Last Updated on December 29, 2021 at 5:21 pm
Yes, you read it right. There is no typographical error in the title. A minor swap of ‘a’ and ‘e’ does make a huge difference. A “multi-beggar stock” is a casual reference to the very opposite of a multibagger stock! R Srivatsan explains how his method to spot bad businesses came good and how you can do it too!
In April 2017, R. Srivatsan (who would like to be referred to as a freefincal reader) explained how you can identify the next “Satyam”. That is, how to differentiate a good business from a bad one, using a stock valuation technique known as Earnings Power Box, introduced by Hewitt Heiserman, Jr, in his book, “It’s Earnings That Count: Finding Stocks with Earnings Power for Long-Term Profits” (available on Amazon).
Srivatsan then sent me an Earnings power module which is now part of the freefincal automated stock analyzer. Another reader, Lokesh Verma then used this to list 50 stocks with solid earnings power: Ability to self-fund and create value. Later, the analysis spreadsheet was extended to include US stocks which Hewitt Heiserman, Jr was appreciative of (private correspondence).
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
What is Hewitt Heiserman Jr.’s Earnings Power Box?
This is a plot of two the Defensive EPS (earnings per share) vs Enterprising EPS. The idea is to spot where a company falls in. This is based on the Earnings Power Valuation Model (doc file).
Srivatsan has defined enterprising and defensive EPS as follows: Enterprising EPS = (Enterprising Income)/(Shares Outstanding) and Defensive EPS = (Defensive Income)/(Shares Outstanding). Therefore:
Enterprising Income = Net Income – (15% x total capital). Here 15% is the weighted average cost of capital (WACC) and is an expected return. Also, 15% x total capital = enterprising interest.
Defensive Income = Free Cash Flow – change in working capital since last FY. Now over to Srivatsan.
Two interesting things happened this week:
- Almost 3 years back, I wrote the first draft of Heiserman’s earnings power box article (linked above)
- My friend Punith (shout out) sent me the news that Talwalkar’s fitness had gone bankrupt (this is about three months old, but did not see it earlier).
So, what’s the big deal here?
I request the readers to please take a closer look at slides 3, 17 and 18 (reproduced below) from my presentation: It’s Earnings That Count: Can you identify the next Satyam?
It was Talwalkars’ wonderful EPS graph that actually started the whole ball (avalanche?) rolling. Talwalkars was the mysterious real company X that resembled an energizer bunny on a treadmill (Kudos to the Holmes/Poirots who figured this red herring clue 🙂 )
Please remember during 2016-2017, to paraphrase Buffett bhakts – this was a dream business with a good moat, good business model (with customers paying upfront as a subscription) and the target segments becoming more and more fitness-obsessed and willing to pay more and more.
Within 2 years of Earnings power box revealing that everything is not hunky-dory; contrary to the financial results and prevailing market sentiment at that time – the company has crashed and burned.
So, this is what I request the readers to think and do:
- If your screener throws up a miraculously undervalued, hitting the 52wk lows, a too good to be true stock especially in the current scenario– run it through the earnings power box. If it falls in quadrant 3 – ruthlessly eliminate and move on.
- Use this method to review your current direct stock holdings annually (preferably after the annual report comes out) – If any of your stocks have gone into the quadrant 3 – alarm bells should be ringing.
- Eliminating a “multi-beggar” is far easier, quicker and takes very little effort and has a greater impact on our portfolio; compared to the time and effort involved in chasing that elusive “multi-bagger”.
“All I want to know is where I’m going to die, so I’ll never go there.” — Charlie Munger
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter with the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)