June 2018 – Top Stock Bargains Watch List

Author: AsgeirToday I was looking for a logic explanation of why the Top Stock Bargains Watch List works so well. So far this year, ending May, the MATS Strategy (a portfolio including the stocks from the Top Bargains Watch List), has outperformed the S&P 500 Index with as much as 9,3 %. I wanted to find a simple explanation. Why are these stocks performing so well? I want to write good, reliable articles that people understand. I want my blog to be a place where people go when they need to know how to invest in stocks for beginners. Being a beginner or a pro, I want it to be a place where the true value investors seek a safe haven. Because that is what the list really contains – true value investing companies. And I want it to be a place where you can get recommendations of specific stocks – with simple, straight-forward explanations and quantified values.

And while I was looking for this I happened to find an excellent explanation in my favorite book by Benjamin Graham (known as the father of value investing), “The Intelligent Investor”. In the chapter about changing patterns in stock quotes related to earnings, he clarifies one important issue that is obvious but yet (almost) not being used by investors at all: Buying stocks in a company that delivers excellent results in a market with good future predictions, IS NOT WISE WHEN THE STOCK PRICE IS SEVERAL TIMES HIGHER THAN WHAT IT WAS JUST A FEW YEARS AGO. On the contrary, bad results (meaning: “Not reaching expectations”) may actually offer you as an investor amazing opportunities! As long as the stock quote reflects the “bad” earnings in a sufficient manner. Which they often do. The market has a tendency to exaggerate in both ends, embracing companies with excellent results and trashing companies with miserable results. Many times that ends in some really great investment opportunities. With both high and low pricing beyond common sense and beyond any sincere fundamental analysis. It is all about pricing. Let me repeat myself: IT IS ALL ABOUT PRICING.

IT IS WISE when you continually pay no more than 2/3 of a dollar for a stock that is worth one dollar. That will give you a valuable advantage in the market, over time. And I mean OVER TIME. Not necessarily next week, maybe not even next month. Most of the value stocks I have had in my portfolios have delivered weaker-than-market performance in the beginning, and that could continue for quite a while. Maybe for months. Until some day something clicks and turns up. Up, up and UP! Getting momentum and just continuing the rise it has started. Then it finally pays off! Many times in a great manner too. The reason why this has been working all the time since Benjamin Graham released his first edition of the book in 1949? Well, there are several reasons to be honest, but one of the most important reasons: MOST PEOPLE DON’T HAVE THE PATIENCE TO WAIT AS LONG AS IT TAKES TO MAKE IT A WIN. The big key question is how to succeed in the stock market? Well, here is one major key: PATIENCE! Impatience is the biggest mistake you make in the stock market. In the moment you sell because you don’t “believe” in it anymore and the stock has delivered you a severe loss, in that moment when you got out and sold your loser, just like magic, it makes a jump up and bounces back to levels not seen in months… Sounds familiar? I guess so, because it is a very common, repeating pattern seen in the markets over and over again. Not so strange either, it simply reflects the dynamics of an efficient market. Don’t forget that the markets are psychologically driven in the short term, and that is why fear and greed are among your worst enemies when it comes to winning in the stock market.

Please enjoy this week’s newsletter. I hope that you will continue to have great benefit of the Top Bargains Watch List.

Engage: Invite to a discussion or ask a question! Please leave a comment before you leave, I would be more than happy to involve and get connected. Any investing related issue or stock talk is heartly welcome.

If you want, you can take a look at the previous lists from earlier this year here: Top Bargains Watch Lists, 2018

Since January I have a portfolio where the top bargain stocks are included. You can follow the performance of every stock and the portfolio here: MATS Strategy – Portfolio Performance (updated monthly).

The average Market Adjusted Total Score (MATS) by May 31st: 81,2

As always, I run the Magic Formula Investing screener to pick the 50 top companies with a minimum market cap of 300 Mill. USD. I intentionally exclude companies above 8.000 Mill. USD (the watch list is limited to small/medium cap companies). This month (ending May) the screener provided a portfolio of 32 companies. These companies from the screener all together gave an average MATS score of 81,2. The companies that ended up with higher than average score, are the top bargain companies listed in the table below. (Unisys is not included in the average score, since this stock still exceeds No 2 on the list with more than the double ( 480 vs 232 points). Including it in the score would have given an unbalanced average score, and several of the other top bargain stocks would have been excluded).

Important notice from this month’s list:

  • Three of the stocks qualify two important criterias: Their Net Working Capital makes up 50 % or more of the Market Cap Value + they have a market discount of 50 % or more compared to their highest stock price during the last three years:
    • GME, CJREF and EVC. These stocks are great examples of what I explained above. They obviously have not been popular among investors since the stock quotes are very low compared to earlier levels. As a result, market prices are now sufficiently low that they have turned out to be obvious bargains in relation to fundamental values.
  • Four stocks get into the list because their Net Working Capital makes up 50 % or more of the Market Cap Value:
    • UIS, AMCX, AGX and TRNC. The stock price of these companies are between 50-100% of their highest levels in three years. That’s why they don’t get into the first category mentioned above. PS: This does not necessarily mean that they are not as “good” or “promising” as the ones in the other category. The reason could as well be that the stock quote has started its rise and that the positive momentum is stronger. One example is Unisys (UIS), this stock has risen about 20 % the last two months and was in the above category last time with a price of 45 % of its three-year-high.
  • Stocks that get into the list because they have a high “Financial Score” combined with a market discount of 50 % or more compared to their highest stock price during the last three years:
    • No companies qualify in this category. (These companies have kind of the “opposite” advantage compared to companies with a high NWC/MCV. They get such a high score because they have very high returns on either assets/invested capital (ROIC) or enterprise value (Earnings Yield), most probably on both. You could turn it around and also say that they have an extraordinary efficient use (return) of their “small” capital).
  • Three stocks get into the list because they get a high “Financial Score” (Earnings Yield and Return on Invested Capital added together):
    • TVTY, INVA and EGOV. The stock price of these companies are between 50-100% of their highest levels in three years. That’s why they don’t get into the category mentioned above. PS: This does not necessarily mean that they are not as “good” or “promising” as the ones in the other category. The reason could as well be that the stock quote has started its rise and that the positive momentum is stronger.

By filtering the stocks from the list this way, it will be easier to see which criterias that qualify each company. I hope this will be helpful when you need to choose which of the stocks to invest in.

The Market Adjusted Total Score

How can several of the stocks get a Market Adjusted Total Score more than double of the average score?

Four out of ten stocks receive a score more than twice the average score of 81. That is quite remarkable, so I guess it deserves a further research and explanation:

  1. Unisys (UIS), MATS Score of 480: The Net Working Capital of this company is $ 3,07 Billion USD. This is 400 % more than what the whole company is priced by the market (market cap of $ 614,1 Mill. USD by May 31st)! Total current assets alone were $ 1,33 Billion USD…
  2. Tivity Health (TVTY), MATS Score of 232: This company has a return on invested capital (ROIC) of 209 %! ROIC is a result of EBITDA divided with the sum of net fixed assets and net working capital. ROIC and earnings yield (EY) added together gives this stock a “Financial Score” of 221,8. Adjusted for “The Market Discount” it receives a MATS of 232,4.
  3. Entravision Communications (EVC), MATS Score of 216: This company receives such a high score as a result of its quite unique combination of both a high sum of EY+ROIC of 129,4 and a net working capital exceeding the market cap value by 5 %, which results in a “Financial Score” score of 184. Adjusted for the market discount related to the S&P 500 it gets a MATS of 216,3. It is worth mentioning that EVC had an earnings yield of 75,3 % last quarter!
  4. GameStop (GME), MATS Score of 193: The Market Cap Value of GME by May 31st was $ 1,34 Billion USD. Its net working capital from the most recent quarter data from April 30th was $ 1,94 Billion USD. Its NWC exceeds the price of the company by 44 %! This results in a “Financial Score” of 137,1. Since the stock price is more than 70 % lower than three-year-high, it ends up with such a high a MATS Score of 192,5.

Here is the list – 10 top bargain stocks with calculations and scores:

All companies listed here are the stocks that got an above average MATS (Market Adjusted Total Score). You can read more about how the numbers and scores are calculated and how the model works here: “The Market Adjusted Total Score – MATS”.

(You will find a further explanation of the parameters just below the table.)

Company

Market Adjusted Total Score*

High last 3 Yrs Closing Price Dividend paid* Percent of High Added Value (if >50 % discount from High last 3 Years)* Financial Score* Total Score S&P, Percent of High Market Discount* Date Quarter Data:

UIS

479,6

20,67 12,05 58,3 461,6 461,6 94,2 35,9 2018-05-31 2018-03-31

TVTY

232,4

48,05 35,05 72,9 221,8 221,8 94,2 21,3 2018-05-31 2018-03-31

EVC

216,3

9,26 4 43,2 6,8 184 194,2 94,2 44,2 2018-05-31 2018-03-31

GME

192,5

47,44 13,2 27,8 22,2 137,1 170,4 94,2 44,2 2018-05-31 2018-04-30

CJREF

147,2

13,88 4,8 0,27 36,5 13,5 104,9 125,1 94,2 44,2 2018-05-31 2018-02-28

AGX

100,9

74,5 38,7 0,5 52,6 80,1 80,1 94,2 41,6 2018-05-31 2018-01-31

AMCX

97,9

85,78 57,17 66,6 84,1 84,1 94,2 27,6 2018-05-31 2018-03-31

INVA

97,2

19,37 14,79 76,4 88,3 88,3 94,2 17,8 2018-05-31 2018-03-31

EGOV

85,0

25,35 15,35 60,6 68,2 68,2 94,2 33,6 2018-05-31 2018-03-31

TRNC

82,3

21,55 16,04 74,4 72,4 72,4 94,2 19,8 2018-05-31 2018-03-31

S&P 500

2873 2705 94,2 94,2 5,8 2018-05-31
*Market Discount: If the stock has fallen (or risen) more than the market, compared to the highest levels in three years, a factor of 0,5 is used into the “Market Adjusted Total Score” area to adjust for the difference.
*MATS: Market Adjusted Total Score. A score which aims to discover stocks with the best combination of financial performance and historical prices.
*Added Value: If >50 % discount from the highest price last 3 years, a factor of 1,5 is added to this difference into the “Total Score” area.
*Dividend paid: Dividend paid after the last quarter’s results.
*Financial Score: A company’s Earnings Yield (EY) + Return On Invested Capital (ROIC). If Net Working Capital makes up 50 % or more of the Market Cap Value, the score is adjusted for this: (EY+ROIC)+(NWC%/MCV%)+50. The last available numbers from the last quarter are used (data from Yahoo Finance).
Disclaimer: The Market Adjusted Total Score (MATS) calculated above, is only a result of my own calculations, and must not be interpreted as “market signals” in any way. I am not an investment advisor. Even though I do my best to avoid mistakes, wrong calculations may occur.

How can you compare your own stocks to the MATS Score of the top bargain stocks?

Here is an example of how to calculate the Market Adjusted Total Score. With this tool, you can type in the numbers from your own stocks into the formula, and watch how the values influence the MATS Score. In just a few seconds, you can see which values you need to put in to make your stock as strong as the top bargain companies. You can change several of the values, e.g. its market price or the financial score. Try it and see for yourself (in Dropbox, you need to click “Open” at the right to make it work in e.g. Excel Online):

Calculate the Market Adjusted Total Score

Text from my post in week 7, 2018: I typed in the values of Amazon Inc. (AMZN) just to check what score it has, and it gets a MATS score of only 15. The stock has a “Financial Score” of 18. To make AMZN get a score around the average top score of this week’s list (87,9), its stock price needs to be as low as $ 270! Or, with yesterday’s closing price of $ 1451, it needs a “Financial Score” of 90 to get a MATS Score of 87…

Is it possible to get a MATS calculation for other stocks too?

Yes, it certainly is!

The price of further MATS calculations (Market Adjusted Total Score):

  •  10 USD per calculation. Pay via PayPal in just one click: http://paypal.me/StockBargains/10
  • 25 USD for three stocks (or the last available quarter plus the two last years for one stock). Pay via PayPal in just one click: http://paypal.me/StockBargains/25
  • 49 USD for one stock compared to five competing stocks (picked by you). MATS Scores are calculated for all six stocks. For even more relevant comparison, MATS Score of the stock is also adjusted to the average market discount of the five other stocks (in replacement of the adjustment vs the S&P 500 Index). Pay via PayPal in just one click: http://paypal.me/StockBargains/49

Please note: When making your payment, specify your order by naming the stocks/companies that you want a MATS Score for. Payments will be done through PayPal. Use this link (or one of the above ones) to start your payment: http://paypal.me/StockBargains Any questions or issues regarding payment can be done to support@stockbargains.net. Thank you!