During their latest episode of the VALUE: After Hours Podcast, Huber, Taylor, and Carlisle discuss Build Your Stock Watchlist Like A Baseball Fan. Here’s an excerpt from the episode:
Huber: I have four-part– my investment process has four components. One is durability, one is growth potential. It doesn’t mean fast growth. It’s just companies that are expanding have what Nick Sleep called a destination. So, companies that are moving forward, heading towards some far off destination, and they have room to improve. So, potential prospects. [crosstalk] Yeah, runway, right? The third would be capital allocation, which is like a management factor. And then, the fourth is valuation. So, those are the four things that I’m looking for with every investment.
Jake: Maybe talk about the baseball analogy that you have for your farm team. [crosstalk] had to be a nice analogy.
John: Yeah. My Journalytic page is filled with all kinds of baseball jargon.
John: In fact, the topic that I was going to touch on today is also a sports topic that I’ll try to manufacture into some investing insight for us, if you guys want to. My watchlist, I’m a baseball and hockey league fan who sometimes watches online and picks NHL derivative tips. My A list is like the big-league list of stocks, and there’s probably 150, 160 companies on there. So, these are companies that have met those three criteria in terms of business quality. And then, the fourth criteria is valuation. My process for valuation is basically, I think about it a little bit differently, I think in terms of rate of return. So, on that spreadsheet, I have my expected rate of return for every stock on that list. And so, that is the main list.
Then I have, like you were referencing, the farm team is basically a list of companies that I’m learning about, wanting to study in more depth, trying to figure out if it’s a company that fits those criteria. That’s a huge list, because anytime if Jake and I are talking and he gives me this idea, I might put it on a list. I rank them. I move them up and down. I try to focus on no more than 10 companies at a time. I try to focus on even fewer than that, but I try to rotate through and focus that list and prioritize that list. I have little systems in place. Like I said, I have this little thing I was going to run by you, guys, but little systems in place to try to organize and prioritize my research process. But the process in a nutshell is build a list of companies and then wait for those companies to hit the price that I think will allow me to meet my objective hurdle rate of return.
Tobias: Do you want to go through your little– your–?
John: I figured it was part of the job to prepare some a veggie segment [Tobias laughs] to get into the Value: After Hours lineup. So, I came prepared. I think Jake might like this. Like I said, we talk a lot about sports and investing, and we share this common desire to build investing analogies around various topics of sports. And so, that’s what this segment is and I’ll touch on that. But basically, I’ll loop back and we’ll talk about portfolio construction, which I thought might be interesting and more specifically, opportunity costs.
A month ago, when Silicon Valley Bank had their run, I started going through a list of bank stocks. I was just curious because I wanted to see– One of the lists on this spreadsheet I was describing earlier, I have a list of bank stocks that I’ve followed over the years and they’re typically like smaller regional banks, community banks. But for those of you familiar with the US banking system, it’s a very fragmented system. The architecture of banking system can be traced back to our distrust, like the original distrust of centralized power in America. It’s like part of our DNA. We don’t like big government, we don’t want centralized power, we’ve always been skeptical of money that’s concentrated in the hands of the few. So, when we designed our system, we didn’t really design it, it just happened this way that we have like 4,000 banks in the United States, and there’s like 600 or 700 that are publicly traded.
So, it’s a tall task to try to go through them and you need some system to try to filter through which ones you want to pass on. As I was going through this list, really quickly you can pass on, I would say, four out of five are just immediately you pass because of a variety of reasons. You might not like the loan book, you might not like the leverage, you might not like the liquidity, you might not like insider ownership or management quality or a variety of reasons, but you still, even for those one out of five that, look interesting, my original idea was there’s going to be some babies thrown out with the bathwater here because there are a lot of issues in a lot of different banks, but there are also banks that are flush with liquidity and huge amounts of cash on their balance sheet. A lot of the stocks trade at five PE, six PE. They’re very, very cheap.
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