We have spent timeless hours, dedicating blood, sweat and tears to deliver our value investing concept, 3D Value Investing. Through observation, investigation, trial, error and revision we have created a platform that makes value investing easy for everyone, from new to experienced investors. Our concept is based on three dimensions, hence the name 3D Value Investing. Using all three dimensions together is crucial in our selection of investment opportunities.
The three dimensions are:
- Fundamental analysis
Considering any one of these elements alone will not provide the necessary framework for accurate investment forecasting. Use them together, however, and long term investments start to perform better than ever before. The three dimensions act as lenses, each one bringing the strengths or weaknesses of any investment potential into clear focus. Together, they show 3D Value Investors exactly what they need to know to make the best, most lucrative investment choices. Over 14 years, STRIDE generated 19.25% returns per year, every year and you can too.
Over the course of the following two weeks, we will be discussing all three dimensions. In this blog we will only be focusing on the first of the three dimensions, fundamental analysis, and its components.
What is fundamental analysis?
It is a method that you use to gain a better understanding of a company, its intrinsic value and its future prospects. Essentially, you want to determine the value of a company so that you can identify if it is a good or bad investment opportunity.
Why use fundamental analysis?
In many cases the market can under- or overvalue a stock. This can be due to a wide variety of reasons. By applying fundamental analysis, you can determine the value of a stock and weigh it against its current market price. 3D Value Investors only buy strong undervalued shares. We can identify those stocks by applying a combination of the three dimension. Fundamental analysis is the first of the three dimensions and a very important part of the process as a whole. Here are the fundamental components we look at when analysing a company:
The components of fundamental analysis
To determine how well a business operates in its sector we need to know how it manages its cash, organises its balance sheet and how well it is run. Understanding the sector or sectors in which a company operates is key to determining strength.
The balance sheet of a manufacturer, for example, is completely different from that of a bank. Gaining this industry insight is difficult and requires detailed understanding of capital structure requirements.
A strong business works its cash reserves / capital and equity as hard as possible to maximise value. An investor should expect investments to generate returns that significantly beat the rate of interest offered by the bank.
If the management team has borrowed money, this should generate returns to cover debts and repayments – as well as reasonable returns for the business itself – of around 25% ideally.
We take a very unique view of balance sheets. We strip away anything intangible or shady, such as accruals, and add charges that we believe are missing, such as amortisation, writing down intangible assets. Soft assets such as patents and goodwill are discounted.
This is not the whole story in how we value a business for 3D VI but it’s a key part of the fundamental stage of our analysis. We also look at the current share price to help us understand how the business is currently valued in comparison with our calculation of its intrinsic value.
If the business pays a dividend, what percentage of your investment can you expect to receive in terms of yield?
3D VIs look specifically for companies that can afford the dividends they pay. A strong business will pay its dividends from free cash flows rather than incur debts to ensure shareholders get paid.
We are not interested in businesses weaving an image of strength whilst undermining their own value.
A perfectly healthy business might stop paying dividends for great reasons, for a long-term investment of its own, for example. Under such circumstances shareholders can expect to receive an increased dividend or superior returns later; this is why it’s vital to research the dividend history of a business to get the full picture.
Through dividend status analysis we want to see evidence of:
- Affordability - evidence that the business can fund dividends out of free cash flows.
- Consistency - are they paid regularly?
- Growth - do the dividends increase year-on-year?
A company’s attitude to its dividends offers a valuable insight into its attitude towards shareholders. However, we believe it is better to buy a business that pays no dividend and delivers superior returns, than to buy a business with a healthy dividend yield that it can ill afford.
This blended metric considers how the management team values growth. It is a historical look at growth across revenue, gross profit, overheads, EBIT and net income.
Ideally, we want to see a long-term upward trend across all areas of the business because this demonstrates a management team that understands the importance of growth at all levels.
The strength of a business is also determined by its ability to withstand external market forces and how protected it is from competition. Michael Porter, Harvard University Professor and corporate strategy expert, devised his five forces in 1979 as a means of measuring the competitive intensity of a market.
Porter categorised his competitive forces as three horizontals: the threat of emerging rivals, the threat of established rivals and the threat of substitutes; and two verticals: the bargaining power of suppliers and the bargaining power of customers.
In determining the economic moat of a business, we look for evidence of how it is combating these external threats or whether it has succeeded in eliminating them altogether. We conduct deep analysis of how the business deploys its capital and how it generates cash flows to determine whether it has a moat at all. If we find there is a moat, we need to understand its size and depth and whether it is growing or shrinking.By analysing these criteria, the 3D VI determines the width and depth of a business’s economic moat and therefore its long-term prospects in terms of market strength.
Our next blog in the 3D Value Investing blog series will cover the second dimension, value, and show you how we use it to get the most value out of a portfolio. If you can't wait, you can always download our free eBook with more in-depth coverage on the matter.
Learn more about our proven investing concept 3D Value Investing by downloading our complimentary eBook below. See how you can achieve 19.25% annualised returns.
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