Postcards: She Knows Now, What I Didn't Know Then

Plus, let's discuss how to properly invest in this market. Go long, young man. ͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­ Forwarded this email? [Subscribe here]() for more You are a free subscriber to Postcards from the Florida Republic. To upgrade to paid and receive the daily Republic Risk Letter, [subscribe here](. --------------------------------------------------------------- [Postcards: She Knows Now, What I Didn't Know Then]( Plus, let's discuss how to properly invest in this market. Go long, young man. [Garrett {NAME}]( Feb 26   [READ IN APP](   Dear Fellow Expat: What does my daughter want to be when she grows up? “An engineer… an archeologist… and a singer.” Okay… we can work with this.  Now, she will need a lot of voice training.  And if she takes after me, she’ll need even more voice training. Archeology is basically anthropology, and it has a very low hit rate. The conversation about archeology descended into a 15-minute YouTube session of me explaining Indiana Jones to her. I told her a very important truth about some of her life’s desires. There’s not a lot of money in the middle of the bell curve for wannabe Tomb Raiders - or wannabe Taylor Swift. Only a few people in that world make a lot of money, and they’re at the tail end of the bell curve. But… engineer. Okay. “I would love to design bridges,” she says. She’s fascinated by bridges. An architectural engineer is a six-figure job. And as we later discussed, singers and archeologists always need to raise money for their projects. And whom do they ask? People with money… like engineers. “So, I could be an engineer and fund my singing career.” This child is six. She understands life and how the system works far better than I did when trying to be a novelist in my 20s. I’d love to take credit for this… but there’s something preternatural about her. All I try to do is keep the train on the tracks and get out of her way. The Models Behind the Model I’ve been receiving questions about company valuations and investment strategies…. This is something that I published in the risk letter about a week ago. We don't look at financial companies because they use different metrics. And if you’re trying to navigate the banking system, obviously, Melvin is your man](. So let’s turn our attention to businesses offering non-financial products or services… What are the logical approaches to tackling businesses? Well, I can think of three things - all three work. They need a different approach and different levels of patience. We’ll start with Warren Buffett's approach. Then, we'll dig into math-based academics. Finally, we'll discuss our hybrid method to find opportunities. Wonderful Companies at Fair Prices Warren Buffett is the CEO of Berkshire Hathaway. He has a history of successful value investing. Buffett emphasizes buying shares of great companies at fair prices. When Buffett talks about "wonderful companies,” he means businesses with key traits. They include the following: - They have a durable competitive advantage. This can come from sources like brand strength. It can also come from proprietary technology, regulatory licenses, or network effects. These moats protect them from new and existing competition. - They have shown an ability to grow revenue over time. - The company is using its capital efficiently to generate profits. - The management is skilled at running the business. They focus on adding value for shareholders. - Buffett prefers companies with simple business models. They must be within his "circle of competence." This strategy is great for assessing big, well-established businesses. I’m talking about ones with large capitalizations. These aren't startups or small-caps. We would want to find companies in the S&P 500 for long-term capital appreciation. We'll discuss this more soon. These stocks will be part of a future letter. But you know you can always find those names in Porter Stansberry’s letter “[The Big Secret on Wall Street.]( Fair Companies at Wonderful Prices Now, let's look at a different approach. I received questions about looking at the Enterprise Value to Earnings Before Interest and Tax (EV-EBIT) metric. This is a buyout multiple commonly used by private equity firms to assess value and buyout possibilities. When we look for that sort of value, consider the insights of Tobias Carlisle. Tobias is a value investor. He uses a different approach than the traditional value investing strategies of Warren Buffett. Tobias wants to buy "fair companies at wonderful prices" instead of Buffett's "buying wonderful companies at fair prices." It’s the central argument of his book “The Acquirer’s Multiple.” His approach emphasizes buying undervalued stocks that may have problems or are out of favor with investors. These "fair" companies might not have the strong competitive advantages or steady growth Buffett looks for. But, they are priced so low that they offer a large margin of safety and the potential for big returns if the company recovers or improves. The work of Benjamin Graham heavily influences Carlisle's approach. Graham is the godfather of value investing. The man advocated for buying undervalued stocks with a margin of safety. This means investing in companies with low share prices relative to their value. Even if the investor's analysis had some errors, the investment would likely still be profitable. Carlisle and other investors use various financial metrics and valuation techniques: - He looks for companies whose market price is low to its book value. Investors may undervalue companies trading at low P/B ratios. - His "Acquirer's Multiple" is a ratio of enterprise value to operating income. Carlisle’s preferred metric compares the price an acquirer would pay to buy the entire business to the company's operating earnings. - Net-nets is another strategy he uses. It involves buying companies with market caps smaller than their net current asset values. These are calculated by subtracting current assets from total liabilities. Carlisle believes that even if they are not high-quality names, the investor limits downside risk due to the low price. But, they still have a big upside if the company improves or the market reconsiders the stock. It's a Contrarian approach. It aims to profit from market overreactions and investor pessimism. I like this strategy, but I believe you can find yourself stuck waiting for these stocks to perform for a while. So, I’d prefer to do one of three things. - First, look for insider buying activity to give me clues about possible bounce-back rallies.  - Second, trade these stocks if they have wide, liquid margins.  - Third, trade them when their individual sectors turn positive and attempt to squeeze gains. A good example of a stock that fits this bill today is Valero Energy (VLO). Valero is a stock that you always buy at $120… and sell it at $140… do it over and over again. It’s clockwork. Our Hybrid Approach Now, we focus on a few things that combine these approaches in our reversion momentum strategy. - A High-Quality Management Ranking - Low Debt - Strong Capital Efficiency - Market Intrinsic Mispricing We do so using a hybrid of the Piotroski-Ben Graham model. The Piotroski-Graham model combines the analysis of financial statements with Graham's investing principles. The model aims to identify beaten-up stocks with strong financial health and earnings potential. The Piotroski-Graham model consists of two main components: The F-Score is a nine-point scoring system. It divides its criteria into three categories: profitability, leverage, and efficiency. Profitability - Positive net income in the current year - Positive cash flow from operations in the current year - Higher return on assets (ROA) in the current year compared to the previous year Leverage - Lower ratio of long-term debt to assets in the current year compared to the previous year - Higher current ratio (current assets divided by current liabilities) in the current year compared to the previous year - No new shares were issued in the current year Capital Efficiency - Higher gross margin (gross profit divided by sales) in the current year compared to the previous year - Higher asset turnover ratio (sales divided by total assets) in the current year compared to the previous year  Companies with an F-Score of 7 or 9 are considered financially strong, while those with a score of 0 to 2 are considered weak.  Graham Value Screens The second part of the Piotroski-Graham model is the Graham Value Screen. It filters for undervalued stocks based on value investing. This screen looks for companies with:  - Low price-to-earnings (P/E) ratio - Low price-to-book (P/B) ratio - Adequate size (market capitalization) - Low debt-to-equity ratio - Low Price-to-Graham Number ratio The Piotroski-Graham model combines these parts. It does this by applying the F-Score to the value-screened stocks. This approach helps investors find undervalued stocks. The stocks have strong financial health and earnings potential. This increases the chance of successful investments. Once we start to assess capital ratios and qualify the opportunities, we seek beaten-down stocks with a great potential for reversion. These types of stocks are the central players in our Model Portfolio. It’s how we found Tower Semiconductor (TSEM), which I recommended on February 1. Shares are now up 17% in a month. We recommended Ardmore Shipping (ASC) on January 1. Shares are up 11%. And this Friday we’ll add a new name to the model portfolio. Hope to see you there. Stay positive, Garrett {NAME} Secretary of Defense Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.   [Like]( [Comment]( [Restack](   © 2024 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()