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

Johnny HopkinsPortfolio Management Comments

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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Seth Klarman – The Price You Pay Protects Your Downside – Here’s How

Johnny HopkinsSeth Klarman Comments

(Image Source, Investopedia, investopedia.com/news/who-seth-klarman, [Accessed 19 Mar, 2017])

One of our favorite investors here at The Acquirer’s Multiple – Stock Screener is Seth Klarman.

Klarman is a value investing legend who runs The Baupost Group, one of the largest hedge funds in the U.S. He also wrote one of the best books ever written on investing called Margin of Safety. Such is the popularity of Margin of Safety that at the time of writing there are 15 used copies selling for $940 and 6 new copies selling for $1500.

I was recently re-reading Klarman’s 1999 Baupost Shareholder Letter in which he discusses the importance of not overpaying in order to protect your downside.

Here’s an excerpt from that letter:

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Howard Marks – Investors Develop Amnesia In The Sharemarket – Here’s Why

Johnny HopkinsHoward Marks Comments

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

One of our favorite investors at The Acquirer’s Multiple – Stock Screener 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 May 2005 piece where Marks discusses why investors develop amnesia when it comes to share-market history. It’s a must read for all investors.

Here’s an excerpt from that memo:

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Tweedy Browne – Focus On The Knowable While Protecting Mightily Against The Unknowable

Johnny Hopkinstweedy browne Comments

One of the value investing firms we follow closely at The Acquirer’s Multiple – Stock Screener is Tweedy, Browne Company LLC (Tweedy Browne).

Tweedy Browne, a successor to Tweedy & Co., was first established by Forrest Birchard Tweedy in 1920 as a dealer in closely held and inactively traded securities. The firm’s 95-year history is grounded in undervalued securities, first as a market maker, then as an investor and investment advisor. The firm’s investment approach derives from the work of the late Benjamin Graham, co-author of the first textbook on investment research, Security Analysis (1934) and author of The Intelligent Investor (1949). Graham, through his investment firm Graham-Newman Corp., was one of the firm’s primary brokerage clients in the 1930s, 1940s, and 1950s. It was through Graham that the original partners of the firm developed brokerage relationships with investment legends Walter Schloss and Warren Buffett, and met Tom Knapp, who joined the firm in 1957 from Graham-Newman and led its conversion from broker to investor.

One of the best free resources available to value investors is the company’s annual reports and shareholder letters. In the March 2016 Annual Report I found the following gem from the Directors of Tweedy Browne which highlights the importance of knowing what you know (in investing) and protecting against what you don’t, using a quote from Benjamin Graham.

Here’s and excerpt from that letter:
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Undervalued InterDigital, Inc, Well Positioned For Growth In 5G And The IoT

Johnny HopkinsIDCC, Stocks Comments

One of the cheapest stocks in our All Investable – Stock Screener is InterDigital, Inc. (NASDAQ:IDCC).

InterDigital Inc (InterDigital) designs and develops advanced technologies that enable and enhance wireless communications and capabilities. Since 1972, InterDigital engineers have designed and developed a wide range of innovations that are used in digital cellular and wireless products and networks, including 2G, 3G, 4G and IEEE 802-related products and networks. The company is a leading innovator in the wireless communications industry and a recognized thought leader in 5G and the IoT technology.

A quick look at the company’s share price (below) over the past twelve months shows that the price is up 59% to $85.45 compared to March 2016. That is 17% off its 52 week high of $102.30.

(Source, Google Finance)

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Seth Klarman – Value Investing Doesn’t Apply Only To U.S. Companies

Johnny HopkinsSeth Klarman Comments

(Image Source, Investopedia, investopedia.com/news/who-seth-klarman, [Accessed 12 Mar, 2017])

One of our favorite investors here at The Acquirer’s Multiple – Stock Screener is Seth Klarman.

Klarman is a value investing legend who runs The Baupost Group, one of the largest hedge funds in the U.S. He also wrote one of the best books ever written on investing called Margin of Safety. Such is the popularity of Margin of Safety that at the time of writing there are 15 used copies selling for $940 and 6 new copies selling for $1500.

I was recently re-reading Klarman’s 1997 Baupost Shareholder Letter in which he discusses why value investing doesn’t apply only to U.S. companies.

Here’s an excerpt from that letter:

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Warren Buffett – Wall Street Makes Billions From Wealthy Investors With A ‘Superiority Complex’

Johnny HopkinsWarren Buffett Comments

(Image Source, Huffington Post, http://www.huffingtonpost.com/john-g-taft/the-warren-buffett-effect_b_5577685.html, [Accessed 8 Mar, 2017])

One of our favorite investors at The Acquirer’s Multiple – Stock Screener is Warren Buffett, and one of the best resources for any investor are the Berkshire Hathaway Inc. Shareholder Letters. In his 2016 letter Buffett explains how Wall Street firms generate billions from wealthy investors with a ‘superiority complex’. It’s a must read for all investors.

Here’s an excerpt from that 2016 letter:

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Undervalued Vectrus Inc, FCF/Price Yield 15%, Solid Prospective Pipeline and Backlog

Johnny HopkinsStocks, VEC Comments

One of the cheapest stocks in our All Investable – Stock Screener is Vectrus Inc (NYSE:VEC).

With a market cap of $240 million, this micro-cap remains undiscovered by a lot of investors and too small for investment by large institutions.

Vectrus provides infrastructure asset management, information technology and network communication services, and logistics and supply chain management services to the U.S. government worldwide. Its main business is providing base operations, logistics, information and communications services to the military.

A quick look at the company’s share price (below) over the past twelve months shows that the price is up 12% to $22.36 from $20.53 in March 2016. That is 36% off its 52 week high of $34.98.

(Source, Google Finance)

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(Month 5) – Up 12% – TAM Deep Value Stock Portfolio

Johnny HopkinsTAM Portfolio Money Game Comments

Firstly, sorry about the delay in getting this month’s update to you.

Today is the end of month five of The Acquirer’s Multiple $45,000 – Deep Value Stock Portfolio – Real Money Game, and the portfolio is up 12% since inception.

The Deep Value Stock Portfolio – Real Money Game means I’m investing my entire superannuation valued at $45,000 into a real life Acquirer’s Multiple Portfolio and documenting it here.

The plan is to build my portfolio over the next twelve months and ongoing. After twelve months I’ll have thirty stocks equally weighted in the portfolio, then I’ll re-balance each position after one year and one day to minimize tax.

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