Strict discipline is an important key to successful investing. The following are disciplines that the GeoTeam generally adheres to.
Screening Discipline Checklist
Screening disciplines are used to focus on only those stocks that offer the best potential for superior returns, otherwise known as GeoBargains.
We have determined that GeoBargains largely adhere to the following criteria:
- Stock has recently attained a new 52-week high.
- Earnings per share (EPS) growth rate should generally be a minimum of 30% and increasing year over year.
- Company has the ability to grow revenues by at least 10% year over year.
- Company has strong a balance sheet.
- Return on Equity (ROE) is at least 15%.
- The companies are seeking profit margin improvements to ultimately achieve minimum pre-tax operating margins of 8%.
- The stock should generally have fewer than 50 million shares outstanding, but exceptions to this rule are routinely made.
- There is high insider ownership.
- Stock has a limited institutional ownership.
- The price-to-earnings (P/E) ratio should be less than 1/2 of earnings per share (EPS) growth rate.
These criteria are frequently attained from company interviews, press releases, conference call transcripts and financial statements.
Buy disciplines are used to explore the stocks identified during the screening process to be potentially undervalued, while keeping in mind that good companies are not always good stocks. Undervalued stocks are defined as having PE ratios that are at a 20% discount to the EPS growth rate, but exceptions to this rule are routinely made.
Additionally, in order for investors to make proper investment decisions, the GeoTeam feels it necessary to adjust EPS numbers to reflect fully taxed scenarios and any one time charges or gains. A user-friendly EPS adjustment calculator is coming soon to this site.
The GeoTeam often uses the following PE analysis to determine these potential valuation scenarios:Short Term (Now) Undervalued Scenarios
- PE of less than 25 on four quarters trailing EPS.
- PE of less than 15 on four quarters forward EPS.
Long Term (12 Months Forward) Undervalued Scenario
Alternate Undervalued Scenario - PE to Growth Comparison
- PE of less than 25 on four quarters forward EPS.
- A common rule of thumb is that a stock has value if its PE is less than past and/or future EPS growth rates.
Sell disciplines are often overlooked, but are equally as important as the other disciplines.
The GeoTeam generally utilizes the following sell disciplines:
The 20% Rule
- Liquidating your entire position after stock appreciates 20% from your initial average cost.
Short-term Target Rule
- Liquidating your entire position after stock reaches a predetermined short-term target.
Long-term Target Rule
- Liquidating your entire position after stock reaches a predetermined long-term target.
- Selling 80% of your position at a predetermined short-term target and 20% at a predetermined long-term target.
Methodical Liquidation Rule
Note: The GeoTeam typically uses the 20% rule and the methodical liquidation rule.
- After a stock gains one dollar in value from your average purchase price, you can methodically sell your position so that you will be totally liquidated by the time the stock attains your short or long-term targets. A user-friendly liquidation calculator is coming soon to this site.