Do you conduct Fundamental Analysis for stocks? Describe your method briefly

I understand a large portion of the discussion on this forum is around Halal Investing - ETFs, screening rules and so forth.

Apart from that, one needs to find investments that will generate income and/or profit.

Do you conduct any fundamental analysis when looking at a stock? Briefly describe your method/tools/shortcuts/framework? or do you index via ETF?

I originally started (optimistically) using DCFs to try and figure out the intrinsic value of companies. However, I quickly found that it requires making more assumptions than I’m comfortable doing.

I then came across Deep Value Investing and it’s what I’ve been doing ever since. I’ve written more about my process here.

I also have some videos on YouTube where I do such reviews live if you’re up for watching long, rambling videos on industry reviews e.g. Live Stock Reviews - 🏠 Homebuilders - YouTube

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Well, my investment focus is primarily geared towards investing in building a dividend portfolio, so for me in this approach I tend to look at a few key indicators to get an idea about whether it’s something I want to invest in or not.

No1: I look at the ROCE - If it’s below 15% I look elsewhere

No2: I look at the EPS (Earnings per share) does it adequately cover the proposed dividend if not then I become a bit warier of investing.

I use simply wall street, alpha seekers and a couple of other websites for research into stocks I’m interested in.

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Saw the first few min of the home builder review where you covered NVR. Zoya has them compliant at 3% of revenue from mortgage banking. was your 25% revenue contribution correct? btw, i like how you were going through the different metrics. btw, on NVR there is a reason why its PE is so ‘high’ relative to the industry. Check its (1) profit margin (2) ROE (3) Balance sheet (4) Growth in EPS over 10 years. You noticed the share count decline. That is just off the charts. And yes, why pay a dividend when the EPS is growing like this and buying back stock leads to such eps growth. And finally do check 10-15 stock chart as well.

I may have heard Deep Value Investing after a long time. Would be curious to have a separate thread on it. I have been tried various styles of investing. Deep Value is a very quant approach typically bases on P/B or P/S and sometimes very low P/Es. Curious on more details.

Good luck!

excellent. thanks for sharing. Dividend investing is certainly an interesting approach. I look at total return but do have a portion of my portfolio in higher yielding stocks for income.

Would be nice to exchange thoughts on building a dividend focused portfolio. Could be its own Thread.
not familiar with the website you said . I rely on VL and SEC filings.

ROE/ ROCE is a good one. Dividend coverage as you pointed out. Ideally, EPS growth as only if that grows will the DPS grow.

Do you consider growth and valuation at all ?

Checked SEC filings on the video, it’s $140m / $938 = ~15% (and not 25% as mentioned in the video). Still significantly higher than 3% though so worth digging into where Zoya gets that figure from.

$NVR has very good profit % and RoE/RoIC, so P/E not unjustifiably high. Still, position’s flat since video went up.

I’ll setup another thread on Deep Value. It got popularized by Roaring Kitty (of GME fame) and you’re right, usually trades at fraction of TBVPS.

Thanks for the insightful comment

I think you are using % of income vs % of revenue.
If we look at % of revenue
Home building revenue $7.4B
Mortgage banking fees (revenue $200M (2.6% of total revenue)

If we see from Operating Profit,
Mortgage banking profit $140M
Home building $938
% is 140/(938+140) = 13%

I believe there is some confusion on even the basic aspect of the 5% rule. Is it 5% of revenues or is it 5% of operating profits. I believe it is sales/revenue.

maybe @saad can chime in.

It is a bit funny to think Deep Value was popularized due to GME. Deep Value investing has been around since Ben Graham - the original value investor. There is tons of material on it. I think very few people practice it. It probably has been out of favor as a strategy for a while, along with most ‘value’ / pure quant strategies.

I have made some adjustments to my approach to investing over the years. I practice Deep Value but in Japan - where there are a lot of decent quality companies trading at negative enterprise value ( Market cap less than the cash on the balance sheet) or low P/E multiples and so on. In the US, I invest using Peter Lynch approach - agnostic of value and growth. Have a balanced approach with a different mix of companies - by growth rate, nature of business, risk profile sector and so on.

Yes, that’s correct. The industry standard is to use total revenue.

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I like to use a few different metrics to assist in selecting stocks.

  1. EV/EBIT (<15, preferable below 10)
  2. ROCE > 10%
  3. Consistent or ideally growing operating margins over 10 years
  4. FCF yield >5%

Rule outs(in addition to halal criteria):

using debt to buy back stock
issuing shares to fund acquisitions
net issuing shares over a long period of time (>5 years)
cyclicals (because I’m rubbish at knowing when to sell)

I’m just aiming for 7% CAGR. Over last 3 years have achieved 6.9%. It’s under market performance. I’m still learning a lot.

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I like some of the criteria you have set up for quality and valuation as well as capital allocation.
I especially love your comment about aiming for 7% CAGR and that you are learning a lot. If i were to bet, i would see you performance edge up over time as you compound your knowledge over time. Such humility is not common in the markets! Bravo !

The 5% FCF yield may rule out some high quality companies but ruling out cyclicals is also a decent approach. Look forward to exchange notes and learn from you.

Just noticed that! You’re completely right, it should be % of revenue not income. Thanks for the comments — and looking forward to reading more of your posts.

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@Umer_Hakeem and @Craftyguy2019 and any others - Would love to hear more from you on

  • Search strategy / idea generation - how do you find / search for ideas - Process/ Tools/ etc
  • Research Process - What do you research in the first 1 hour to decide you want to continue research
  • What all do you study - qualitatively /competition / quantitatively
  • how many years back of data do you use?
  • Portfolio construction - how do you size positions
  • Sell strategy

I know these are big topics
cc: @saad we likely need a new category for fundamental analysis / research / Portfolio management.

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