Deep Value Scorecard - Part II

This continues on a scorecard from The Contra Guys, half of which was shown over here, yesterday. The premise was, that in order to properly assess "deep value" investments, a good scorecard is needed.

Given The Contra Guys excellent long-term record of very high returns using their contrarian investing techniques (26% return annually over 10 years), it's felt that this particular scorecard offers unusual utility. Anyway, yesterday, the first 12 items were given; today, the remaining eleven are shown:

1. Positive financial condition +1 or +2
2. Amount of time followed +1 to +4
3. Book value +1 to +2
4. Reasonable price/earnings +1
5. Downtrodden industry +1
6. Readable annual report +1
7. Public awareness +1
8. Excellent cash flow +1
9. Our understanding of the business +1
10. Possibility of a takeover +1
11. Intangibles +1
    

The benchmark of these 23 items that's required before The Contra Guys will invest is a minimum score of ten. The higher the better obviously. If you want further explanation, you can buy their book, The Contrarian Investor's 13.

Still, using this scorecard alone in assessing deep value situations isn't going to guarantee success. However, it should improve your chances of success by allowing you to more diligently assess a situation, and also ensuring that you have methodically looked at a number of different areas that can enhance returns.

Perhaps another day, I'll show you another scorecard I've used that's been well "field-tested".


JW

The Confused Capitalist

Deep Value Investing Situations: Use a Scorecard - Part I

One of the things this site promises is a "value" investing orientation. And one of the things most needed to properly assess deep value" situations is a scorecard. Without a scorecard, it's too easy to get caught up in the pessimism of the investment situation, or to become too euphoric because you think you've found the greatest thing since sliced bread.

What you need is a scorecard - and hopefully one that's been tested as having some utility over time. Over the next few days, I'm going to present one that's been used fabulously by its creators, The Contra Guys, North American deep-value investors, Benj Gallander and Ben Stadelmann. These gents run a very fine newsletter service indeed, with an enviable record has produced a 40% annual return over the past five years, and over 26% over the past ten. As with most deep value situations, trading costs are minimized by relatively long holding periods.

(Note: Since these returns are stated in Canadian dollars, the past five year record would be even higher for those whose investments are denominated in US currency.)

In their book and other places, they have produced an investing scorecard that aids them in deciding whether or not to invest in a deep value situation. Their scorecard consists of twenty-three items, to which ordinal values of between -2 to +4 can be scored for each particular measure. The scorecard will be shown over two postings here, so this only consist of approximately one-half of the measured items:

1. Recent downward share price spiral -1
   
2. Single, double, triple, quadruple price upside +1 to +4
3. Negative margin of safety -1
4. Stock is likely to undergo a share consolidation -1
5. Good or excellent management +1 to +2
6. Management ownership position +1 or +2
   
7. Insider trading -1 to +1
8. Excessive versus equitable executive compensation -1
9. High research and development expenditures +1
10. Favorable demographics +1
11. Excessive, or reasonable debt -2 to +2
12. Dividend payout +1

The rest of The Contra Guys scorecard will be presented later, within the next day or two.

JW

The Confused Capitalist