Screening for Saul Stocks

I’d like to take the observation currently under discussion (i.e., increasing investment in pre-profitable companies), plus the observation from a few days ago that 1YPEG is currently being de-emphasized, throw in the distinction between cash flow and net income (net income NEVER went into the bank – cash flow did! – before stock-based compensation, there was depreciation and amortization), and try to wrap it all in a tidy package…

Should we be looking at – regardless of how unpronounceable it is – a 1Y-P/FCF-G metric instead of one based on PE versus growth? Or maybe substituting P/CFFO (Cash Flow from Operations) instead of P/FCF (Free Cash Flow – which is CFFO minus maintenance CapEx)?

Anyone care to discuss?

I also note that Mr. Hochfeld favors Enterprise Value divided by Sales, which kind of ties in to the discussion Bear and I had a while back about my not thinking PE is appropriate for Chipotle, but completely respecting a discussion of appropriate market cap (I told you I wouldn’t forget, Bear). Market Cap is overwhelmingly the biggest component of Enterprise Value, at least for probably any company we would consider here. That said, I wonder if Mr. Hochfeld would still favor that metric if he weren’t so tech-focused (which, presumably, we’re not).

Additional thoughts/discussion?

I know this isn’t related to any particular stock, which might make the discussion seem inappropriate. But I think it affects how we might screen to find stocks of interest, making it potentially a useful discussion. Saul, if you don’t like the thread, just ask that discussion cease, and we will comply (I know I will).

Fool on!
Thanks and best wishes,
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Peace on Earth


Using EV is probably better than Mkt Cap, I just usually don’t bother to go to the extra trouble unless there’s a special circumstance. But whichever one you use, I would not use EV/S or P/S in a screen because they aren’t meaningful in isolation. For example, you wouldn’t want a screener for “P/S < 10” or something because you’d miss out on SHOP. Why is SHOP worth such a high PS? Because it grew 86% last year! So if I were going to screen I would look for the growth only and worry about the valuation later. The problem I usually have with screens is that I end up wasting a lot of time. Sure, ATVI shows up as high growth, but it’s because of the King Digital acquisition. Even after you weed through all the bogus hits, you still haven’t begun figuring out how the company makes money and whether you like the business. Personally I’d rather start with a company I have some reason to look into – because someone mentioned them on this board or elsewhere on the Fool or another site. There are still plenty of companies to look at, and I have the added bonus of knowing I’m not completely wasting my time if I can figure out why the recommender likes them. Perhaps I can show that person something they’re not considering and then we all learn something. Or if they’re right and I end up buying it, even better.

Hope that helps somehow.



Hi Bear,
Interesting thread. I guess my opinion would be that any screening technique is tough to make work in practice unless it is just a way to get a lot of potential companies that you are willing to sift through.

My experience is that you don’t want the outliers in any statistical category. In simplified terms a company that shows an extreme value by screening is usually at the extreme because there is a red flag somewhere. I.E., a very low PE is because the market thinks earnings are going to go down. I know that might not be a good example but the really good companies aren’t usually that cheap. I’ll use SHOP here, because I know you like it. When I have found a stock that just looked cheap on some basis, it usually doesn’t pan out. I have had much better luck finding a company growing and then make sure the numbers hold together. In summary, I want the great companies that will grow for a long time, not the one that is statistically an outlier somehow.

Finally, I do have to comment on your picking of ATVI as a reason to not just follow revenue growth. Although you are correct, that is not the reason to buy them, but i do have to say that I think they are a great selection to buy. I have owned them for a few years now. Bought most of my shares sub $15 and I still think they are a great stock. Games have been a growth industry for 15 years and there is no sign of slowing down. They have been in the midst of a economic shift in the last few years where they have begun selling their games directly to the consumer over the web. This reduces costs, increases margins and cuts out the middle man. They have also improved their economics by selling in-game improvements which is smoothing out their revenues and driving margins up even higher since the incremental costs of giving an internet player additional capabilities is basically zero!

Finally longer term, e-sports are getting more and more popular. For those who don’t watch them (me included) you might not realize the very widespread nature of these tournament’s that are viewed online. It’s not very hard to see these continuing to grow in our electronic society. And then you can throw in the potential of Virtual Reality. The next wave in gaming…

An incredibly bright future in my opinion…

Sorry for the diversion from the main thread topic…

Long ATVI (one of my top holdings)


I’d be leery of having more than a modest portion of my money in pre-profitable companies. It’s swinging for the fences, while singles and doubles are safer and can still win games handily.