Originally Posted by
tripled
so, theoretically speaking, what sources could a novice consult to find a company with ‘+ free cash flow’ with cash in a ‘distressed industry’? I’m asking for a friend.
congrats on those nice returns.
Thanks. First I highly recommend reading a couple books first, The Acquirer's Multiple by Tobias Carlisle and The Little Book that Beat the Market by Joel Greenblatt. Both are quick, easy reads. Pair those with Investopedia.com where you can look up any terms you don't understand and get additional education on how to read an income statement, Balance sheet, and Cashflow statement. One Up on Wallstreet by Peter Lynch is another great book to follow up with. Also a relatively quick read.
Next you begin your research which starts with selecting your screening method and a good screener. I look for companies that have low EV/EBIT multiples(Enterprise Value to Earnings Before Interest and Taxes). It's essentially a better version of Price to Earning ratio (PE Ratio) because it adds the net debt of the company to the market cap so you have a better sense of the company's capital structure. I use The Acquirer's Multiple $45 a month screener. Gurufocus(also $45) is another great screener for EV/EBIT or EV/EBITDA screening. Free screeners are plentiful but those usually limit you to PE ratio screening with no EV related screening options.
Once I run the screener I look at the cheapest companies then look for quality. I search for a company that has enough cash to cover all its long term debt, is free cash flow positive in operations, and has decent return on invested capital. Almost all the companies I listed I have never heard of in my life so it's was intriguing to learn about the businesses reading their 10k. Some of these companies are so undervalued while gushing cash I invest after less than 20 mins of reading. I typically invest in 12-15 companies (anything more than that is a pain to track) equally sized.
Overall the key to all this is to realize you are purchasing pieces of a business not pieces of paper. If you take the time to learn how to accurately value businesses in the long run the market will reward you.
In the short term the market is a voting machine, in the long term it's a weighing machine, and it's weighing the free cash flows generated by the business. Your goal is to find companies that are trading at low to rediculously low valuation relative to its cashflows.
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