Here are therebalan additional tickers for the upcoming reshaping:

AE ALE ARA ATO BAC BAMM BBW BONT BWS C CEC CHIC CHRS CPB CTR DBRN DF DLM DTE DUK FINL FL FMD GEHL GYI HAIN HLYS HNZ HZO JOSB JPM KSWS MW NI NWY ODP OGE PLCE POR PSS PTEN PTRY RSC RT SCVL SGU SHOO SLGN SMRT SRE TUES UNH WLFC WR WTSLA ZONS

And now for a reader question on the original reshaping candidates list:

What?s your ranking system? Have you written a note about it? Also, what was the criteria for inclusion in the list above?

I?ll probably suggest some other stocks as a function of the above. Also, as a value investor myself, I think the following pair of questions is worthy of reflection and debate: 1) Is undervaluation better thought of as a ranking factor or a safety factor – e.g. should one try to pick the most undervalued stocks so they go up the most, or should I try to pick stocks with most improving outlook and use undervaluation and/or low growth estimates as a safety net in case they blow up? 2) To what extent should I use the valuation measure that makes the most rational sense to me vs. the one that gives the best empirical match to market behavior ( fine to reference mean reversion in the answer, but I expect that one can fit data over a long time frame and still find important differences between the two).

Answering in order:

• The ranking system comes in the next phase.
• Inclusion criteria was that it looked interesting at some point in the last four months.? Anytime I get an idea, I write it down, and wait for the reshaping.? By waiting, I avoid making hasty decisions, or trusting the authority of another clever investor.
• Undervaluation — ranking or safety?? Why choose?? They are by nature both at the same time.? Truly undervalued companies have higher upside and lower downside compared to more richly valued peers.
• Your last question is one that I have thought about a lot and concluded that there is either no good answer, or the data involved is out of my reach.? If you use the one that matches market behavior, then you end up doing relative value trades, but if you use one that takes into account average valuation over time, you can play for mean reversion, but may miss some relative value.? If we had enough data, and a regression package that could do cross-sectional time-series, we could try to isolate both effects, and perhaps figure out when companies and factors are cheap, independent of each other.? Would love to try it, but that would be costly.

One more reader question:

I am interested in your feelings on GLYT. I have recently bought this company. The reported in-line earnings back in July but guided lower, and the market took out their frustrations on them.

They have shown growth both in revenues and earnings and have been pairing down their debt.

Let me know your thoughts

I’ve owned GLYT twice in the 90s.? Great management team; wish I’d never sold it, even though I made good money on it both times.? It’s more expensive today than when I owned it before, and the growth opportunities may not be as good as they were.? If it scores closer to the top of my list, I’ll take a closer look.

A note before I begin. When I do book reviews at this website, I have read the whole thing, even if I might skim some sections. In this case, I read all of it without skimming. It is a very good book on value investing. His objective is to teach you how to make money in range bound markets. Now I hadn’t thought of value investing in that way before, but it makes sense to me. If the average dollar invested in the stock market isn’t going anywhere, how can you make money? It was easy from 1982 to 2000, but what about relatively stale periods like the last seven years? During periods like that, security selection is paramount, as is willingness to adjust your portfolio to accommodate new cheap areas of the market.

He has a three part system for stock evaluation — Quality, Valuation, and Growth. He spends most of his effort on valuation, and provides the reader with a detailed and disciplined way of coming up with what P/E a stock deserves. I am not going to adopt it for myself; I already have my own methods, but someone looking for a rigorous way to value public companies could do worse than the author’s methods. (Note: this is not a full endorsement of his valuation methodology. I’d have to do a lot more work to get there. It’s credible and reasonable; it looks fair, but requires the user to make relative judgments about the character of the company being analyzed.) The methods require thought and work, but none of the formulas require anything more than grade school math, unless you want to try discounted cash flow analysis.

Other key concepts get covered in the book as well: margin of safety (and how to calculate it), buy discipline, sell discipline, contrarianism, and diversification (not too little, not too much). The idea is to not lose much when an idea goes wrong, and make money when the price of an undervalued stock returns to fair value, and sometimes overshoots it. His view on risk is similar to mine: don’t overdiversify, buy quality companies trading at a discount, sell them when they are fairly valued, or when the deteriorating fundamentals no longer justify the price. His view on international investing is similar to mine: go anywhere, but be aware of the risks.

On the whole, I found his methods to be similar to mine. Here are the differences:

1. His portfolio is more concentrated than mine. 20 stocks vs 35.
2. I have a more explicit rebalancing strategy.
3. He focuses more on growth than I do… maybe I could learn something there.
4. I spend more time on industry selection and pricing power.
5. I don’t use P/E as my primary metric.
6. I spend more time looking for ideas that are better than my current portfolio, and doing explicit swap transactions to keep my portfolio focused on value.
7. I may be wrong here, but I think I spend more time on accounting and free cash flow issues.

That said, I like Vitaliy Katsenelson’s processes and can heartily recommend this book to my readers. His book is a fine addition to the world of value investing. If you want to buy it, you may do so below. Full disclosure: I get a small cut of the proceeds from Amazon if you use the link below.

Oh, and here is the book’s website.