Value Hunter

Last modified 10:16, 15 Sep 2012

Value Hunter

The Value Hunter is a Growth model fundamental analysis.

The Value Hunter model seeks "value investments", meaning it looks to buy quality businesses at bargain basement prices.

Investment decisions are made from the perspective of buying the whole business as a going concern. It requires a target company to have predictable earnings and strong businesses, while at the same time having a share price that is reasonable, if not slightly lower than it might be expected to be trading at.

Analysis / Calculation

The Value Hunter model is divided into two stages.

  • In the first stage, the quality of the company's business is assessed.
  • At the second stage, the expected future rates of return are evaluated.

In order for a company to be considered in the second stage, it must pass the first stage.

First Stage - Quality Assessment

To pass the first stage, a company must have high returns that can be predicted with a high degree of certainty.

Some of the criteria in the first stage of analysis include the following.

Brand

The company must be a recognized Brand in its Industry.

Earnings Predictability

The Earnings-per-Share (EPS) of a company must be continually growing.

Long Term Debt Levels

Debt must be at an acceptable level; no more than 2 times net income.

Minimum Return on Equity

The Value Hunter requires a Return on Equity (ROE) of 15% or more over the last 5 years.

Capital Expenditure

Free Cash Flow per Share is the amount of money that is free to spent, i.e. it is cash flow minus all expenses. Free cash is available for capital expenditure.

The Value Hunter requires cash flow per share to be positive.

Utilization of Retained Earnings

While free cash may be available, it is also important to determine whether management is using retained earnings to increase shareholder value, i.e. is management wisely reinvesting funds from retained earnings?

The Value Hunter requires retained earnings for the past 5 years to have returned at least 12%.

Second Stage - Future Rate of Return

Once a company has been determined to be a Value Hunter-type company, the market will determine whether it should be invested in or not. This is because the price now heavily determines the returns that can be reasonably expected over the longer term.

There are 3 major parts to the Second Stage analysis.

Expected Rate of Return - ROE

First the Expected Rate of Return is calculated using the ROE method.

Expected Rate of Return - ROE

Second the Expected Rate of Return is calculated using the EPS Growth method.

Average of Both Results greater-than 12%

Finally the average of both Rates of Return is determined. If the average is greater than 12% the company is awarded a PASS
Page statistics
730 view(s) and 1 edit(s)
Social share
Share this page?

Tags

This page has no classifications.

Comments

You must to post a comment.

Attachments