Rich Smith targets bargain-priced stocks with modest dividends.
Rich Smith
Occupation
Former lawyer turned woodworker, investor and financial writer.
Portfolio
Includes shares in Raytheon Co., Baidu Inc. and Alibaba Group Holding Ltd.
The investor
In the 1990s, Rich Smith worked as a corporate lawyer. Since 2000, his preoccupations have been woodworking, investing and writing for financial sites such as The Motley Fool.
TipRanks.com currently rates him fifth best out of 8,712 investment analysts and bloggers. Of his 469 stock picks since 2009, more than 65 per cent were profitable. The average annual return was 20 per cent in the first 12 months after his buy and sell recommendations.
How he invests
"My ideal stock has name recognition … grows at better than 10 per cent annually, carries little debt and pays a modest dividend," Mr. Smith says.
It also has to be bargain-priced when he buys. This requires an enterprise value-to-free cash flow (EV/FCF) ratio of less than 10 (enterprise value equals market capitalization plus debt minus cash; free cash flow equals cash from operations minus capital expenditures).
For high-growth companies, he looks for a rate of growth (G) that exceeds the EV/FCF ratio. In other words, the EV/FCF/G ratio needs to be less than one.
Chinese high-growth technology stocks Baidu Inc. and Alibaba Group Holding Ltd. were purchased on the basis of this latter metric. Thanks to the sell-off in Chinese stocks in recent months, they "got beaten down long enough for me to buy them," he notes.
Another holding is Raytheon Co. It pays a nice dividend and is the most geographically diversified defence contractor. One could also argue there is a greater need for defence spending nowadays as tensions grow between the superpowers and within some regions.
Raytheon's free cash flow grew 5 per cent to $1.95-billion (U.S.) in fiscal 2015. Mr. Smith thinks it will keep growing given the company's rising order backlog – nearly three-quarters of which represent U.S. Congress appropriations.
Best move
Buying some stocks during the financial crisis of 2009.
Worst move
Not buying enough stocks during the financial crisis of 2009.
Advice
"Find a system and stick with it. EV/FCF/G works for me. It was telling me to buy in 2009. I didn't, but I should have. Find the system that works for you and follow it."
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