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How Do You Find Value Investment Ideas?

It’s easy to drown while trying to drink from the fire hose of information that is the stock market. After 25+ years of value investing successes and failures, I’ve come up with my 11 favorite shortcuts to finding promising companies. Did I miss any shortcuts? How do you find value investment ideas? I’ve got the fire roaring, eggnog in hand, enjoying some downtime during the hectic holiday season. The New Year is approaching, which inevitably has me looking back over the investment year that was. There were some successes and, as always, there were some failures. I still flinch while thinking about my ill-timed “deworsification” into the Russian stock market. One question I always try to answer is, “How exactly did I find my best ideas?” Value investing is for investors with a long-term outlook and simply looking back over the last year is not going to be very informative. The sample size is too small and not enough time has elapsed to let investment themes play out. So instead of just looking at the past year, I decided to go back a little further. During my investment career, I have spent a substantial amount of time searching for excellent value ideas. But finding that one gem in the ocean of possible alternatives can be overwhelming. It’s easy to drown while trying to drink from the fire hose of information that is the stock market. So over time, I have unearthed many useful tools that have helped me to discover great ideas. Some of these shortcuts started off extremely useful and continue to be powerful, but some simply didn’t pan out or lost their efficacy. I went back over the last 25+ years of my investing career and tried to recall how I first stumbled across each successful investment idea. I then narrowed this list down to the top 11 ways to find new ideas that I have found most useful. The list progresses from least to most valuable. Traditional Media – I wasn’t sure if I should include media on this list as it can really be more of the delivery mechanism for the other criteria below, but I have been spurred to look closely at a company because of information I’ve gathered through various media outlets, including newspapers, television and business websites. I tend to find investable concepts more than individual stock picks using traditional media, and there is a ton of noise, but there’s a lot of good information out there if you look hard enough. Removal From an Index – Obviously, when a stock is dropped from an index, there is forced selling by index funds that hold the name. However, the index sponsors also try to game the system. Companies that are added to an index tend to be sexy and on an upward trajectory, while companies that are dropped from an index tend to be stodgy and are often out of favor. The oversold cast-offs can be an attractive place to discover value investments. New CEOs – This really depends on the specific situation. If a company’s CEO is retiring after being named Time Magazine’s “Person of the Year”, when the company’s stock price is at an all-time high, it’s not going to attract my attention. If a CEO is pushed out by the board after failing miserably, now we’re talking! A new CEO can make a huge difference in the right situation. Companies that tend to benefit the most from a change at the top tend to have a smaller market cap, a manageable debt load and strong free cash flow. Biggest Percentage Losers – I check the biggest losers list every day. Most of these stocks deserve the sell-off, but every so often a great idea can be salvaged from this discard pile. When bad news comes out, many investors sell first and ask questions later, if ever. I’ve worked as an equity analyst and I have seen this first hand. The thought of going into a client meeting with a dog that dropped 40% makes investment professionals cringe. Stocks that drop dramatically often sail right past true value. 52 Week Lows – This is another list that I check every day. What’s on the list? Why? It’s a fantastic way to spot industry trends as well as to find individual companies that have been left for dead. It’s a fantastic list to use to find bargains, but just because a stock is at a 52-week low, it doesn’t mean it’s undervalued. Exiting Bankruptcy – Companies that are overlooked with a checkered past can often lead to very attractive gains. Bondholders often receive equity when a company emerges from bankruptcy and many times they sell it quickly, depressing the company’s share price. Organizations that are exiting bankruptcy often have smaller debt loads and have shed unattractive businesses during their reorganization, yet are still covered in the taint of failure. If you feel your nose wrinkling as your face contorts into a look of disgust upon hearing the name of a company that imploded into bankruptcy, but is now emerging, you may be on to a great investment idea. Insider Buying – A sizeable open market purchase by an individual with intimate knowledge of a business can be a fantastic buy signal. However, there can be a lot of noise. Ignore small, insignificant purchases and stock acquired through options. Pay more attention to open-market purchases by company management with a good track record of buying and selling stock, especially when there is size to their trades. Gurus – Do you have a team of 20 well-paid, remarkably intelligent and highly-trained analysts at your disposal? No? Neither do I, but many successful value managers have this and much more. So why not utilize their resources? I don’t tend to get too excited when I see that 40 hedge fund managers own Apple, but when a highly-respected value manager purchases 5% of a $100 million company, then I tend to take notice. Always pay attention to the type of manager you follow as some trade frequently and utilizing their public filings is not advisable. However, there is an extended list of value managers with long-term time horizons and superior track records that trade infrequently. Untraditional Media – I would include blogs and newsletters in this category, including Seeking Alpha. Ideas from untraditional media can be hit or miss, but I’ve cultivated a small group of analysts/investors that I genuinely trust and rely on. Unlike many of the other resources I use to find investment ideas, I can assume that the ideas presented by this trusted group will be well-thought-out and worth a second look. I’m always searching for smart investors that share the same value investing methodology as myself. Sentiment – As a value investor, I want to see high negative sentiment. The more hated and despised a company is, then the more interested I become. When everyone is negative, the slightest positive news can start to move a stock upward. I have always viewed traditional academic value screens as a measure of sentiment. The reason most companies are trading in the bottom decile of book value is that they are hated. Some of my favorite valuation screens include price/book, price/sales and EV/EBITDA. If these metrics are depressed, you likely have a company with very poor sentiment. Spin-offs – I know. I’m sure many of you are cringing, wondering why you should sit through another narrative on why spin-offs are so great. I agree…but they still work. I won’t go through all of the reasons that spin-offs tend to outperform as the information is freely available across the internet. If the information is so freely available, shouldn’t the strategy stop working? Yes, it should. But when going back through my investing career, I have used the strategy to consistently find huge winners. I imagine that spin-offs will lose their ability to outperform eventually, but I don’t believe we are at that point just yet. Index funds still dump spin-offs that are not in their index and individuals still dump the 25 share position that has magically appeared on their brokerage statement. Although investors need to be more selective when investing in spin-offs today, especially when many savvy investors are familiar with the strategy, there are still excellent opportunities available. Hopefully I’ve been able to outline a strategy or two that readers will find helpful. Undoubtedly, there are many more strategies that successful investors use to uncover great value ideas that I have missed. I’d love to hear from the Seeking Alpha community. How do you find value investment ideas?

Clean Energy Fuels: Weighing The Pros Against The Cons

Summary Except for revenue, Clean Energy Fuels saw a decline in other key metrics in 2014. Clean Energy is burning through cash as it invests in infrastructure to tap the natural gas fueling market. Since natural gas-powered vehicles are expected to grow over 20 times in the next six years, it is important for Clean Energy to invest in infrastructure. Clean Energy, however, needs to make a quick turnaround in order to arrest a rapidly rising debt/equity ratio and a declining profit margin. It can be easily concluded that 2014 has been a year to forget for Clean Energy Fuels (NASDAQ: CLNE ), with the stock having depreciated almost 60%. This doesn’t come across as a surprise, because the company’s revenue growth hasn’t led to an improvement in its profitability. In addition, the company is burning through cash. The following chart will give us a bird’s eye view of Clean Energy Fuels’ problematic 2014. CLNE Revenue (NYSE: TTM ) data by YCharts But, the decline in Clean Energy’s net income, EBITDA, and cash from operations isn’t surprising at all as the company operates in an industry that’s making gains at a fast pace. According to Navigant Research , the global market for natural gas vehicles (NGVs) will reach 35 million units by the end of the decade, an impressive increase over 1.5 million units this year. Now, Clean Energy provides fueling infrastructure for these trucks. Considering the rapid pace at which the usage of NGVs is expected to grow in the future, Clean Energy needs to build up its infrastructure. This is the reason why the company’s financial performance has not been up to the mark this year, as it has aggressively invested in its infrastructure. But, the good thing is that it has positioned itself nicely for growth in the future. In fact, in 2015, its loss is expected to drop to $0.83 per share from the expected 2014 loss of $1.07 per share, translating into an improvement of 22.4%. Additionally, its revenue is slated to improve 15%. Moreover, for the next five years, Clean Energy’s bottom line is expected to continue improving at an annual rate of 25%. Factors Driving the Bullish Case The question is: Can Clean Energy actually achieve the expected growth rates? I think it can. The company recently closed two key strategic transactions with Mansfield and NG Advantage , and both these will allow it to tap key growth markets. NG Advantage has a robust compression infrastructure in place. As a result, it can provide cheaper natural gas for the facilities and vehicles of Clean Energy’s customers. Mansfield Energy, meanwhile, is a key behind-the-gate fuel provider in the U.S. It has partnerships with more than 900 petroleum hauling carriers countrywide. Through this venture, Clean Energy will operate closely with Mansfield’s haulers for transitioning their fleets to natural gas. Now, the addressable market opportunity that this joint venture has opened up is worth 3 billion gallons of diesel a year. In comparison, Clean Energy delivered 159 million gallons of natural gas in fiscal 2013. Hence, there is a big market that Clean Energy can tap as a result of the Mansfield deal. Apart from these partnerships, Clean Energy is also spending on the growth of its organic infrastructure. So far this year, Clean Energy has closed 49 station projects, and it has another 28 station projects under development. Driven by these infrastructure improvements, Clean Energy has been able to increase its customer count on the back of improved capacity. For instance, Clean Energy has signed a deal with Dillon Transport, and plans to open three truck-friendly public CNG stations to maintain Dillon’s expanding fleet of 200 natural gas trucks. Once fully deployed, these are expected to use 2.5 million gallons of fuel per year. The Bearish Case However, not everything is rosy about Clean Energy, as the following chart shows: CLNE Profit Margin ( TTM ) data by YCharts Clean Energy’s profit margin has been declining at a very fast pace, while its debt is rising at the same time. Presently, the company has total cash of $248 million, while its debt stands at $619 million. Also, as mentioned earlier in the article, it is burning through cash. The company’s operating cash flow is a negative $58 million in the past one year, while levered free cash flow is also negative at $121 million. Thus, if Clean Energy is unable to make a quick turnaround, its position might deteriorate further. This is a risk that investors need to be aware of. Conclusion As I mentioned in my bullish case, Clean Energy’s bottom line is expected to improve at an impressive pace. Given the prospects in the natural gas fueling market and Clean Energy’s own investments, there is a good probability that the company will be able to make a comeback in the future.

Portfolio Strategy For Someone Just Starting Out

Summary This article is meant for folks who are just starting out in stock investing. It focuses on how to make a beginner’s portfolio, which is well diversified, relatively safe, but at the same time offers flexibility, a learning curve and room for growth. There are other simpler and passive alternatives, like buying a few diversified ETFs, but if you like to invest in individual stocks, please read on. This article is not for everyone. I know a vast majority of Seeking Alpha readers are by and large mature investors, considering how often we see a healthy debate in the comments section. But then there are others who are just starting out and not sure how to approach investing. It could be someone fresh out of college who just started working, or someone in their early 30s (or even later) who never thought of investing until now. The first-time investor often does not know where to start. Should they invest all of their capital at once, or should they invest over time? How much do they really need to save to have a diversified portfolio and how many stocks should they invest in? Most folks, who are just starting out, will buy few random stocks based on some article or tip, without a plan. Once they have bought a few stocks, they have no long-term or exit strategy either. This article will focus on the importance of a strategy, even when you are starting out with a relatively small amount of capital and how to form a starter portfolio. Where to start: First things first. a) Determine how much money you want to invest: How much do you want to start with and how much you are going to contribute on going-forward basis? I always prefer a staggered approach to investing. – Initial Capital – Monthly contribution b) Determine your risk profile: It will depend on your age, type of job/ employment you are in, your emergency funds situation and most importantly, your risk-tolerance (% of investment capital you can afford to lose in a worst case scenario). Based on all these factors, put yourself into one of these categories – High-risk, above-average risk, moderate risk, low-risk or extreme conservative. For the last category, though, investing in individual stocks is not advised. c) Decide on a brokerage company: There are several to choose from in terms of deposit requirements, features, trading commissions and fees. Some examples are Fidelity, TD Ameritrade, E*Trade, TradeKing, Interactive Brokers, Scottrade etc. If your account size is small (less than $10,000), you would probably be better off with an ultra-low commission broker like Interactive Brokers. d) What kind of account you would want to open: This depends on your overall goals and factors like, how long can you afford to keep this money locked in? The account-types can be a simple individual taxable brokerage account, or a retirement type account like an IRA or Roth-IRA. The IRA or Roth-IRA accounts come with certain restrictions like yearly contribution limits and income limits. Also, there are restrictions as to when and under what circumstances you can withdraw from an IRA account without penalty prior to the age of 59½. Most brokerage firms list them when you attempt to open an account. Be sure you are aware of them or read them carefully. e) Write your investment goals: Yes, write them. You can choose whichever medium you would like, paper or electronic. But please, write your short-term and long-term goals for the investment portfolio you are about to start. If you are still with me, let’s begin: We will assume that you are starting out with at least $5000 (or more) and then will add some money every month to bring your first year total investment capital to $10,000. Divide your money in four buckets of 25% each. – We will call the first bucket as “Core.” – The 2nd bucket will be “Income” bucket. – The 3rd will be “Growth.” – Lastly the 4th bucket will simply be called “Cash.” This will be the money sitting in cash most of the time. 1. “CORE” Bucket: Depending upon the size of your bucket, this money should be invested in “Dividend Champions” or “Dividend Aristocrats.” The best place to start is the list called Dividend Champions maintained by SA contributor “David Fish.” This list consists of over 100 well known companies who have paid and increased dividends for at least 25 years. Some well known examples are Coca-Cola (NYSE: KO ), ExxonMobil (NYSE: XOM ), Johnson & Johnson (NYSE: JNJ ), Procter & Gamble (NYSE: PG ) etc. You could also look at the Dividend Aristocrats that are S&P500 constituents and have paid growing dividends for 25 consecutive years. If your investment money in this bucket is only $2,500, you could still buy 4 or 5 individual stocks ($500 or $600 each), provided your trading commission is minimal (say $1 per trade). If your brokerage charges $5 or more, you will be restricted to fewer companies to keep your trading costs low. 2. Income Bucket: Why income? Some might argue, “Why should someone who is just starting out care for income from the investment portfolio?” There are a couple of important reasons why I am suggesting this. First, this will allow us to diversify into alternative assets like REITs, MLPs, Bonds and Munis etc., which typically offer higher yields than the ordinary stocks, including the dividend paying stocks like JNJ, KO, PG etc. Second, the income stream can either be reinvested in the same securities to compound or accumulated to invest into new stocks. Thirdly, it adds more stability (less volatility) to the portfolio. Lastly, let’s face it – everyone likes income; it simply adds to the motivation. Below are just some examples for further research. These are not recommendations, but just a place to start your own research. REITs (Real Estate Investment Trust): Realty Income (NYSE: O ), HCP, Inc. (NYSE: HCP ), Cohen & Steers Total Return Reality (NYSE: RFI ) MLPs: Kayne Anderson MLP Investment (NYSE: KYN ), Duff & Phelps Select Energy MLP fund (NYSE: DSE ) One can choose individual MLPs, but one should be aware of the tax implications. Bond/Utility/Munis/ Preferred funds: PIMCO Dynamic Credit (NYSE: PCI ), PIMCO Dynamic Income (NYSE: PDI ), Nuveen Muni High Inc (NYSEMKT: NMZ ), Cohen & Steers Infrastructure (NYSE: UTF ), iShares US Preferred Stock (NYSEARCA: PFF ) High Yield Div Stocks: AT&T (NYSE: T ) Verizon (NYSE: VZ ) It may be best to choose one name from each of the categories above. 3. Growth Bucket: This is your money to invest in “growth,” or even somewhat speculative names, based on your individual experience, age, comfort level and risk profile. Just make sure your position sizes are small. For example, if the bucket size was $2500, do not invest more than $500 in any one stock. Basically, this is the money you can use to develop your learning curve. This is not the “buy and hold” bucket, so don’t be afraid to trade a little more frequently. Don’t be shy to sell when you can realize substantial profits. However, before you invest, always keep in mind your risk-profile, small position-sizing and due diligence. Below is one rather relatively safe strategy that you can deploy in a Bull Market. However, this will not work very well in a prolonged downturn. This is also called “momentum” trading. Every 4 to 6 months, pick the 3 most favored sectors (ETFs) of the market during the previous 3 months, and invest equal amounts in each of them. Repeat the process every 3 to 6 months. For example, in the last 3 months, the most favored sectors have been Consumer Staples, Healthcare and Technology. 4. CASH Bucket: This is your 25% cash position. In practical terms, this will vary between 15 to 20% of the total portfolio. Ideally, in a late Bull Market like we have today, this bucket should be overflowing, whereas in a downturn it can be used selectively to make good use of the opportunities that the market may offer (this means loaning money to other 3 buckets). As soon as it falls below 10-15%, a conscious effort should be made to bring it back to 20-25% level by way of diverting dividends/income or by adding fresh money. Now let’s see how well this portfolio will fare based on certain parameters: Safety: Investing can never be risk-free. However, we can manage the risk, by diversifying into different type of assets. Our (above) portfolio will have almost 50% of the capital in Cash and Core stocks. Another 25% is in alternative assets to some degree. This will provide the relative safety and low volatility during a down market. Growth: For anyone who is just starting out, “growth” is very important. Some would argue that for early stage investing (especially younger folks), 90-100% of the money should be invested in growth stocks. Theoretically this may be true, but it is easier said than done. Most folks do not have tolerance for high volatility and large drawdowns (the kind we saw in 2008) and they often end up exiting the market at just the wrong time. In contrast, this portfolio strategy is focused on investing discipline and asset diversification. The 25% cash position will provide the confidence to face any serious downturn, as it will provide opportunities to buy good companies at discounted prices. In addition, the CORE bucket should provide significant growth over a long period of time, assuming the dividends are re-invested. The 25% growth-bucket will provide better growth with time as the investor gets over the learning curve and becomes more experienced. Risks: The first risk is of course the market risk, which is true with any investment. Secondly, if you happen to invest at the tail end of the Bull Market, you are likely to face some headwinds. But one can only know this in hindsight. One way to mitigate this risk is to stagger your investments over a period of time. If you plan to contribute a regular amount on a monthly basis, this will automatically stagger your purchases. The third risk is that this portfolio is likely to underperform in a raging Bull Market (like we saw in 1990s or even in 2013), but at the same time, this will outperform in a down or sideways market. Concluding Remarks: For some, this strategy may look a little complicated for a small portfolio. However if your plan is long term and you would like to grow this into a large portfolio with regular contributions and portfolio growth, I believe this is the right approach. There are, of course, simpler and passive alternatives like buying a few diversified ETFs and these would be perfectly fine for someone who has no time or interest to study and research individual stocks. However, if you want to be an active investor, you need to have a strategy. I believe any strategy is better than none at all, since investing based on a well-defined strategy forces the investor to be more disciplined. The strategy outlined above is not perfect or complete by any means. Over time, as you develop your skills, you can make improvements and make it perform better to suit your individual temperament and needs. Full Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy.