How do I determine the discount?
- I usually focus on free cash flow and enterprise value (market capitalization less cash plus debt)
- I will screen through large numbers of companies by looking at the enterprise value/EBITDA ratio, though the ratio I am willing to accept tends to vary with the industry and its position in the economic cycle
- If a stock passes this loose screen, I’ll then look harder to determine a more specific price and value for the company
- I also invest in rare birds — asset plays and, to a lesser extent, arbitrage opportunities and companies selling at less than two-thirds of net value (net working capital less liabilities)
- I’ll happily mix in the types of companies favored by Warren Buffett — those with a sustainable competitive advantage, as demonstrated by longstanding and stable high returns on invested capital — if they become available at good prices.