The GeoTeam believes that developing a disciplined investing approach can greatly increase your chances of excelling in the stock market. In this regard, there are many strategies that one can employ. In this article you will get a brief glimpse of the methodologies the GeoTeam utilizes in its quest to uncover diamonds in the rough. In the end, it is not the rocket science that most professionals who want your money will make it out to be. Value investing, complimented by the GeoTeam’s calculated use of momentum-based principles, has helped to identify growth companies in a timely manner.
Define Your Company Universe For Disciplined Investing
In this step, narrowing down your potential pool of stocks is the main goal for discipline investing. Once accomplished, the rest is quite simple. Think about it. When all venues are included, there are over 20 thousand stocks floating in the United States investing universe. Sorting through the list to identify potential winners can seem like a daunting task. Although investors may have various ways of accomplishing this task, the GeoTeam believe that many become frustrated during the process. However, once a primed down list has been created, your wealth building journey can begin. The following is glimpse into the methodologies the GeoTeam utilizes to isolate a focused list of stocks from the investing universe.
Technical Triggers. While fundamental analysis remains the crux of the GeoTeam’s approach to investing, technical triggers are invaluable and accessible tools that can be used to seed your research.
- 12 month highs: widely accepted as long-term strength potential of a stock.
- 3 & 6 month highs: interim highs can offer insight into the early recovery potential of stocks during recessionary periods. These indicators can be used quite effectively to identify the stocks that lead the way out of major pullbacks.
- 3, 6 & 12 month lows: these benchmarks present investment opportunities when companies may have unjustly been beaten up by Wall Street.
Press Releases. The GeoTeam typically peruses every micro-cap company earnings press release to spot companies that:
- Report 30% quarter earnings per share growth.
- Report unfavorable earnings, but with positive commentary that could present opportunistic scenarios.
- Significantly beat analyst estimates (often applied as a day trading tool)
- Report news that meets the GeoTeam’s GeoBargain criteria.
Fundamental Screening. The premise of fundamental screening is to discover stocks that meet several of the GeoBargain criteria. Contrary to many screening strategies, we start with the most basic inputs to define our potential universe. From there, we break the mold, preferring to use too many criteria in screens as nothing can replace the human perspective, especially since a substantial amount of the data from financial vendors is inaccurate. In fact, the lack of dependable data is a growing problem for small and microcap companies.
Disciplined Investing Requires Categorizing Your Findings
Once the investment universe has been reduced to a manageable list, it is time to perform the grunt work required in discipline investing. The goal is to determine if a stock will be:
- a Bargain based on fundamentals
- a trading opportunity
Fundamental Reasoning. The main question you have to ask about your trimmed-down list is, “Are the events that led me to add these stocks to my list justified?” To make sure this question is sufficiently addressed, the GeoTeam diagnoses SEC filings, shareholder letters, company presentations, relevant press releases, analyst estimates, company guidance, conference calls and interviews. The GeoTeam also develops valuation scenarios in which the focus lies squarely on non-GAAP data as a supplement to GAAP data. After these activities are performed, the GeoTeam can determine if a stock qualifies as a GeoBargain.
There have been many instances where conference calls cleared up misunderstands arising from earnings press releases. As expected, the stocks ultimately recovered from the initial investor overreaction.
The review of SEC filings is an extremely value-added activity that, when done properly, can offer valuable insight into company specifics omitted from other publicly available information. Filings have helped the GeoTeam pinpoint important information and act on timely information in advance of less inquisitive investors.
Trading Opportunities. Although trading is a minor part of the GeoTeam’s focus, the GeoTeam realizes that it can be a lucrative activity when combined with the diagnosis of company fundamentals and seeks companies that are beating analyst estimates or internal guidance. A favorite play is to trade stocks that analysts had forecast to post a loss but turned a profit — a favorable approach because in many cases the trades run for several days.
Discarded Stocks. The stocks in the GeoTeam’s discarded lists did not meet any of the needed fundamental or trading criteria, although some may remain on watch lists if there are compelling components to their stories.
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.
Establish a Buy Discipline
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
- PE of less than 25 on four quarters forward EPS.
Alternate Undervalued Scenario – PE to Growth Comparison
- A common rule of thumb is that a stock has value if its PE is less than past and/or future EPS growth rates.
Establish a Sell Discipline
Sell disciplines are often overlooked, but are equally as important as the other disciplines. Disciplines vary with your goals, so one person’s discipline will not always parallel another person’s discipline, which is why we help our Premium Members through this process. The GeoTeam engages in sell discipline routines on a daily basis, and makes these decisions known to its Premium Members to help them navigate the volatility of the markets.
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
- 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.
Note: The GeoTeam typically uses the 20% rule and the methodical liquidation rule.