I received a very nice note from Joe at my website recently. I’m including the following excerpt in this post. Joe wrote, “What you have also done though is opened my eyes to use this (Adjusted Floor Price Scorecard) for dividend-paying stocks. As you said in your book, the momentum money has piled into these stocks creating a mismatch between adjusted floor price and price today. With that being said, I still see application where I get ‘CONTINUE’ for ‘Liquidity’ and for ‘Solvency’ (from your Scorecard, parts A and B).”
Joe asks, “Do you have any suggested applications of your (Scorecard) spreadsheet to large-cap dividend-paying stocks?”

Joe asks a great question. I’ll respond to Joe’s specific question toward the end of this post but first I’ll use the essence of his question to hone in on my Adjusted Floor Price Scorecard further. Please note that the discussion here will only make sense if you have read my book, Choose Stocks Wisely, and sought to apply the Adjusted Floor Price Scorecard, revealed and explained in the book.

Note that Joe’s question implies that he has filtered (screened) for stocks differently than my book presents in Chapter 10. It is not the purpose of this post to delve into the issue of varied approaches relative to screening for stocks but rather to delve into the Scorecard.

Joe notes a significant fact about my Scorecard relative to his mention of targeting low prices for large-cap dividend-paying companies. Joe notes that my Scorecard revealed some large dividend-paying companies which met the Scorecard’s balance sheet quality requirements for liquidity and solvency (Parts A and B). Yet these companies did not meet my low buying price requirement (determined in Parts C and D). Recall that in my book that I mentioned that the Scorecard can be used to score “any” company stock.

While the Scorecard, as presented in my book, reflects a passing grade on quality with regard to many companies, even the largest ones, very few of those same companies meet my Scorecard’s determination of a low price. In other words, many companies may get a CONTINUE on Parts A and B of my Scorecard (spreadsheet), but few will be available to buy at prices as low as the buy price determined through Parts C and D of the Scorecard. That’s because I’m really, really “cheap” when I’m looking to buy. As stated in the book, I want the risk absolutely beaten out of the price when I buy.

Joe’s question really strikes on the critical contribution of my book. The issue of quality assessment (Part A on liquidity and Part B on solvency) is the dominant Scorecard feature of the book, from my perspective on analyzing risk. It is good financial stewardship to analyze a company for the quality (health) of its balance sheet before considering an investment in that company. Even if you are not as cheap as I am when buying (that is, you would be more willing to pay a higher price relative to the balance sheet equity than I might be willing to pay), assurance about a company’s financial health before buying is essential if one is going to be wise about investing.

The greatest risk faced when investing in stocks is that of default. So, performing balance sheet quality assessment, as I’m attempting to do through the Scorecard’s parts (A) and (B), is essential to risk analysis. So, I prefer not to even discuss flexing Parts A and B of my Scorecard.

Now, parts (C) and (D) of the Scorecard carry out my stringent practice to find deeply undervalued stocks. Can Parts C and D be “flexed” to target certain types of stocks trading at what could be considered low prices (low enough to merit an investment)? That is, can my personal balance-sheet definition of a very low price be flexed any? It would be a bit over-the-top if I said that it couldn’t. I can say, though, that my disciplined practice for buying as low as defined in Parts C and D of the Scorecard is a major factor in my sizable returns. Yet, I believe it’s certainly possible that one could still make solid returns without being as strenuous in parts C and D as I am.

Let’s now return to Joe’s specific question…..do I have a suggested methodology for using the Scorecard to find a low price on large (quality) dividend paying companies?

I don’t have an approach to target a specific “type” of stock with my Scorecard…..like targeting dividend-paying stocks, for example. Again, I’m simply looking for really low-priced companies through my Parts C and D of the Scorecard. As my book describes, companies that trade at levels I’m seeking are usually way off investor radar screens. However, I recognize that making parts C and D less strenuous would enable more types of stocks to meet a low-price buying requirement.

To get at an answer to Joe’s question about the Scorecard’s potential application to a class of stocks like large-cap dividend paying stocks, I’ll say the following. It is certainly “doable” to flex the Scorecard’s pricing procedure (Parts C and D) to handle a price scoring for such a class of stocks. If dealing with large dividend-paying companies, for instance, one might hypothetically say that he/she is comfortable with doubling the “initial floor price” (initial floor price is determined in Part C of the Scorecard).

Doing something like this recognizes that large, well-established dividend-paying companies have been discovered by the market many times over and are going to be trading more on their earnings performance than on a number that is based on the amount of their balance sheet equity. Next, this “modified” initial floor price could be adjusted for 12 months’ earnings per share (eps), just as is presently done in Part D of the Scorecard to arrive at the “adjusted floor price.” I’m not suggesting actually doing this (doubling the initial floor price and adding 12 months eps for large dividend-paying stocks that meet the quality standards in Parts A and B of the Scorecard), mind you, but just saying that one could easily do “something like this.”

I’ve stayed with my cheapness in my investing practice, but have thought many times about what Joe’s question probes. So, the answer is that while I don’t have any well-researched suggested applications beyond my present Scorecard approach (which I’ve used successfully for years now) for identifying a very low price on a quality company, Joe’s question definitely alludes to the numerous potential pricing applications of the Scorecard.