Value Screeners Identify Opportunities for Spring 2023

As investors monitor the ongoing bank rout, GuruFocus’ value screens have identified several stocks that meet investing criteria based on value legends like Benjamin Graham, Peter Lynch, Joel Greenblatt (Trades, Portfolio) and Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) co-managers Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio).

One of the website’s major Premium features, GuruFocus’ value screens include the Benjamin Graham net-net screen, the Undervalued-Predictable Screener, the Buffett-Munger Screener, the Peter Lynch Screener, the Greenblatt Magic Formula Screener and other value screeners involving historical low price-book ratios, historical low price-sales ratios or high dividend yields.

U.S. indexes continue slide as bank stocks pressure markets

On Friday, the Dow Jones Industrial Average traded at an intraday low of 31,788.60, down 457.95 points from the previous close of 32,246.55 on the back of bank stocks continuing tumbling amid a regional bank crisis.

Shares of First Republic Bank (FRC, Financial) tumbled over 25% on Friday despite several financial institutions providing the San Francisco-based regional bank with $30 billion in deposits to help serve First Republic’s consumers.

U.S. market remains modestly overvalued based on Buffett’s indicator

Buffett once opined that the ratio of total market cap to gross domestic product is probably the best single measure of where valuations stand at a given point in time. On Friday, the ratio of total market cap to the sum of gross domestic product and Federal Reserve assets stands at 112.9% approximately 18.46% higher than the 20-year-median ratio of 94.44%.

The current market valuation ratio is based on a Wilshire 5000 full cap price index of $38.765.3 billion, total gross domestic product of $26.145 trillion and total Federal Reserve assets of $8.382 trillion.

Based on current market valuation levels, the implied market return per year is 3.8% per year, assuming market valuations reverse to the median ratio.

The predicted and actual returns chart also considers an optimistic case in which market valuations reverse to 130% of the median, and a pessimistic case in which market valuations reverse to just 70% of the median. Based on the chart, the implied market return ranges from approximately -0.6% per year to approximately 6.9% per year.

Benjamin Graham Net-Net Screen

Benjamin Graham wrote in his book, “The Intelligent Investor,” that the net-net investing strategy seeks to invest in the stocks trading below 66% of net current asset value. Graham defined net-net investment capital as the sum of cash and cash equivalents, 75% of accounts receivable and 50% of total inventory minus total liabilities.

Table 1 lists the number of Benjamin Graham Net-net stocks for each GuruFocus subscription region.

Table 1

Undervalued-Predictable Screener

The Undervalued-Predictable Screener looks for stocks that have high business predictability and are undervalued based on the discounted cash flow model.

By default, the GuruFocus DCF Calculator starts with a company’s trailing 12-month earnings per share and considers two stages of growth: a growth stage of 10 years at the 10-year earnings growth rate followed by a terminal stage of 10 years at the estimated long-term inflation rate of 4%.

As of Friday, the Undervalued-Predictable model portfolio has returned a cumulative 412.32% since its inception in January 2009. The model portfolio has returned an annualized 9.59% over the past 10 years, compared to the Standard & Poor’s 500 index return of an annualized 9.75% over the same period.

Table 2 lists the number of undervalued-predictable stocks for each GuruFocus subscription region.

Table 2

Buffett-Munger Screener

The Buffett-Munger Screener lists the stocks that meet Buffett and Munger’s four-criteria approach to investing: understandable business, favorable growth prospects, shareholder-oriented management and attractive valuations. Key criteria include a high business predictability rank, increasing gross profit margins, low debt-to-asset growth rate and a price-earnings-to-growth ratio less than 2.

As of Friday, the Buffett-Munger model portfolio has returned a cumulative 332.49% since its December 2009 inception. The model portfolio returned an annualized 8.09% per year over the past 10 years.

Table 3 lists the number of Buffett-Munger stocks for each GuruFocus subscription region.

Table 3

Peter Lynch Screener

The Peter Lynch Screener lists the stocks that trade below the Fidelity Magellan Fund manager’s earnings line, which Lynch set at 15 times earnings per share.

Table 4 lists the number of Peter Lynch stocks for each GuruFocus subscription region.

Table 4

Greenblatt Magic Formula Screen

Gotham Asset Management leader Joel Greenblatt (Trades, Portfolio) wrote in his book, “The Little Book that Beats the Market,” a magic investing formula that involves the earnings yield and return on capital. Greenblatt defined earnings yield as the ratio of earnings before interest and taxes and enterprise value. Likewise, Greenblatt’s return on capital is the ratio of earnings before interest and taxes and the sum of net working capital and property, plant and equipment.

Based on Greenblatt’s magic formula, stocks with high earnings yield and return on capital have higher rank. Table 5 lists the number of magic formula stocks for each GuruFocus subscription region.

Table 5

Table 6 reports the number of stocks per GuruFocus subscription region for each of the other popular value screens.

Table 6