Negative Quality Screens - A checklist to avoid value traps 🧵
CC: Validea
@ms89_meet @DividendGrowth
CC: Validea
@ms89_meet @DividendGrowth
Earnings That Are Expected to Fall
Analyst estimates are notoriously unreliable. But despite that, they are usually directionally correct when large deviations are forecast.
Analyst estimates are notoriously unreliable. But despite that, they are usually directionally correct when large deviations are forecast.
Cash Flows Not Keeping Up With Earnings
Cash flows are more difficult to manipulate than earnings. We filter out situations where cash flows paint a significantly worse picture of the business than earnings do.
Cash flows are more difficult to manipulate than earnings. We filter out situations where cash flows paint a significantly worse picture of the business than earnings do.
High Debt
Debt magnifies everything. If a company has problems, and most value companies do, debt makes them more difficult to overcome. We screen out the companies with the highest debt using a composite of different metrics.
Debt magnifies everything. If a company has problems, and most value companies do, debt makes them more difficult to overcome. We screen out the companies with the highest debt using a composite of different metrics.
Deteriorating Fundamentals
We have a Twin Momentum strategy that uses earnings, return on equity, return on assets, accrual operating profitability to equity, cash operating profitability to assets, gross profit to assets, and net payout to calculate a firm’s fundamental momentum
We have a Twin Momentum strategy that uses earnings, return on equity, return on assets, accrual operating profitability to equity, cash operating profitability to assets, gross profit to assets, and net payout to calculate a firm’s fundamental momentum
Poor Economic Margin
For a company to be a viable entity, it should earn a return on capital that exceeds its cost of capital. If the reverse is true, providing a company with more capital doesn’t make sense. We filter out the companies with the biggest gap.
For a company to be a viable entity, it should earn a return on capital that exceeds its cost of capital. If the reverse is true, providing a company with more capital doesn’t make sense. We filter out the companies with the biggest gap.
Low Relative Strength
If a company is at the absolute bottom of the market in terms of relative strength, often there is something very negative going on, even if it isn’t reflected in the other fundamental screens.
If a company is at the absolute bottom of the market in terms of relative strength, often there is something very negative going on, even if it isn’t reflected in the other fundamental screens.
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