Identify Value Investing Targets by Calculating Returns

stride-identify-value-targets-strong-returns-featured.jpegWelcome to the next video in our 3D Value Investing series. In this video, I’ll be talking about our STRIDE scores - breaking them down, looking at whether they work or not, and showcasing their benefits. 

To recap from our last video, 3D Value Investing is made up of three dimensions: Timing, Valuation, and Fundamentals. The fundamentals are Strength, Intrinsic Value, Returns, Dividends, and Earnings Predictability. 

This time round, I'm going to be looking at Returns.

Understanding STRIDE's Scores: Returns

Wistia video thumbnail - Returns for value investing

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The following notes are taken out and adapted from the above video.

STRIDE Fundamentals: Returns

Screenshot 1

Returns is measured differently for different businesses and industries, but there is a general approach to take. We measure Returns on equity, invested capital, capital employed, and assets (in some cases).

For REITs, for which we have a new model coming soon, we look at FFO/REA (Funds From Operations / Real Estate Assets) and FFO/ Net REA.

For Banks, we look at the finance rate at two different levels.

Most importantly, though, we’re looking at how a business generates returns.

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What’s interesting to see, if you look at Returns by decile of our score, most businesses don’t generate a return (82% of all listed companies, in fact, fall below our STRIDE score target of “60”).

That means that by looking at Returns alone, you can already filter down listed companies to one fifth of their original number (18%).

Our last video looked at the Strength score and how that filters businesses out, but obviously when you couple it with other scores like Returns, you start to get a much more accurate target list.

What’s more interesting is that the largest groups in this filter are those in the ’60’ and ‘100’ range, and the fewest businesses sit between these two points.

Does STRIDE Returns Work?

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This is quite a busy chart, so bare with me.

What you’re look at is the percentage of companies (the red line) that falls into each of those deciles. We can see that ’90’ is the lowest again, and that it ticks up slightly for ‘100’. But it’s important to note the general decreasing trend of this percentage of companies as the STRIDE decile gets higher, meaning that the score is clearly filtering companies out quite strictly.

When you look at the average returns (the green line) in this graph, you’ll see that the score is working for itself. As the percentage of companies gets smaller, the average returns grow. Most importantly, you’re cutting down your target list to a smaller list of companies that generate a superior return (buying fewer companies for better returns).

In Conclusion

That really covers breaking down this score. Companies that generate superior returns deliver superior returns to shareholders, and this score separates these companies out. As Joel Greenblatt points out in his book The Little Book that Beats the Market, this can be a silver bullet.

Of course, consistency is always key and coupling this score with Earnings Predictability increases returns by over 10% on average. So stay tuned to see my next video covering Earnings Predictability, and I hope you’ve enjoyed my brief expose on Returns.

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Topics: STRIDE


3D Value Investing: Triangulating The Best Investment Targets

3D Value Investing uncovers the best businesses for investment, the fair value of those businesses and the best times to buy in and sell out. This approach to long-term investing results in higher returns with lower risk.

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