Finding value stocks – how to find stock value.

Finding value stocks – how to find stock value.

 

 

The Hunt

Hunting and the pursuit of value are instinctive traits, imbibed in our DNA from the time our ancestors roamed the jungles of Africa. However, millennia of instincts do not change overnight, they just take on a different form.

We have covered the merging of the instinct for hunting and the desire of value in our quest to find undervalued stocks. The journey of a thousand miles begins with a single step. Your journey with us in the pursuit of value is now reaching its most crucial leg. For those of us who have directly arrived at this article, we would suggest you to go through our whole series which will help you understand the discussion going on currently.

That being said, you are more than welcome to continue reading as the knowledge of previous articles is not mandatory for one to understand what we are going to talk about but that knowledge might enhance the understanding further.

 

The Karate Kid - Investor Edition

The Karate Kid was a blockbuster of its time holding within it some valuable investing lessons as well. I am talking about the 1984 edition and not the 2010 one. The primary lesson that an investor must learn is patience. Mr. Miyagi's tasks might seem menial and repetitive but their purpose becomes clearer in time.

Those same tasks instill in you a sense of discipline and a focus on fundamentals which combined with patience form the core tenet of a successful investor's psyche. Allow us to be your Mr. Miyagi and teach you what it is to become a successful investor and you, our Daniel-San would become the champion of the martial arts called value investing.

 

Wax On, Wax Off

Fundamental analysis and focus on fundamental aspects of the company should be the number one priority. The approach to do so is a top down focus, focusing on country, industry growth potential and finally on companies, company health and company's earnings. High growth combined with value are desirable qualities and it is there where investment successes are found.

Many investors find it tough to simply begin this approach because it involves reading up on macroeconomics, industry market value, growth rate, company's share price, investment criteria and tons of other stuff. At fairvalue-calculator.com, we make things simple for you so you can save all the time otherwise spent in menial efforts and concentrate on where it is really required, investment ideas and their execution.

 

The Crane Kick

Like Daniel-San discovering the crane kick when his leg was injured, investors will often find the best investment opportunities in times of adversity. We now begin the top down approach of finding value and once you figure out where the flow starts, the rest of it is simple, intuitive and flows pretty smoothly.

The biggest adversity plaguing the world since last year is the COVID-19 pandemic. The world shut down, companies suffered, did not pay dividend, bond yield went down, people suffered devastating financial impact and long term prospects of countries began to be questioned. Earnings growth was negative and free cash flow had dried up. All in all, it was a gloom and doom scenario that saw stock price and value of a stock going down across the board.

 

The Eagle suffers

The country worst affected by this pandemic was the United States of America. With high levels of obesity and a poor healthcare system with no universal healthcare, it saw lots of infection and deaths. This prompted the country to shut down and force people to stay in their homes while they managed to build healthcare infrastructure to be better able to handle the pandemic.

What happens when you lock a bunch of people home with nothing to do? People get bored and with no social life due to the pandemic, tend to turn towards entertainment to while away the time. Industries catering to providing that entertainment like gaming and broadcasting saw immense popularity and rise in business, subsequently converting earnings to growth and increasing book value per share.

 

Broadcasting the hidden treasure

A quick look at the sector analysis screener on fairvalue-calculator.com will show you that gaming as a sector is significantly overvalued and can be ignored for investment.

 

Electronic gaming and multimedia is overvalued

 

The sector that is pretty undervalued is broadcasting. The next thing one must look for is the hidden treasure. i.e. undervaluation in a sector that is booming and broadcasting turned out to be that hidden gem.

 

'The Blockbuster Killer'

Netflix began to be known as the Blockbuster killer once internet services improved and people began preferring streaming movies to visiting their local Blockbuster store. Netflix overhauled the way people chose and consumed content and the cable broadcasting industry began to feel the heat as well.

Waiting for weeks or months to know the status of your favorite TV characters or sitting through painfully long ads on nasty skin diseases to solve the suspense of the murder mystery became things of the past. All you had to do was pay a monthly subscription and watch the entire season in one go. Netflix gave rise to the term "Binge Watching"

This unprecedented success from Netflix which saw its p e ratio, p b ratio, stock price, book value, price to earnings ratio, peg ratio, price to book, market share etc grow to phenomenal levels also prompted other media companies to follow suit and launch their own streaming services and today we have as many streaming companies as we have cable TV channels.

 

Top

Streaming Burnout

The world has come full circle and the burnout from streaming services is now felt across the world. Netflix had a vast library of content from various production companies like Disney, NBC etc. to show on their platform. With each production company having their own streaming service, it became costly for subscribers to pay multiple times for multiple streaming services, instead opting for a one stop cable service.

However, what will really bring about the revival of broadcasting is their focus on local content. During the pandemic, as a responsible citizen and neighbor, our priority remains towards our community and our people. It is more important to know what is happening in your county, city or district than it is to know what is happening across the globe or some fictional show on a streaming service.

 

Vocal for Local

Investors use a personal bias when picking stocks. Investors focus on metrics & calculate fancy metrics which are often far away from profit, equity, debt, relative strength, assets and fair value stock. The focus must be on investing in a right market, with stocks having strong financial statements, earnings per share, low p e ratio/ p e ratios, low market price, low price to book ratio p b, low peg ratio high dividend yield etc.

During times of pandemic, while we are keen to know about the outside world, we are more keen to know about the local scene. Local basketball or football matches and tournaments cheer us up while weather reports and emergency information help us prepare. With no social contact, people crave for anything related to the community which is where broadcasting companies tend to shine. Investing in these companies with intrinsic value greater than stock price, investor is bound to achieve financial success.

 

NEXSTAR, the next star

Now that we know broadcasting has the potential, we now look at market leaders in this segment. Nexstar Media Group (NXST) with their local news and programming oriented focus has demonstrated strong revenue and profits, choosing to challenge the streaming juggernauts and win back market value for their industry and for their stock price.

Their tag line which is “Committed to localism, innovation & growth” drives them to acquire, develop and operate television stations throughout the United States. They also own real estate properties and strive to make money off them.

 

Broadcasting in the USA

Before understanding how Nexstar works, it is important to understand how the industry works in the United States. Commercial Broadcasting began in the USA on regular basis in 1940s and is highly regulated by the Federal Communications Commission(FCC).

A limited number of channels are available for over the air broadcasting in any one geographic area and a license to operate a television station in an area must be granted by the FCC. All television stations in the country are grouped by The Nielsen Company which is a national audience measuring service into 210 television markets known as Designated Market Areas (DMAs).

Each DMA is an exclusive geographical area consisting of all counties in which the home market commercial stations receive the greatest percentage of total viewing hours. Most television networks that you hear of like American Broadcasting Company (ABC), National Broadcasting Company (NBC) etc. take on television stations as affiliations allowing the networks access to the respective geographical areas.

 

Revenue Model

Revenue is driven by advertising. Network programming is provided to the affiliated television stations in exchange for payment of network affiliation fees and retention of a substantial portion of advertising time during the network programs. The network then sells this advertisement time and retains the revenue. The remaining portion of advertisement time is sold by the television station who keeps the revenue. Between network programming, the television station will introduce its own programming in the form of local news, movies, sporting events and other fillers like teleshopping and infotainment. The advertising revenue in local programming is completely retained by the television station like Nexstar.

 

Advertisers

Advertisers are of two types, national and local. National advertisers like car manufacturers or cell phone manufacturers give ads that are telecast across the country and local advertisers are those that target local customers like restaurants, car dealerships etc. A television station will tend to have a mix of local and national advertisers with local dominating the segment since national advertisers tend to advertise with network programs who retain that revenue. Advertiser disclosure statements will often point out to this local/national mix.

 

What works for Nexstar?

This is where we at fairvalue-calculator.com step in. Normally one has to scour the internet for data like p e ratio/ p e ratios, p b ratio, book value, price to earnings ratio, free cash flow, dividend yield, peg ratio, price to book ratio, earnings growth, price earnings, earnings per share and various other financial metrics whose list is as long as the Nile river.

At fairvalue-calculator.com, we have a database of over 35.000+ stocks from across the globe and all detailed information about each stock is available in an easy to search and readily accessible manner with emphasis on visualization of that data. The following screenshot from the website will highlight how easy it is:

 

Revenue growth of Nex

Ironically, the company's high revenue growth coincides with the growth of the streaming giant Netflix itself flying in the face of those that thought the broadcasting industry was dying. Its revenue growth is way above sector average and above our calculated target level as well.

 

Sustainability of revenue

It is not just important to grow revenue but to also have that growth be sustainable. Focus of revenue from Nextstar is on local advertisers which form 69% of the total ad revenue. Nexstar's uniqueness stems from its local, community oriented programming which in combination with local advertisement focus builds confidence amongst both advertisers and audiences alike. The revenue growth is aided by a series of acquisitions of television stations across different geographical areas allowing for the company to gain access to more markets.

Margins are another important factor because simple revenue growth does not translate into profits. Company's margins have been strong and again better than sector average

 

EBIT Margins of Nex

Finally, Return on Equity which is an earnings growth rate measure is significantly high ensuring that investors in the company's stock get the best measure for their buck with long term prospects.

 

Where is the value?

Again, here we at fairvalue-calculator.com step in. As your Mr. Miyagi, we allow you to focus on your fundamentals while we calculate the required financial metrics to help you find undervalued stocks so that you, our Daniel-san can focus on winning the right battles and not waste time to calculate the stock's financial ratios.

As we have stated before, a consensus of various financial ratios helps find undervalued stocks and we use the same principle.

 

metrics and ratios for Nex

 

All four ratios are way below their target value and p e ratio & p/c ratio are even below sector average. P/S ratio is on par with the sector. The common consensus is that it is a part of undervalued stocks and worth investing in.

 

Parting words

As a cherry on the cake, we at fairvalue-calculator.com provide ratings which make it easy to decide stock selection in a glance. Rated on fundamental and technical factors, a rating of 3 or above makes the investment candidate a worth prospect.

 

Rating of Nexst

The company's rating is a superb 4 stars on both the parameters making it a wonderful undervalued stock and suitable enough for investment. (Disclaimer: All investment strategies and investments involve risk of loss.  Nothing contained in this website should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit).t requires high levels of time, effort, dedication, perseverance and finally patience to pull off a successful analysis to find undervalued stocks. The failure rate is high and one has to sift through hundreds of stocks to find that one undervalued gem.

We at fairvalue via our premium membership make this job easy, economical and effective allowing you, our Daniel-san to focus on winning that competition called life while we guide you and assist you like Mr. Miyagi. So come join our premium membership and understand the techniques required to find undervalued stocks.