16 February 2025
Screens can be an excellent source of new investment ideas.
You can set the parameters you want according to your investment principles. There are no ‘stories’ or ‘gossips’ – just raw facts. You also step out from the daily noise and can see things in perspective.
For example, Frasers, a UK retailer with a contrarian founder, may bring many unpleasant thoughts among domestic investors, but the facts tell a different story. The company has increased sales by 7% annually over the past 10 years, grew its EPS by 33% (last 5 years), generated 23% ROE and reduced share count by 14% in the past 5 years. It is also trading at just 6.5x forward P/E.
Many well-known investors developed their own investment criteria and maintained those screens publicly. The Magic Formula screen by Joel Greenblatt is one of them.
The big advantage of screens is that they introduce discipline by forcing you to follow the rules. Eliminating subjective judgment can materially improve your performance. How many great opportunities have we missed thinking, ‘The stock is up 10% in a week, I will wait for a better entry price’?
As usual, there are quite a few exceptions. Just a low P/E company may be at its peak earnings. Or a company with an innovative business model may report losses in the early years and print a single-digit ROIC but can still be a 100-bagger, as was the case with Amazon.
From my own experience, not a single screen would ever identify some of the winners in the HVG portfolio, such as Trustpilot or Airbnb. The first was barely profitable when I bought it in September 2023, and the second – never appeared cheap on traditional metrics like P/E or EV/EBITDA and has not been growing fast enough recently (c. 10% top-line growth). Trustpilot is up 3.7x since September 2023. Airbnb is up c. 38% since our first report in September 2024.
But qualitative factors about their business models indicated much higher earnings power in the long term which was not reflected in the share price.
Having said that, I still find screens a valuable source of ideas.
Last year, I ran two screens on Corporate Cannibals and UK Deep Value, which brought up quite a few interesting names.
You can set the parameters you want according to your investment principles. There are no ‘stories’ or ‘gossips’ – just raw facts. You also step out from the daily noise and can see things in perspective.
For example, Frasers, a UK retailer with a contrarian founder, may bring many unpleasant thoughts among domestic investors, but the facts tell a different story. The company has increased sales by 7% annually over the past 10 years, grew its EPS by 33% (last 5 years), generated 23% ROE and reduced share count by 14% in the past 5 years. It is also trading at just 6.5x forward P/E.
Many well-known investors developed their own investment criteria and maintained those screens publicly. The Magic Formula screen by Joel Greenblatt is one of them.
The big advantage of screens is that they introduce discipline by forcing you to follow the rules. Eliminating subjective judgment can materially improve your performance. How many great opportunities have we missed thinking, ‘The stock is up 10% in a week, I will wait for a better entry price’?
As usual, there are quite a few exceptions. Just a low P/E company may be at its peak earnings. Or a company with an innovative business model may report losses in the early years and print a single-digit ROIC but can still be a 100-bagger, as was the case with Amazon.
From my own experience, not a single screen would ever identify some of the winners in the HVG portfolio, such as Trustpilot or Airbnb. The first was barely profitable when I bought it in September 2023, and the second – never appeared cheap on traditional metrics like P/E or EV/EBITDA and has not been growing fast enough recently (c. 10% top-line growth). Trustpilot is up 3.7x since September 2023. Airbnb is up c. 38% since our first report in September 2024.
But qualitative factors about their business models indicated much higher earnings power in the long term which was not reflected in the share price.
Having said that, I still find screens a valuable source of ideas.
Last year, I ran two screens on Corporate Cannibals and UK Deep Value, which brought up quite a few interesting names.
HVG Screen - February 2025
This week, I have run a screen using several fairly broad criteria so as not to miss potential multi-baggers that often do not stand out in terms of a single number (e.g. low P/E or high ROIC).
The goal was to find great businesses selling at attractive prices. I admit neither of these definitions is entirely objective, but it never hurts to check what is out there.
Here are the criteria I have used:
1. Sales Growth (10Y CAGR) of at least 5%. Why not more than 5%? Firstly, a company may have sold a loss-making unit later in the period. Such a transaction would lower its recent sales and drive annualised growth lower. However, it was still a good transaction as the elimination of a loss-making segment increased earnings and return on capital. By raising the threshold, I would have punished companies that optimise their portfolio. On the other hand, I do not want to own businesses that have been shrinking over the long term. They can be good trades in the short term but never suitable investments in the long term. Hence, a 5% growth criteria, not zero or negative.
2. EPS Growth (5Y CAGR) over 10%. I wanted to give more weight to near-term performance. A business that went through an exceptional period some time ago but is struggling now is not so interesting. It could have passed the earnings growth test if I looked at earnings growth over a longer period. Note that this is per-share earnings growth, so “buying” growth through dilutive acquisitions does not count.
3. Share count increased by up to 5% over 5 years. Great companies can grow without the need to raise a lot of capital. I did not narrow the search to companies with declining share counts because buying back its own stock is not always the best option for a company that has plenty of high-return reinvestment opportunities, like Amazon, for example.
4. ROE and ROA over 15% and 5%, respectively. I did not use ROIC as it requires manual adjustments to get the correct number. ROE alone may not be sufficient either. However, a combination of the two gives a good idea of the quality of the business. A company with a lot of capital and low earnings cannot be part of the HVG portfolio.
5. P/E below 20x. There are many limitations of the P/E ratio, but no valuation metric is ideal. I kept the threshold as sometimes it is worth paying up for quality or growth prospects.
I ran my screen for European and North American companies only, excluding Asia, LatAm and other EMs.
The goal was to find great businesses selling at attractive prices. I admit neither of these definitions is entirely objective, but it never hurts to check what is out there.
Here are the criteria I have used:
1. Sales Growth (10Y CAGR) of at least 5%. Why not more than 5%? Firstly, a company may have sold a loss-making unit later in the period. Such a transaction would lower its recent sales and drive annualised growth lower. However, it was still a good transaction as the elimination of a loss-making segment increased earnings and return on capital. By raising the threshold, I would have punished companies that optimise their portfolio. On the other hand, I do not want to own businesses that have been shrinking over the long term. They can be good trades in the short term but never suitable investments in the long term. Hence, a 5% growth criteria, not zero or negative.
2. EPS Growth (5Y CAGR) over 10%. I wanted to give more weight to near-term performance. A business that went through an exceptional period some time ago but is struggling now is not so interesting. It could have passed the earnings growth test if I looked at earnings growth over a longer period. Note that this is per-share earnings growth, so “buying” growth through dilutive acquisitions does not count.
3. Share count increased by up to 5% over 5 years. Great companies can grow without the need to raise a lot of capital. I did not narrow the search to companies with declining share counts because buying back its own stock is not always the best option for a company that has plenty of high-return reinvestment opportunities, like Amazon, for example.
4. ROE and ROA over 15% and 5%, respectively. I did not use ROIC as it requires manual adjustments to get the correct number. ROE alone may not be sufficient either. However, a combination of the two gives a good idea of the quality of the business. A company with a lot of capital and low earnings cannot be part of the HVG portfolio.
5. P/E below 20x. There are many limitations of the P/E ratio, but no valuation metric is ideal. I kept the threshold as sometimes it is worth paying up for quality or growth prospects.
I ran my screen for European and North American companies only, excluding Asia, LatAm and other EMs.
The Results
The screen initially had about 280 names. I have manually removed investment companies and other firms with unclear business models. I also tried eliminating companies with obvious accounting issues (e.g. a low P/E is a function of inflated earnings due to a one-off gain).
So, the end result (228 companies in the Premium version) is a cleaner list, although it does not mean there will be no one or more outliers.
I was pleased to find in that list ten names that we covered in our previous write-ups here at HVG. In particular, we have discussed the following companies:
The list also has a few of the usual suspects, including homebuilders like Toll Brothers and NVR. There are quite a few Polish stocks, which is unsurprising given that this market is often neglected by global investors, being classified as ‘emerging’. Geographical proximity to Russia and Ukraine adds further risks or at least a perception of such risks.
Quite a few UK stocks also made it to the list, including B&M Retail, Inchape, Renew, Glanbia and others.
The next step in our research process after running such screens is to analyse the most interesting companies using a five-criteria approach:
1) understanding the business (e.g. what makes its products valuable and unique, what are the sources of competitive advantages);
2) how these business qualities are reflected in the key financial metrics;
3) understanding leverage;
4) assessing management; and
5) a more detailed look at valuation.
Here is a link to the top 50 companies ranked by P/E (free version).
Premium Members, you can find the entire list with 228 names in Excel at the end of this post. Please continue reading to learn which 14 stocks I have identified as the most interesting candidates for further research.
So, the end result (228 companies in the Premium version) is a cleaner list, although it does not mean there will be no one or more outliers.
I was pleased to find in that list ten names that we covered in our previous write-ups here at HVG. In particular, we have discussed the following companies:
- Wallenius Wilhelmsen ASA
- Frasers Group
- Vidrala
- Legrand
- Corpay
- Clarkson Plc
- Stella Jones
- Atkore
- Builders FirstSource
- Teleperformance
The list also has a few of the usual suspects, including homebuilders like Toll Brothers and NVR. There are quite a few Polish stocks, which is unsurprising given that this market is often neglected by global investors, being classified as ‘emerging’. Geographical proximity to Russia and Ukraine adds further risks or at least a perception of such risks.
Quite a few UK stocks also made it to the list, including B&M Retail, Inchape, Renew, Glanbia and others.
The next step in our research process after running such screens is to analyse the most interesting companies using a five-criteria approach:
1) understanding the business (e.g. what makes its products valuable and unique, what are the sources of competitive advantages);
2) how these business qualities are reflected in the key financial metrics;
3) understanding leverage;
4) assessing management; and
5) a more detailed look at valuation.
Here is a link to the top 50 companies ranked by P/E (free version).
Premium Members, you can find the entire list with 228 names in Excel at the end of this post. Please continue reading to learn which 14 stocks I have identified as the most interesting candidates for further research.