Value Screeners

Now live at: https://screeningforvalue.com/greenwald

Data pipeline and flask site to approximate the intrinsic value of stocks. Uses a number of shorthand valuation techniques to estimate intrinsic value and margin of safety.

Adapted from the following authors:

• Bruce Greenwald
• Phil Town and Danielle Town
• Aswath Damodaran

Table of Contents

• Valuation Calculator
  • Valuation Methods
    • Greenwald, Graham and Dodd Investing
    • Damodaran, Growth Rates
    • Town & Town, 10 Cap Value
    • Town & Town, Payback Time
    • Town & Town, Margin of Safety
  • Data
• Data Pipeline
  • AWS Setup
  • Provision EC2 w/ terraform

Valuation Methods

Greenwald, Graham and Dodd Investing

Greenwald's adopts a "Graham and Dodd" approach updated for modern market conditions. It rests on two pillars:

• The reproduction value of a company's assets
• So-called "sustainable" earnings power.

Greenwald looks at the ratio of assets to earnings power in order to identify companies with structural advantages in the market (Buffet's "moat"). Importantly, growth is not considered as a factor and significant adjustments are made to infer what a company's assets and earnings would be if they stopped reinvesting.

Assets are calculated as:

Current and non-current assets
+ Research and development costs
+ Administrative expenses
- Total liabilities

Earnings power value is calculated as:

(Normalized EBIT
- Average tax rate
- "Maintainance Capex")
\ Weighted average cost of capital (WACC)

Value of equity:

EPV - nebt debt = value of equity

Damodaran, Growth Rates

(Coming Soon) An implied forward 1 year growth rate derived from the reinvestment rate and return on equity. It makes sense to use an average net income value (e.g. past 5 years) to calculate ROE as this will be a big factor determining the growth.[^1]

Reinvestment Rate = Retained Earnings / Current Earnings 

Return on Investment = ROE = Net Income / Book Value of Equity

Implied forward growth = Reinvestment Rate * Return on Investment

To be conservative, this will be the growth rate in year 1 only. Years 2-5 will be 5%, and years 6-10 will be 2%.

Town & Town, 10 Cap Value

(Coming Soon) Warren Buffet's "ewner earnings" multiplied by 10. The intuition here is that you should pay no more than 10 years of future earnings in order to get a minimum 10% capitalization rate. It takes no account of growth or the present value of future cashflows.[^2]

Owner earnings is calculated as:

Net Income
+ Depreciation & Amortization
+ Net Change: Accounts Receivable
+ Net Change: Accounts Payable
+ Income Tax
+ Maintenance Capital Expenditures
= Owner Earnings

Town & Town, Payback Time

(Coming Soon) The total time to fully recuping the expense of an investment. Here it is the sum of free cash flows compounded by the company's growth rate for eight years. The period of eight years is to provide a margin of safety. According to Charlie Munger, a private company typically sells for half the price of a public one, and public companies sell for between 12 and 20 times their current free cash flow, or 16 on average. Half of 16 is 8, giving the "private" sale price of a company. Accounts for growth but not the present value of future cashflows. Also, growth is assumed to be static. For high growth companies this will produce valuation_metrics going to infinity. [^3]

Free cash flow can be calculated as:

Net Cash Provided by Operating Activities
+ Purchase of Property and Equipment (a negative number)
+ Any Other Capital Expenditures for Maintenance and Growth (also negative numbers)
= Free Cash Flow

Town & Town, Margin of Safety

(Coming Soon) A shorthand approach to discounted cashflow analysis. Puts a price on a company's earnings over 10 years with a minimum acceptable rate of return (MARR) of 15% per annum.

Steps:

1. Find the future value of earnings compounded by the company's growth rate for 10 years. This is a forward 10 year EPS.
2. Assumes that the market will value the company at 2 times is growth rate. This is the future P/E ratio.
3. Multiply forward 10 year EPS by future P/E ratio to give future 10 year share price.
4. Back calculate what the price should be today, assuming a 15% return per annum.
5. Discount this to the present day, building in our MARR. Future 10 year share price / (1.15^10).
6. Divide the result by 2 to build in a 50% margin of safety.

This method does account for growth and for the present value of earnings.

Data

Column	Description	Unit	Period	Input for
TIDM	Tradable Instrument Display Mnemonic, aka Ticker
Name	Name of Share
Market Capitalization	Latest close price multiplied by the number of shares	m	Daily
Number of Shares	Number of shares outstanding, not including employee options. Aggregate into a single number if there is more than one class of shares.	m	Most recent
Close	Yesterday's close price	listing currency	Daily
Retained Profit	Profit minus dividends payed in cash to shareholders	m	TTM	Growth rate
Post-tax Profit	Pre-tax profit from continuing operations	m	TTM	Growth rate
Net profit	Profit from continuing operations after interest and depreciation, but before tax	m	TTM	Growth rate
Net profit 5y av.	5 year average of profit from continuing operations after interest and depreciation, but before tax	m	5 year average	Growth rate
NAV	Net Asset Value (or Book Value). Total assets - total liabilities	m	TTM	Growth rate
Net profit	Profit from continuing operations after interest and depreciation, but before tax	m	TTM	10 Cap Value
Depreciation & Amortization	Write-down costs of both tangible and intangible assets	m	TTM	10 Cap Value
Change in debtors	Change in money owed by the company	m	TTM	10 Cap Value
Change in creditors	Change in money owed to the company	m	TTM	10 Cap Value
Tax paid	Net tax paid, including rebates and/or deferred losses (can result in negative figure)	m	TTM	10 Cap Value
Capex	Capital Expenditure: purchase of property, plant, and equipment. Can include software.	m	TTM	10 Cap Value
Free cash flow 5y av.	5 year average of cash available to pay as dividends, i.e. post-tax profit. Operating cash flow - tax paid - interest paid - capex	m	5 year average	Payback Time
EPS	Earnings per share	m	TTM	Margin of Safety

Data Pipeline

AWS Setup

1. Create Amazon RDS instance (postgres), deploy schema using ./resources/sql/model.sql

2. Add s3 extension via psql

psql --host=<instance> --port=5432 --username=<username> --password=<password> --dbname=valuation_db

CREATE EXTENSION aws_s3 CASCADE;

3. Create the appropriate IAM roles for RDS<->S3 access: Using an IAM role to access an Amazon S3 bucket

Provision EC2 & ECR w/ terraform

$env:AWS_ACCESS_KEY_ID & $env:AWS_SECRET_ACCESS_KEY before running

# Initialize the directory
terraform init

# Format the config file
terraform fmt

# Validate the config file
terraform validate

# Apply
terraform apply

# Inspect state
terraform show

[^1] Damodaran, Aswath. n.d. 'Session 10: Growth Rates - Historical, Analyst and Fundamental - YouTube'. Accessed 24 May 2022. https://www.youtube.com/.

[^2], [^3] Town, Danielle, and Phil Town. 2018. Invested, chapter 7.