In their latest episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discuss Updates To Acquirer’s Multiple Screens. Here’s an excerpt from the episode:
Tobias: The ongoing questions that you always have as an investor is how concentrated you want to be in an industry or sector. It’s just the case that whatever is ailing any particular stock tends to be– often, it’s an industry that gets cheap. Like energy for the last few years has been just getting cheaper and cheaper until recently, when it started taking off again. What that means is that the screeners get heavy with individual industries. There’s also the problem that for the most part it does tend towards–
Tobias: Yeah, cyclicals. I don’t necessarily hate that, but you can get a very heavy concentration and then as we know, with cyclicals, there can be no bottom for a long period of time, and the cycle seems to be quite long. I run back tests for everything that I stick for every change that I make to everything. What I have done in the screens is I’ve just limited the number of names per industry to six, on the basis that the seventh cheapest name in the industry is probably not that interesting and if there’s about 80 industries that ends up with about– [crosstalk]
Jake: That’d be on 3%, because even position sizing. So, you end up with 18% max sector exposure?
Tobias: Or, max industry exposure. I’ve done down to the industry level. There are about 480 industries– Sorry, 480 names across 80 industries roughly, six names for industry. You get a little bit of a different distribution. I’ve increased the market cap cut off in the large cap screener to 20 billion just because I haven’t moved it up for a long while. [crosstalk] Yeah, it’s amazing how big everything’s got and it’s an interesting distribution of names now in that top– in the large cap screen.
So, Facebook actually makes an appearance in there, which is extraordinary, because it means it’s one of the cheapest names in its industry, I guess, but it also is one of the cheaper names having made that cut that gets in there among a whole lot of other like all the cigarettes are in there. Moderna popped in there, which I thought was funny. Moderna is absolutely terrifying to me as a position, because clearly it’s had a pretty spotty record up until recent times with the vaccines.
Jake: It could be a bit of a hula hoop.
Tobias: To create the bubble charts, I need a second axis. I’ve got The Acquirer’s Multiple on one axis and I just was trying to find something to stick on the other axis that was related to performance. I put the five-year average return on assets on there. It’s an interesting analysis that gives a little spread of these names. You can clearly see which are the better businesses or which are the businesses that generated a little bit more return on assets than the other ones. These bubble charts are great. You can have a color axis as well. It means that it’s gray to green. I’d rather run from red to green, but I can’t figure out how to change that sitting in the back. So, it’s gray to green at the moment. I used the [crosstalk]
Bill: Tech was never your high point.
Tobias: Say it again? [laughs]
Bill: I said tech has never really been your real high point. I can see how the gray to red would throw the entire idea off.
Tobias: I think to be fair I’ve got it a long way for a lawyer to have got this stuff out.
Jake and Bill: Yeah.
Tobias: Get all this stuff talking together.
Bill: Well, your best I think–
Tobias: I like tinkering.
Bill: Your best at long form books and charts.
Tobias: That’s fair. That’s probably correct.
Bill: Formatting and tech, I don’t know. I wouldn’t say like, “That’s Toby’s [crosstalk] strength.
Tobias: I like to think a little bit artistic, but [crosstalk] I like Greenwald’s growth metrics. I like Greenwald’s way of valuing growth. He looks at the yield, he looks at the return on the reinvestment rate, looks at it incrementally, and then he sums it all together, and that gives you this expected return figure, which is what I’ve done. I’ve made my own modification to it, because I’m not using free cash flow. I’m using operating income and then playing around with a little bit. It makes intuitive sense to me. I might have to explain it a few different times, find a way to explain it better– [crosstalk]
Jake: Toby adjusted earnings? [laughs]
Tobias: I find it interesting. It’s quite a useful little tool and it tests reasonably well, too. It’s interesting in the sense that what it has done, if you’re just purely ranking on this expected return figure, it’s quite good at picking stocks that do well in a growthy market. It’s a growth screen. I put that into the screener. There’s one on the front page, which is the large cap screener. If you go to The Acquirer’s Multiple website, you can pull it up. It takes a little while to load up, but then you can see that screen and then if the paid screen is on our full depth on all investable, full depth on small and micro, and you can see the bubble chart distribution to see where everything is in there.
$FB Is Cheap
I think there are a few things that are interesting to stand out. To me, Facebook stands out. I’ve said this a few times as we discussed last week and the week before. I don’t know which of these two outcomes is the correct one. All I know is that the price is quite distinct from the last five years of operating history for that business. Either the business is going to collapse pretty precipitously here over the next few years and that’s entirely possible. That’s not off the table at all or the price is wrong, if it can continue on what it’s doing. So, I don’t mind little bets like that.
Jake: Can I set the calendar reminder for 2032 to pull that growth screener off the shelf and–? [laughs]
Tobias: Yeah. Well, next time you go to write your value worst opportunity sitting 25 years or whatever it’ll be by that stage, 35 years or 55 years.
Jake: Yeah. [crosstalk] but that’s it.
Expected Growth Is A Good Value Approach
Tobias: Let me know because then we’ll switch that one. The expected return is still a value approach to investment, because it still requires fundamental–
Tobias: The rate of growth is limited by the ability of the firm to reinvest in itself. The better returns on assets in the higher rates of reinvestment will generate higher expected returns. It’s just that for whatever reason, they tend to be quite mean reverting, they tend to not pan out the way that they present in the screen.
That tends to be just too optimistic, I think, for the most part, but it’s still in periods of time where growth is running pretty hard. It’s pretty good at picking good names and it’s got some good names in there. Now, you can go in there, you can rank. I’ve added some additional things. That’s one of the things I’ve included.
I’ve included this expected return ranking thing in there and an intrinsic value to price, because this is the way that I think about it. If you’re going to spend a dollar, how much intrinsic value, i.e., buying, you want to be buying more than a dollar for the most part.
Although when I tested, I found that provided you are getting about 60 cents or more in these better names, you’re going to be fine. You can overpay for really good stuff. A little bit like that discussion we were having earlier about stocks falling 70%. If for a really good business, you can tend to pay over the– Even the growthy estimate of what they’re worth. If they work, the payoff is so huge over a period of time. In my experience that seems to be it’s okay.
But about 60 cents is pretty consistently, you don’t pay too much more than that. If you’re getting 60 cents or more and then– You want high expected return without paying over the odds from those names in the screen that delivers pretty good performance, but this is the crazy thing. The Deep Value Screen is still the best one. It’s just very cyclical, but Deep Value Screen continues to be– I don’t know how this is the case, because it picks a whole lot of really scary stuff all the time, as rerating does seem to work.
Anyway, so, go check out those screens. Let me know what you think of. I’ve had some fun playing with them in the background. I’ve been doing it for about three weeks. I think I’ve gotten slightly insane doing it all, but it was fun while I was doing it.
Jake: Welcome back. [laughs]
Tobias: I had to put it all up on the site, because I was getting tired. I was getting sick of it. So, that was the point. I had to let it go, but I’ve been torturing my wife with it. She just doesn’t care. [laughs]
Jake: Oh, God. Like getting a [crosstalk] great artist. I can’t stand a look at it anymore. We’ll just send it out.
Tobias: I think that’s the way to go. Yeah. Anyway, it’s fun.
Jake: Guys want to crank through some “Where do returns come from?”
Tobias: Yeah, let’s do the Bloomstran thing.
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