Postcards: The One and Only Tim Melvin

I remember arriving. It gets a little hazy after that. But I do recall the second greatest gift that Tim ever gave me.                                                                                                                                                                                                                                                                                                                                                                                                                 Forwarded this email? [Subscribe here]() for more [Postcards: The One and Only Tim Melvin]( I remember arriving. It gets a little hazy after that. But I do recall the second greatest gift that Tim ever gave me. [Garrett {NAME}]( Dec 27   [READ IN APP](   Dear Fellow Expat: In late 2011… I met my in-laws. It went poorly. That Sunday afternoon, I’d gone to a football game with my father. We got into it. So, when I arrived at Tim Melvin’s townhouse, I was pretty unimpressive from the Smirnoff and Bud Lights that Dorsey and I shared. Here’s where it got worse. My wife’s brother was in charge of pouring my drinks for the rest of the night. He was… liberal with the pour. I recall two things from that evening. And ONLY two things from that evening. One, my now-wife (then disappointed girlfriend) yelled at me to get in the back of the car. Two… Tim Melvin talking about the F and Z score. Upon meeting, we had a deep conversation about fundamentals in equities. What more could you want out of a father-in-law? Oh… that and the fact that he took mercy on me… Perfect Stocks Tim calls them perfect stocks. I agree. I will take this idea and run until I’m blue in the face because it’s one of the best discoveries in the history of modern finance. Let’s dig into the basic numbers. If you want great names for the long term, AJB Capital uses three metrics that are critical to finding the best names to trade around. - The Piotroski F-score. - The Altman Z-score. - A valuation rank. - They’re optionable, meaning they have an options chain. Now, that sounds overly simple.  Well, it’s not… Because the stocks we identify have sound fundamentals — which seem to perform well in this current economy.  Let’s dive into those perfect stocks. The Perfect Stocks We start each screen by focusing on improving financial growth and low debt exposure — the F-Score tells both.  This score was created by former Stanford/Chicago Professor Joseph Piotroski.  The F-Score — or Piotroski Score — is a nine-point system that rewards each company for meeting a specific criterion on its balance sheet. If the company meets all nine criteria, it has an F-score of 9. On its own, just this number is incredibly powerful, as a strong score is a sign of outstanding financial discipline at the company. Let’s look at all nine principles.  - Positive net income: Assign 1 if the company has positive net income in the current year; otherwise, assign 0. - Positive operating cash flow: Assign 1 if the company has positive operating cash flow in the current year; otherwise, assign 0. - Increasing return on assets (ROA): Assign 1 if the company’s ROA is higher in the current year compared to the previous year; otherwise, assign 0. - Positive cash flow from operations in relation to net income: Assign 1 if the company’s operating cash flow is greater than net income; otherwise, assign 0. - Decreasing leverage: Assign 1 if the company’s long-term debt ratio is lower in the current year compared to the previous year; otherwise, assign 0. - Increasing current ratio: Assign 1 if the company’s current ratio (current assets divided by current liabilities) is higher in the current year than the previous year; otherwise, assign 0. - No dilution of shares: Assign 1 if the company did not issue additional shares of common stock in the last year; otherwise, assign 0. - Increasing gross margin: Assign 1 if the company’s gross margin (gross profit divided by sales) is higher in the current year than the previous year; otherwise, assign 0. - Increasing asset turnover: Assign 1 if the company’s asset turnover (sales divided by average total assets) is higher in the current year compared to the previous year; otherwise, assign 0. Then there’s the Altman Z-Score.  A weighted average of five metrics determines whether a company might go out of business.  So, if a company falls below 2.6, it has a risky balance sheet. Why is it risky? There are large debt loads or weak cash flow. Simple as that.  We always want to find stocks with a Z-Score of 3 or higher.  I don’t know what’s coming in the rest of 2023, let alone 2024. So, I want to ensure that I’m protected if a major credit event transpires.  We have many questions about future liquidity, and these names are the ones built to ride out a potential storm. They tell us RIGHT NOW what is working in the U.S. economy.  Finally, I added a quick valuation score. We want stocks trading at cheap buyout multiples… It’s as simple as that. Since we are fans of selling put spreads on stocks that we want to own on a monthly rotation, I’ve ensured that these stocks have liquid options chains. So, what does this list offer us heading into January? It’s a light list… because of the recent rally. Here is what the screen shows. A financial manager… a global shipping company… and a shipping company. That’s it. It speaks to what works now but also shows that this market is overstretched. I love the trucking companies right now, like Wabash National. I think it’s a great long-term play in the last-mile space. International Seaways is cheap. I couldn’t tell you a thing about Federated Hermes. But I’ll dig into it. For now, think about putting spreads on a name like WNC. I think trucking stocks are only heading higher with Yellow - a rival - going out of business. Take what the market —- and the economy are giving to you. Stay positive, Garrett {NAME} Invite your friends and earn rewards If you enjoy Postcards from the Florida Republic, share it with your friends and earn rewards when they subscribe. 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