Friday, 12 August 2016

Canadian Shareowner Investments Stock Universe (Pseudo Greenblatt Ranking)

I'm going to imbed the work on the Shareowner "pseudo" Greenblatt rankings I've been doing as a googlesheets link on the blog. I hope that by sharing my research, people can get an idea as to the highest and lowest ranked stocks. I say "pseudo" Greenblatt because I've sort of tailored my ongoing research based on what I feel are important categories to me, which are 1) margin of safety at an 8% cap rate, calculated as FCFF / 8%, 2) pretax cap rate = EBIT/EV, 3) ROIC (not Greeblatt's ROC). I've split the worksheet into two tabs, financial and non-financial. I'm most interested in the non-financial tab, and I've only linked to this tab on the blog.

Strong caveats:

  • These are preliminary rankings based on rolling raw ttm data. 
  • I will only update the rankings once a quarter. I could drive myself crazy and update the rankings more often, but I don't see how this could help my decision making process
  • I will update the data (EBIT, FCFF, ROIC) once a year. I was thinking of even revisiting the models at the end of this year and using average data (EBIT, FCFF, ROIC) over the last 5 years instead of ttm, this way I'm more conservative. I haven't made my mind up yet on this
  • The entire ranked universe really is a relative point in time snapshot vs. the comparable stocks in the universe, and should be viewed as a starting point for additional research. For example, as at August 11th, 2016, Gilead had the highest ranking relative to every other stock in the Shareowner universe. The ranking tells us a set of facts, but does not tell us why this set of facts exists at this point in time. The job of the investor is to determine why Gilead is relatively cheap comparably. Sometimes, top ranked stocks are cheap for a reason.
  • The data is historically geared and does not forecast future growth or future cash flows at all. For example, if a company makes a significant acquisition which is going to result in immediately accretive cash flows, my historical methodology of determining FCFF does not reflect this
  • If a stock has a high ranking in my database, it does not automatically mean that the stock is cheap. It means that it is cheaper relative to other more expensive stocks in the the Shareowner universe, which is predominantly comprised of large, blue-chip, dividend paying stocks. If the overall universe of large, blue-chip, dividend paying stocks as measured by the S&P500 is not cheap, I may be looking at a non-representative sample in conducting my analysis, when I should really compare rankings across the entire universe of stocks, not just the S&P500.
Here are the top 20 ranked stocks as at August 11, 2016 based on my methodology:




And here are the top 20 ranked stocks as at May 4, 2016:




It's interesting to compare the changes in the rankings between periods. Gilead held top spot at the end of both periods, and based on backward looking data, is cheaper now relative to all other stocks in the Shareowner universe. It also doesn't surprise me that there is a proliferation of retail names in the top 10, Buckle, Gap, Bed Bath & Beyond, specifically. Apple always seems to round out the top 10, as does Cisco. Certainly a good starting point for further research.









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