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08 Oct | My New Investment Philosophy – Part III

This post is a follow on from the My New Investment Philosophy and My New Investment Philosophy Part II posts I wrote last week.

So without delay, on to the criteria:

Criterion Number 1 – Market Cap > £9M and < £900M

Basically I’m looking for companies not too small to be flying well below the radar of your average investor. Minnows often quote outrageous spreads and have thinly traded markets that tend to drift south on infrequent news. That’s not to say there’s no money to be made from companies with a minuscule market cap, just that they’re not the type of company I am fishing for here.

On the other end of the scale, I’m seeking companies that are not too big to have the potential for some explosive growth. I don’t want great news being swallowed up in the machinations of a multi-billion pound behemoth.

Criterion Number 2 – Return on Equity > 5%

Companies exist to make money. Well, not always the ones I’ve invested in in the past but this should be fairly high on the wish list of any Board of Directors. So with that in mind, I’m looking for companies where attributable profit that is equal to or greater than 5% of shareholder equity. 5% is an arbitrary figure that I could play with down the line to either invite more companies in to my returned result set or narrow the number of companies returned.

Criterion Number 3 – Earnings Per Share (EPS) Growth % > 0

By ensuring that earnings per share are up on last year, it’s another indicator that things are – of late at least – moving in the right direction.

Criterion Number 4 – Market to Book Ratio (MBV) < 2.0

Market to Book Ratio (or Price to Book Value), is the ratio of the current share price to the book value per share. It’s a classic value investing ratio that I ummed and ahhed about adding to this set of criteria. On a very basic level, the lower the ratio, the less value the market places in a particular equity, although it must be noted that this ratio will vary dramatically on an industry to industry and even a company to company basis.

But at the end of the day, what criteria make into your own screen is totally up to you. I like the idea of its inclusion but understand that MBV alone means litte without looking into all of the fundamentals and issues behind it.

Criterion Number 5 – Current Ratio > 0.75

Being invested in a company with a stack of short term debt and little in the way of an ability to repay it, is a recipe for disaster. A current ratio greater than one implies that – if required – all short term debt can be met by a company’s short term assets.

I’ll be back later in the week with criteria 6 through 11.

Thanks again for dropping by.