Explore investment opportunities with our Value Stock Screener, inspired by Warren Buffett and Peter Lynch's value investing principles. Analyze over 25,000 stocks globally to find undervalued companies with strong growth potential.
Buffett, known for his value investing philosophy, focuses on businesses with strong fundamentals and long-term growth potential. He emphasizes:
Lynch, famous for his management of the Magellan Fund, advocates for investing in what you know and understand. His key points include:
1. Revenue Growth
Revenue Growth measures a business’s ability to increase sales over time, reflecting its market expansion and operational success. It’s considered a vital indicator by investors like Warren Buffett and Peter Lynch for identifying companies with long-term prosperity potential. Consistent revenue growth (over 5% per annum) suggests a business’s ability to maintain a competitive edge and meet market demand effectively. This metric, especially when combined with high EPS growth, is crucial in value investing as it often leads to increased profitability and shareholder value.
2. EPS (Earnings per Share) Growth
EPS Growth measures how much a business’s net profits have increased over time, on a per-share basis. A consistent EPS growth above 10% per annum over a decade indicates a strongly growing business. Both Buffett and Lynch see consistently high EPS growth as a sign of a business’s enduring profitability and potential for long-term success. Buffett, in particular, views this as evidence of a business’s ability to increase its fair value (intrinsic value) over time.
3. EPS Growth Stability
This metric assesses the consistency of a business’s earnings growth. High stability indicates that the business has reliably grown its earnings, showing resilience against market fluctuations. Stability in earnings growth is crucial for both Buffett and Lynch. It demonstrates a business’s ability to perform well even in challenging economic conditions, aligning with their focus on long-term investment.
4. ROIC (Return on Invested Capital)
ROIC measures how effectively a business uses its invested capital to generate profits. A high ROIC (over 15% per annum) suggests that the business is making good use of its investments. High ROIC is a key metric for Buffett as it indicates efficient capital utilization by management and a strong competitive advantage. Lynch also values high ROIC as it often accompanies businesses with sustainable growth.
5. Cash Conversation Ratio (Free Cash Flow / Net Profit)
The Cash Conversion Ratio gauges a business’s efficiency in converting its net profits into free cash flow, which indicates the actual cash generated from operations. A high ratio (over 80%) demonstrates that the business isn’t just profitable on paper but also excels in cash management, reinforcing its ability to support growth, fund operations, and return value to shareholders. For Buffett, this ratio suggests a business’s financial stability, highlighting prudent management that doesn’t rely heavily on debt. Lynch views a high Cash Conversion Ratio as a sign of operational strength and resilience, indicating that a business can endure market fluctuations while still providing growth potential.
6. Interest Coverage Ratio
This ratio measures a business’s ability to pay off its interest expenses with its earnings before interest and taxes (EBIT). Both investors use this ratio to gauge a business’s debt management. A high ratio (>10) indicates that the business is not overly burdened by debt and can comfortably meet its financial obligations.
7. PEG (Price Earnings to Growth) Ratio
The PEG ratio assesses a stock’s Price / Earnings (P/E) ratio relative to its earnings growth rate. A PEG ratio below 1 suggests that a stock may be undervalued. Lynch often preferred the PEG ratio over traditional metrics like P/E ratio because it helps identify stocks that offer growth potential without being overpriced. Buffett also recognizes the value of this ratio.
8. Discount to Fair Value
A critical aspect of Buffett’s philosophy is the calculation of fair value (intrinsic value). Buffett places a strong emphasis on determining the fair value of a business based on its fundamentals and then comparing it to its market price. Our Value Stock Screener estimates the Discount to Fair Value of the stock based on two methodologies: one using historical free cash flow growth and the other using historical net profit growth. Click here for more information on the Discount to Fair Value Calculation.
It should also be noted that Buffett and Lynch place significant importance on qualitative aspects of a business, such as its business model, competitive advantage, and management quality. These are difficult to quantify in a screener, although may be reflected to some degree in the ROIC and ROE metrics. It is important to recognize that value investing decisions should not be made solely based on quantitative metrics.
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The accuracy of the data in this website is not guaranteed and it is highly recommended that you perform your own due diligence before making an investment decision by directly reviewing the business’s annual report and accompanying financial statements.
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Investopedia’s Value Investing article is an excellent resource for those new to stock investing and interested in understanding the basics of value investing. This article covers the fundamentals of value investing and offers insights into various investment strategies.
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