Value Investing Checklist--Image from © Petrovich12 - stock.adobe.com

Value Investing Checklist

This value investing checklist will provide the user with an idea of whether or not a particular stock is undervalued. This checklist will take you less than three minutes and is a screening process all value investors should consider.. Please see the value checklist below for further details on the basic criteria a stock should meet in order to be considered for additional analysis. 

• < 15 Price-to-Earnings Ratio
• P/B x P/E = < 24.5
• Margin of Safety > 25% (Intrinsic Value* vs. Current Price)
• Current Ratio > 1.5
• Positive Free Cash Flow
• Free Cash Flow Yield > 8%
• Market Cap > $500 million
• 5Y Return on Equity > 8%
• LT Debt/Equity < 0.5
• 10Y Revenue & EPS Growth Rate > 5%
• ROIC > WACC

* Intrinsic Value = (EPS x (7 +1g) x 4.4)/Y in which Y= current 20 year AAA bond rate and g = long-term (5-10 years) earnings growth. Calculate this value then subtract it by the current price of stock. This will allow you to arrive at the stock’s margin of safety. To get this as a percentage, take the margin of safety and divide it by the current price of the stock. This calculation is attributed to Benjamin Graham but Weekly Investments LLC. has modified it to reflect a more conservative valuation and to be more aligned with present day factors.

Many of these ratios and equations can be found by utilizing online resources at Finviz, Gurufocus, and Yahoo Finance.

Very few stocks will meet all of these criteria and for those that do, it is imperative to do your due diligence on the macroeconomic and microeconomic forces which could be causing the stock to be so undervalued. This value investing checklist should be used more for eliminating stocks rather than picking them. This means the less criteria above that a stock meets, the more likely it shouldn’t be categorized as a value stock. 

For further details on how to pick stocks, visit our blog.