The Internet has been both a blessing and a curse for equity investors. In terms of information access, the average investor now has a wealth of data at her fingertips that was unheard of decades ago. Rather than waiting for annual reports to arrive in the mail or having to visit the library for industry data, it's all on the Web and free for the most part.
That being said, the Internet has also cursed investors because every three seconds, they can check stock prices. And that availability of rapid-fire information has caused most investors to make dumb decisions: They sell when the share price falls and buy when prices climb.
I strive to focus on information sources that provide ideas and information, not random prices every minute. With a bit of a mood change in the market, I decided to revisit an old stomping ground. One is known as a "Magic Formula" stock screen. The name is silly, yes, but the data are far from silly. Started by famed value investor Professor Joel Greenblatt, this stock screen screens companies based on two metrics: return on invested capital and low price-to-earnings ratio. This screen seeks good companies (hence a quality return on capital) with cheap stock prices.
One name that shows up (that I've also seen in other value areas) is PDL BioPharma (PDLI). On paper the company looks absurdly cheap. It has a market cap of $1.2 billion and trades for less than 5x earnings and 3x forward earnings. The business is very profitable and the balance sheet shows $300 million of net debt. Yet the market isn't happy, as PDLI shares are trading at $7.50, near a 52-week low. If a class-action securities suit against the company turns out to be nothing, the stock will zoom higher.
Another name on the list is Weight Watchers International (WTW), a company I have written about several times. Each time, the share price was getting lower and lower. Since then, however, shares have climbed back above $27 from $20 in a declining market.
For those who crave safety in size, large-caps Northrup Grumman (NOC) and Cisco Systems (CSCO) are on the "magic formula" list. One thing to keep in mind when it comes to return on invested capital is that a company can have a high return on capital but not all high ROICs are equal. Cisco's high ROIC is not unlimited; in other words, the company has become so large that it can no longer invest all its excess cash at its historical returns, hence the 3% yield and stock buybacks. The biggest bang for the buck comes when you have high ROIC companies that are growing and putting increased capital into those high-return projects. That was Cisco 20 years ago, but not today.
Not all stock screens are perfect; a good company today can be a bad company tomorrow. But this screen is useful for its simplicity: finding good companies at cheap prices. That's what value investing is all about.