Introduction
The book Buffettology describes the investment principles that Warren Buffett uses to evaluate many of his investments. This screen is inspired by these principles. The goal of the screen is to find fundamentally strong businesses with a great track record of creating shareholder value in the past 10 years, and where an investor will likely earn more than the risk free rate in the market.
Screen Details
This stock screen looks for small cap stocks between $30 million and $2 billion in market capitalization that meet the investment criteria as laid down in the Buffettology book. The company should have a 10-year track record of generally increasing EPS with no negative earnings years; long-term debt not more than 5 times annual earnings; average ROE over the past ten years at least 15%, average ROIC over the last 10 years at least 12%, and earnings yield should be higher than the long term Treasury yield. Full details of the screen are as follows.
- Earnings Yield > 3%
- EPS now > EPS 5 years ago, and EPS 5 years ago > EPS 10 years ago
- 10 year average ROE > 15%
- Long Term Debt <= 5*Net Income
- 10 year average ROIC >12%
- EPS > 0 in each of the past 10 years
The Screen Results
Stock | Company | Sector | Earnings Yield (%) | Price/Graham Number |
|---|---|---|---|---|
AMSF | Amerisafe | Financial Services | 6.7 | 1.3 |
CCF | Chase | Basic Materials | 5.8 | 1.6 |
DHIL | Diamond Hill Investments | Financial Services | 12.5 | 1.0 |
DLHC | DLH Holdings | Industrials | 9.6 | - |
EDUC | Educational Development | Communication Services | 21.4 | 0.4 |
HCKT | The Hackett Group | Technology | 7.3 | 2.4 |
ITIC | Investors Title | Financial Services | 19.8 | 0.6 |
JBSS | John B Sanfilippo & Son | Consumer Defensive | 6.6 | 1.6 |
KFRC | KForce | Industrials | 5.9 | 2.6 |
MED | Medifast | Consumer Cyclical | 8.6 | 2.1 |
MEI | Methode Electronics | Technology | 7.1 | 1.4 |
MMI | Marcus and Millichap | Real Estate | 9.8 | 1.1 |
MPX | Marine Prods | Consumer Cyclical | 7.8 | 1.5 |
MSB | Mesabi Trust | Basic Materials | 19.6 | 1.6 |
NRC | National Research | Healthcare | 4.4 | 6.7 |
NVEC | NVE | Technology | 6.1 | 1.6 |
PLBC | Plumas | Financial Services | 13.0 | 0.7 |
SJT | San Juan Basin Royalty | Energy | 7.0 | 10.6 |
VALU | Value Line | Financial Services | 3.9 | 3.1 |
WGO | Winnebago Industries | Consumer Cyclical | 20.9 | 1.2 |
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Notes and Observations
It is worth reminding that Earnings Yield is inverse of a P/E ratio and for Price/Graham Number filter, we generally want the value to be as low as possible.
This screen is not designed to give you the most undervalued companies based on any particular metric. Buffettology is different from the Grahamian screens. This screen aims to find quality companies selling at cheap to fair prices that have some moat that they can sustain over time. The value creation comes from the company's successful protection of its moat so it continues to earn a ROE in excess of the market.
However, we can certainly be partial to the cheapest of the stocks in this list.