Radu Novitchi
Edited
๐—œ๐—ป๐˜ƒ๐—ฒ๐˜€๐˜๐—ถ๐—ป๐—ด ๐˜€๐˜๐—ฟ๐—ฎ๐˜๐—ฒ๐—ด๐—ถ๐—ฒ๐˜€ ๐—ณ๐—ผ๐—ฟ ๐—ฏ๐—ฒ๐—ด๐—ถ๐—ป๐—ป๐—ฒ๐—ฟ๐˜€ The 52-Week Low Formula: A Contrarian Strategy that Lowers Risk, Beats the Market, and Overcomes Human Emotion Today we will be discussing a strategy called "The 52-Week Low Formula" this strategy is described in book called "The 52-Week Low Formula: A Contrarian Strategy that Lowers Risk, Beats the Market, and Overcomes Human Emotion" by Luke L. Wiley I like this strategy very much because it leaves a lot of room for personalization but at the same time provides a strong framework that is proven efficient. Few takeaways from the book: - If you have a problem to solve, consider all the solutions that wonโ€™t work and, in so doing, the correct answer reveals itself. - It is about buying the โ€œright businessโ€ at its 52-Week Low versus buying โ€œany businessโ€ at its 52-Week Low - If you want to achieve above average outcomes you must be willing to take an unconventional approach. If your approach is conventional and commonly used then you guarantee average results. The 52-Week Low Formula - uses five filters, four quality filters and one price filter. 1. ๐˜ฟ๐™ค ๐™ฉ๐™๐™š๐™ฎ ๐™๐™–๐™ซ๐™š ๐™– ๐™™๐™ช๐™ง๐™–๐™—๐™ก๐™š ๐™˜๐™ค๐™ข๐™ฅ๐™š๐™ฉ๐™ž๐™ฉ๐™ž๐™ซ๐™š ๐™–๐™™๐™ซ๐™–๐™ฃ๐™ฉ๐™–๐™œ๐™š? Are they the kind of company that is hard to compete with, either because they have cornered a difficult market or because competing with them would require an unreasonably high investment by others? 2. ๐™’๐™๐™–๐™ฉ ๐™ž๐™จ ๐™ฉ๐™๐™š ๐™ฅ๐™ช๐™ง๐™˜๐™๐™–๐™จ๐™š ๐™ซ๐™–๐™ก๐™ช๐™š ๐™ค๐™› ๐™ฉ๐™๐™š ๐™˜๐™ค๐™ข๐™ฅ๐™–๐™ฃ๐™ฎ ๐™ง๐™š๐™ก๐™–๐™ฉ๐™ž๐™ซ๐™š ๐™ฉ๐™ค ๐™ž๐™ฉ๐™จ ๐™›๐™ง๐™š๐™š ๐™˜๐™–๐™จ๐™ ๐™›๐™ก๐™ค๐™ฌ? If someone were to come in and buy the entire company, would the free cash flow being generated be well in excess of simply investing in a 10-year Treasury bond? After all, the cash flow on a 10-year Treasury bond is said to be โ€œrisk-freeโ€ while the free cash flow from a company is not without risk. 3. ๐™’๐™๐™–๐™ฉโ€™๐™จ ๐™ฉ๐™๐™š ๐™ง๐™š๐™ฉ๐™ช๐™ง๐™ฃ ๐™ค๐™ฃ ๐™ž๐™ฃ๐™ซ๐™š๐™จ๐™ฉ๐™š๐™™ ๐™˜๐™–๐™ฅ๐™ž๐™ฉ๐™–๐™ก ๐™ค๐™› ๐™ฉ๐™๐™š ๐™˜๐™ค๐™ข๐™ฅ๐™–๐™ฃ๐™ฎ? Is the company using its money wisely to create returns greater than its cost of capital, or is it destroying shareholder value due to generating returns below its cost of capital? Is it using its money well to create returns, or is it taking on bad investments that donโ€™t pay off? 4. ๐˜พ๐™–๐™ฃ ๐™ž๐™ฉ ๐™ฅ๐™–๐™ฎ ๐™ค๐™›๐™› ๐™ž๐™ฉ๐™จ ๐™ก๐™ค๐™ฃ๐™œ-๐™ฉ๐™š๐™ง๐™ข ๐™™๐™š๐™—๐™ฉ ๐™ฆ๐™ช๐™ž๐™˜๐™ ๐™ก๐™ฎ ๐™ฌ๐™ž๐™ฉ๐™ ๐™›๐™ง๐™š๐™š ๐™˜๐™–๐™จ๐™ ๐™›๐™ก๐™ค๐™ฌ? There are a lot of companies out there that are making a lot of money, but should revenues stall or decelerate, could their long-term debt be paid off within a short period with free cash flow? 5. ๐™„๐™จ ๐™ž๐™ฉ ๐™ฉ๐™ง๐™–๐™™๐™ž๐™ฃ๐™œ ๐™˜๐™ก๐™ค๐™จ๐™š ๐™ฉ๐™ค ๐™ž๐™ฉ๐™จ ๐Ÿฑ๐Ÿฎ-๐™’๐™š๐™š๐™  ๐™‡๐™ค๐™ฌ? ๐—ฆ๐˜๐—ผ๐—ฐ๐—ธ ๐—ฝ๐—ถ๐—ฐ๐—ธ๐—ถ๐—ป๐—ด ๐—ฝ๐—ฟ๐—ผ๐—ฐ๐—ฒ๐—ฑ๐˜‚๐—ฟ๐—ฒ: 1. ๐˜‹๐˜ถ๐˜ณ๐˜ข๐˜ฃ๐˜ญ๐˜ฆ ๐˜ค๐˜ฐ๐˜ฎ๐˜ฑ๐˜ฆ๐˜ต๐˜ช๐˜ต๐˜ช๐˜ท๐˜ฆ ๐˜ข๐˜ฅ๐˜ท๐˜ข๐˜ฏ๐˜ต๐˜ข๐˜จ๐˜ฆ (๐˜ฎ๐˜ฐ๐˜ข๐˜ต) - yes/no ? 2. ๐˜๐˜Š๐˜ ๐˜ ๐˜ช๐˜ฆ๐˜ญ๐˜ฅ > 10-๐˜บ๐˜ฆ๐˜ข๐˜ณ ๐˜›๐˜ณ๐˜ฆ๐˜ข๐˜ด๐˜ถ๐˜ณ๐˜บ ๐˜ฃ๐˜ฐ๐˜ฏ๐˜ฅ ๐˜บ๐˜ช๐˜ฆ๐˜ญ๐˜ฅ a. FCF Yield = Free Cash Flow/Enterprise Value i. FCF - www.investopedia.com/terms/f/freecashflow.asp ii. EV - www.investopedia.com/terms/e/enterprisevalue.asp 3. ๐˜™๐˜–๐˜๐˜Š > ๐˜Š๐˜–๐˜Š (๐˜ค๐˜ฐ๐˜ด๐˜ต ๐˜ฐ๐˜ง ๐˜ค๐˜ข๐˜ฑ๐˜ช๐˜ต๐˜ข๐˜ญ) a. www.investopedia.com/terms/r/returnoninvestmentcapital.asp b. www.investopedia.com/terms/c/costofcapital.asp 4. ๐˜“๐˜ฐ๐˜ฏ๐˜จ-๐˜›๐˜ฆ๐˜ณ๐˜ฎ ๐˜‹๐˜ฆ๐˜ฃ๐˜ต ๐˜ต๐˜ฐ ๐˜๐˜ณ๐˜ฆ๐˜ฆ ๐˜Š๐˜ข๐˜ด๐˜ฉ ๐˜๐˜ญ๐˜ฐ๐˜ธ < 3 5. 10% ๐˜ง๐˜ณ๐˜ฐ๐˜ฎ 52-๐˜ž๐˜ฆ๐˜ฆ๐˜ฌ ๐˜“๐˜ฐ๐˜ธ ? ๐—ฅ๐—ถ๐˜€๐—ธ ๐— ๐—ฎ๐—ป๐—ฎ๐—ด๐—ฒ๐—บ๐—ฒ๐—ป๐˜: The risk is managed by picking quality businesses at low price, this usually happens because of negative sentiment and not underlying fundamentals. It's advised to pick around 25 stocks. ๐—ฃ๐—ฟ๐—ผ๐—ณ๐—ถ๐˜๐˜€: Profits can be taken when a particular stock is not passing some filters, if there are more than 25 stocks passed all the filters, one filter can be turned to a ranking criteria and to pick first 25 stocks and sell if one stock has dropped in the ranking. ๐—œ๐˜๐—ฒ๐—ฟ๐—ฎ๐˜๐—ถ๐—ผ๐—ป ๐—ฟ๐—ฒ๐˜๐—ฟ๐—ผ๐˜€๐—ฝ๐—ฒ๐—ฐ๐˜๐—ถ๐˜ƒ๐—ฒ: This is the step where an investor is customizing the strategy to his own needs. ๐‘๐‘œ๐‘ก๐‘’: ๐ผ๐‘› ๐‘กโ„Ž๐‘’ ๐‘๐‘ข๐‘Ÿ๐‘Ÿ๐‘’๐‘›๐‘ก ๐‘’๐‘ฅ๐‘œ๐‘Ÿ๐‘๐‘–๐‘ก๐‘Ž๐‘›๐‘ก ๐‘š๐‘Ž๐‘Ÿ๐‘˜๐‘’๐‘ก ๐‘–๐‘ก'๐‘  ๐‘๐‘œ๐‘ ๐‘ ๐‘–๐‘๐‘™๐‘’ ๐‘กโ„Ž๐‘Ž๐‘ก ๐‘›๐‘œ ๐‘๐‘œ๐‘š๐‘๐‘Ž๐‘›๐‘–๐‘’๐‘  ๐‘ค๐‘–๐‘™๐‘™ ๐‘๐‘Ž๐‘ ๐‘  ๐‘กโ„Ž๐‘’ ๐‘“๐‘–๐‘™๐‘ก๐‘’๐‘Ÿ๐‘ , ๐‘๐‘ข๐‘ก ๐‘–๐‘ก'๐‘  ๐‘–๐‘›๐‘ฃ๐‘’๐‘ ๐‘ก๐‘œ๐‘Ÿ ๐‘—๐‘œ๐‘ ๐‘ก๐‘œ ๐‘Ž๐‘‘๐‘—๐‘ข๐‘ ๐‘ก ๐‘กโ„Ž๐‘’ ๐‘“๐‘–๐‘™๐‘ก๐‘’๐‘Ÿ๐‘  ๐‘ก๐‘œ ๐‘กโ„Ž๐‘’ ๐‘๐‘ข๐‘Ÿ๐‘Ÿ๐‘’๐‘›๐‘ก ๐‘’๐‘›๐‘ฃ๐‘–๐‘Ÿ๐‘œ๐‘›๐‘š๐‘’๐‘›๐‘ก. Example : $STNE (StoneCo Ltd A), $BABA (Alibaba), $ABEV (Ambev ADR), $DISCA, $ZNGA (Zynga), $ITRI (Itron Inc), $SWBI (Smith & Wesson Brands Inc) ๐‘‡โ„Ž๐‘–๐‘  ๐‘–๐‘  ๐‘œ๐‘›๐‘™๐‘ฆ ๐‘“๐‘œ๐‘Ÿ ๐‘™๐‘’๐‘Ž๐‘Ÿ๐‘›๐‘–๐‘›๐‘” ๐‘๐‘ข๐‘Ÿ๐‘๐‘œ๐‘ ๐‘’๐‘  ๐‘–๐‘ก'๐‘  ๐‘›๐‘œ๐‘ก ๐‘Ž๐‘› ๐‘–๐‘›๐‘ฃ๐‘’๐‘ ๐‘ก๐‘–๐‘›๐‘” ๐‘Ž๐‘‘๐‘ฃ๐‘–๐‘๐‘’, ๐‘’๐‘Ž๐‘โ„Ž ๐‘–๐‘›๐‘ฃ๐‘’๐‘ ๐‘ก๐‘œ๐‘Ÿ ๐‘š๐‘ข๐‘ ๐‘ก ๐‘๐‘Ÿ๐‘’๐‘Ž๐‘ก๐‘’ ๐‘–๐‘ก'๐‘  ๐‘œ๐‘ค๐‘› ๐‘ ๐‘ก๐‘Ÿ๐‘Ž๐‘ก๐‘’๐‘”๐‘ฆ.