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Rivkin’s top ASX value stocks

Overview

What is a ‘value stock’? Here at Rivkin, we have defined ‘value’ to mean a stock that has good prospects of future share price growth based on a range of fundamental factors. 

The details of those factors are described in the next section however the quality and efficiency of the company’s earnings is a major part of the analysis. Several items from the income statement and balance sheet are evaluated to calculate Rivkin’s value score to find the highest ranked stocks on a value basis. This, therefore, is a fundamental based strategy to find companies with strong future earnings potential.  

Our team of analysts run the model each month to determine which are currently the best value stocks in the ASX 200. We will reveal five of our value stocks for this month in this article, but first, let’s make sure the process behind our stock selection is understood. (Scroll to the bottom if you wish to skip the explanation and just want the stocks.) 

“The quality and efficiency of the company’s earnings is a major part of the analysis.”

What are the fundamental criteria?

Stocks are selected from the universe of the ASX 200 index which provides a list of medium to large size companies. 

There are three primary parts to the calculation of the final score:

  1. Earnings Quality
  2. Capital Efficiency
  3. Dividend Yield

Looking at each of these three in turn will give a better picture of the selection process. 

Earnings quality is a measure of the stability and sustainability of earnings for the company. Sustainability is an important characteristic for a long-term investment as you want the company’s performance in one year to be repeatable in future years. 

For example, starting a marathon as though it is a 100m sprint may initially give the appearance of great performance but it is certain that future performance will decline drastically. Steady, sustainable earnings are therefore the first characteristic that we look for in company accounts.

Capital efficiency is a measure of how efficiently the company uses the resources at its disposal. In other words, what kind of return is the company earning relative to the amount of capital it has. 

As an analogy, consider a farmer with one harvester who harvests 1,000 acres of wheat while a second farmer harvests 1,500 acres with two harvesters. The first farmer has a higher capital efficiency because he is generating more wheat per harvester. 

For a company, this is measured by the return earned relative to capital employed (a combination of debt and equity). 

Finally, dividend yield is simply the proportion of earnings paid out as dividends on a per share basis relative to the share price. High levels of dividends relative to earnings generally represent lower growth companies as the company pays its income to shareholders rather than reinvesting them back into the business. 

On the other hand, lower relative dividends implies that the company is reinvesting earnings in an attempt to obtain capital growth. 

Our value stock ranking system looks at dividend yield to identify the growth companies.

A combination of these three factors provides the score that determines which stocks make the top of the list for the month. 

Ranking universe

The ranking process is implemented on the ASX 200, which comprises the largest 200 ASX listed companies by market capitalisation. As of the end of December 2017, the sector breakdown is as follows.

Figure 01. ASX200 sector breakdown