I have been working a lot with screens and back tests the past few months as part of the ongoing search for winning methods and solid stock picks over time.
Technology has finally caught up with my inadequate programming skills. Tasks that would take days of building a big clunky spreadsheet for downloading data of dubious quality can now be accomplished with a few clicks and questions.
As a result, I have spent an enormous amount of time the past few months testing thoughts, ideas and strategies. It is surprising how many things that sound good when you talk about it collapse quickly when you crunch the numbers.
I put together a screen recently that is based on comments by noted value investors Walter Schloss and Peter Cundill over the years. It makes adjustments to certain balance sheet items, subtracts all obligations ahead of the common equity and produces a list of companies that trade for less than their liquidation value.
It is not a fire-sale-panic-liquidation value (that would be net current asset value) but the value of the company if calmly and rationally liquidated. I then further refined the screen to identify only those companies who traded below liquidation value and had positive Piotroksi F-scores and Altman z-scores. This should produce a list of rather cheap stocks with improving fundamentals and the ability to survive until they thrive.
This turned out to be one of the rare ideas that worked even better than I could have hoped. The screen produces the highest rates of return of any I have ever tested. An investor using this screen over the past 15, 10 or five-year period would be in rarified company.
If the investor tried to scale it into a superfund, however, he would fail, as most of the stocks are pretty small and you could not manage tens of billions of dollars using this approach. For those of us content to grow our nest egg without concerns of raking fees off a huge hedge fund, it will work just fine.
When I ran the screen this morning there were some interesting names worth consideration by long-term value investors. Universal Corporation (UVV) processes and sells for pipes, cigarettes, cigars and smokeless tobacco products. They are also getting involved in the liquid nicotine products for the vaping industry and e-cigarettes industry.
Using my calculations as stolen from Cundill and Schloss, I get a rational liquidation value of about $1.2 billion vs. a total market capitalization for Universal of $1.1 billion. The company has an F-score of 7 and a Z-score of 2.2, so it is safe and the fundamentals are solid. You get paid well to wait for things to get better and the stock price moves higher as Universal shares currently yield 4%.
Fuel Systems Solutions (FSYS) is a company that would appear to have bright future but is dragging its heels getting here. The company makes components and systems that control the pressure and flow of gaseous alternative fuels, such as propane and natural gas used in internal combustion engines.
At some point it seems reasonable to assume we would look toward natural gas- powered cars as a bigger part of an energy and environmental solutions and this company should be a major beneficiary. Using my formula I get a liquidation value of about $174 million and the market cap of Fuel Systems is just $153 million. The f-score is 6 and the z-score is 25, so the company should be able to survive until they thrive and the stock price moves a lot higher.
One of the more undervalued companies using this formula is Gulf Island Fabrications (GIFI). That undervaluation makes sense as they are a fabricator of offshore drilling and production platforms, and other steel structures for the energy companies. With everyone cutting back capital expenditures right now, business could be ugly for a few quarters for this company.
The rational liquidation value of the company, however, is $255 million and the market cap is just $163 million. There is a pretty large margin of safety in that big a discount. The z-score of 3.55 and f score of 6 indicates that perhaps things are not as bad as investors seem to assume right now.
Looking for companies than can be liquidated at a profit is a solid approach that dates all the way back to Ben Graham's original works in the 1930. Adding measures of fundamental performance and financial strength appear to improve the results greatly.