Updated: Jan 14
In this use case, we focused on the best, undervalued cash generators on the American stock market and selected one to add to our virtual portfolio. 1. We selected companies with top "gross profit margin", low "Price Earnings Ratio" (PER) and high "Return On Equity" (ROE)
One of the rawest ratios we can use to judge how much money a company makes is the gross profit margin:
Now, let's plot the distribution of the gross profit margin against the price-earnings ratio for the entire American stock market :
... And select companies with an extremely high "gross profit margin" (above 80%) that are cheap enough (PER below 10). Let's zoom on this specific stocks and set a legend based on "return on equity" (ROE):
We filter the companies with the highest ROE ratio, they're the darkest points on the scatterplot. We end up with the following selection, and keep only the top 3:
Our 3 winners are:
2. We analysed the top 3 companies with a fundamental approach
Using a combination of financial ratios and important lines from the financial statement, we evaluate the 3 companies: - Dorchester Minerals LP (DMLP): the fundamentals are very solid. The cash ratio is reaching high levels with a strong upward trend. Also, the net profit margin has been systematically positive during the last 10 years meaning that the company managed to be continuously profitable.
- Immersion Corporation (MMR): the cash ratio is good but the EBITDA, EPS and net profit margin have been negative during a long period of time (2012-2017) meaning that the company had some struggles and does not look as stable as the former one.
- Exelixis (EXEL): has good overall fundamentals if we look at the last 10 years with a pleasant upward EPS trend but the net profit margin experienced a severe drop that reached a concerning low. It only became profitable very recently
3. We decided a winner and added it to our virtual portfolio
Based on the analysis above, if we had money to invest in an undervalued stock with strong fundamentals, it would be in Dorchester Minerals LP (DMLP). Let's add a first line to our virtual portfolio:
Disclaimer: this is information, not advice or recommendations. We only use this virtual portfolio as a proof of our performance overtime, we do NOT recommend visitors of the website to buy this asset.
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