building (see below). To tell you the truth it’s really easy!

Here at The Acquirer’s Multiple we provide three deep value stock screens. We use The Acquirer’s Multiple® to select the stocks for our screens. The Acquirer’s Multiple® is calculated as:

Enterprise Value / Operating Earnings*

*The Acquirer’s Multiple® is different to EBIT and EBITDA as our operating earnings figure is constructed from the top of the income statement down. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

The Acquirer’s Multiple® was born out of the research conducted by Tobias Carlisle in his Amazon best-seller Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations which describes how companies with a low rank based on The Acquirer’s Multiple® may be undervalued.

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Warren Buffett – How to Calculate Intrinsic Value

Johnny HopkinsWarren BuffettLeave a Comment

(Image Source, Huffington Post, http://www.huffingtonpost.com/john-g-taft/the-warren-buffett-effect_b_5577685.html, [Accessed 16 Feb, 2017])

One of our favorite investors here at The Acquirer’s Multiple is Warren Buffett.

Yesterday I provided and excerpt from Buffett’s ‘Owner’s Manual’ – In June 1996, Berkshire’s Chairman, Warren E. Buffett, issued a booklet entitled “An Owner’s Manual” to Berkshire’s Class A and Class B shareholders. The purpose of the manual was to explain Berkshire’s broad economic principles of operation.

Today, I provide another excerpt from the same Owner’s Manual in which Buffett explains the principles that he and Munger use to calculate Intrinsic Value. It’s a must read for all investors.

Here’s another excerpt from Buffett’s Owner’s Manual:

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Warren Buffett – An Owner’s Manual

Johnny HopkinsWarren BuffettLeave a Comment

(Image Source, Huffington Post, http://www.huffingtonpost.com/john-g-taft/the-warren-buffett-effect_b_5577685.html, [Accessed 15 Feb, 2017])

One of our favorite investors here at The Acquirer’s Multiple is Warren Buffett.

In June 1996, Berkshire’s Chairman, Warren E. Buffett, issued a booklet entitled “An Owner’s Manual*” to Berkshire’s Class A and Class B shareholders. The purpose of the manual was to explain Berkshire’s broad economic principles of operation. It’s a must read for all investors.

Here is an excerpt from the updated version:

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Undervalued Alliance Resource Partners – Remains A Gem In The Mining Sector

Johnny HopkinsARLP, StocksLeave a Comment

One of the cheapest stocks in our all All Investable – Stock Screener is Alliance Resource Partners, L.P. (NASDAQ:ARLP).

ARLP is a diversified producer and marketer of coal to major United States utilities and industrial users. The company is the nation’s first publicly traded master limited partnership involved in the production and marketing of coal. It’s currently the second largest coal producer in the eastern United States with mining operations in the Illinois Basin and Appalachian coal producing regions. ARLP currently operates eight mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia, and operates a coal loading terminal on the Ohio River at Mount Vernon, Indiana.

Due to lower gas prices and ongoing emission control legislation, 2016 wasn’t a great year for coal producing companies. However, despite all of the talk about renewables and natural gas replacing coal in terms of electricity generation, the latest Annual Energy Outlook 2017 Report, released by theU.S. Energy Information Administration (EIA) shows that coal will continue to outpace natural gas as a selected fuel through 2020 as natural gas prices rebound from their 20-year lows which occurred in 2016. The same report also shows that while coal production in general is set to drop in a number of regions, the one location set to rise is the Interior Region which includes ARLP’s sites in Illinois, Indiana, and Western Kentucky.

ARLP is a terrific company that has excelled thanks to the strategic location of its mine sites being in close proximity to its customers and the fact that it produces thermal coal. The company is extremely well run with a strong balance sheet and the ability to generate loads of free cash flow. Ongoing improvements in operating efficiency mean ARLP has continued to improve both its operating and bottom line margins while remaining prudent with regards to its capital allocation.

In terms of its valuation, ARLP generated $364 million in free cash flow after dividends for the full year 2016 and remains squarely in undervalued territory with a FCF/Price Yield of 20% (ttm), a P/E of 6.98, and an Acquirer’s Multiple of 6.52, or 6.52 times operating earnings. The company also provides a nice shareholder yield of 14% (ttm) thanks to its outstanding track record of providing shareholders with dividends.

You can get our full stock analysis on Alliance Resource Partners at ValueWalk here.

Warren Buffett – How Charlie Convinced Me To Break My Cigar-Butt Investing Habit

Johnny HopkinsCharles Munger, Warren BuffettLeave a Comment

(Image Source, Huffington Post, http://www.huffingtonpost.com/john-g-taft/the-warren-buffett-effect_b_5577685.html, [Accessed 9 Feb, 2017])

One of our favorite investors at The Acquirer’s Multiple is of course Warren Buffett.

As a value investor, one of the most important free investing resources is Buffett’s Berkshire Hathaway shareholder letters. Each contains hidden gems of value investing wisdom.

One of my favorite gems is in the 2014 shareholder letter in which Buffett explains how Charles Munger convinced him to break his habit of investing in cigar-butt companies, it’s a must read for all investors.

Here’s an excerpt for that shareholder letter:

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Howard Marks – The One Thing You Need To Be A Superior Investor

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(Image Source, CNBC, http://www.cnbc.com/2014/12/19/howard-marks-oil-prices-expose-debts-weaknesses.html. [Accessed 8 Feb. 2017])

One of our favorite investors at The Acquirer’s Multiple is Howard Marks.

Howard Marks is Chairman and Co-Founder of Oaktree Capital Management, the world’s biggest distressed-debt investor. He’s known in the investment community for his “Oaktree memos” to clients which detail investment strategies and insight into the economy, and in 2011 he published the book The Most Important Thing: Uncommon Sense for the Thoughtful Investor.

One of our favorite memos is his September 2015 piece where Marks discusses the one thing you need to be a superior investor. It’s a must read for all investors.

Here’s an excerpt from that memo:

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United Continental Still Undervalued – 10% Cashflow Yield + 11% Shareholder Yield

Johnny HopkinsStocks, UALLeave a Comment

One of the cheapest stocks in our Large Cap 1000Stock Screener is United Continental Holdings Inc (NYSE:UAL).

United Continental Holdings, Inc., (United) together with its subsidiaries, provides air transportation services in North America, the Asia-Pacific, Europe, the Middle East, Africa, and Latin America. The company transports people and cargo through its mainline and regional operations. As of December 31, 2015, United operated 1,236 aircraft. The company also sells fuel; and offers catering, ground handling, and maintenance services for third parties.

Airline stocks, including United, got a boost in late 2016 after it was revealed Berkshire Hathaway had added three of the biggest U.S. airlines to its third quarter portfolio. Stocks included — American Airlines Group Inc (NASDAQ:AAL), Delta Air Lines, Inc. (NYSE:DAL), and United Continental Holdings Inc (NYSE:UAL). According to the September filing, Berkshire owned 21.8 million American Airlines shares worth $797 million, 6.3 million Delta shares worth $249.3 million, and 4.5 million United shares worth $237.8 million. While there are a number of airline stocks in our Large Cap 1000Stock Screener, today I want to focus on United.

While the company’s recently announced full year 2016 revenues were down slightly compared to 2015, United is a company on a clear growth trajectory based on the strategic initiatives it announced back in November. These initiatives include the introduction of basic economy fares, optimizing its network, adjusting its aircraft order book, and ratifying new labor agreements. United is embarking on a rigorous cost and revenue management program and has embraced the use of mobile technology, with its award-winning mobile app, to better serve its customers as well as improving operational efficiencies for its employees. CEO Oscar Munoz has demonstrated his willingness to shake-up his senior leadership team in order to achieve his goal of making United an agile and innovative industry leader.

Get our full stock analysis on United at ValueWalk here.

Warren Buffett – Thoughts On Market Forecasting – 1966 Partnership Letter

Johnny HopkinsWarren BuffettLeave a Comment

One of our favorite investors at The Acquirer’s Multiple is of course Warren Buffett.

As a value investor, one of the most important free investing resources is Buffett’s earliest partnership letters. Each contains hidden gems of value investing wisdom.

One of my favorite gems is in his 1966 partnership letter which contained his views on ‘market forecasting’, it’s a must read for all investors.

Here’s an excerpt for that partnership letter:

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