Application InstructionsEach prospective club member must submit an on-line application that includes a favorite current investment recommendation. To assist you in this process, we have provided the guidelines below.

INVESTMENT IDEA- Should be about a 500 word (or more) explanation of your investment idea. The idea may be equity or bond based and either long or short. We prefer ideas whose operations are US based and follow US accounting standards. Value Investing does not necessarily require or imply that a stock must be selling at a low P/E or a low Price/Book ratio (although such opportunities may make fine investments). Excellent companies selling at a discount to their intrinsic value may also qualify as "value" investments irrespective of current P/E, Price/Book or similar ratios (e.g. the notion of value as articulated by Buffett).

Your idea should include the appropriate valuation criteria for the selected companythat may involve some of the following measures:

Price/Earnings
Total Enterprise Value ("TEV")/EBIT
Price/Book
Forward P/E
TEV/(EBITDA-maintenance cap/ex)
Price/Free Cash Flow
Price/Sales
Return on Equity and/or Assets
TEV/Sales

In addition, if any of the following valuation criteria apply to your idea, please include analysis:
  • Normalized earnings and/or free cash flow if different than current
  • Future growth rates of sales, earnings and/or free cash flow
  • Relative value to similar companies
  • Private market value
  • Break-up analysis
  • Asset valuation

Heavy insider ownership, recent open market transactions, special option grants or other evidence of extraordinary management incentives should be noted.

Please focus on any special insights that you may have into the company or the particular situation. Detailed operating descriptions can easily be found in the 10-K so space should not be wasted with readily available information that is not central to the basic investment thesis.

CATALYST- should explain what action, event, situation or future realization will cause the market to recognize the value discrepancy that you observe. Examples could include an impending regulatory/legal change, expected sale/merger, spin-off, split-off, restructuring, large buyback, product introduction, management change, or other. Sometimes no catalyst is identifiable, but value discrepancy is too large to ignore.

TEV (Total Enterprise Value)-is defined as (market capitalization(price times # of shares outstanding) plus interest bearing debt plus preferred stock minus excess cash)-this measure is used when trying to compare companies with different debt levels. For example, the relevant comparison of value between a home purchased for $1 million with 200 hundred thousand dollars in equity and an 800 hundred thousand dollar mortgage versus the value of a home purchased for $1 million in cash with no mortgage can only be made when the purchase price includes the amount of debt and equity used for the purchase.

EBIT (Earnings before interest and taxes) - EBIT is often referred to as operating income. Analyzing TEV/EBIT is a shorthand way of looking at the multiple of total "cost" of the company (market price of equity plus assumed debt) to the pre-tax cash flow generated by that company.

EBITDA (Earnings before interest, taxes, depreciation and amortization)- adds back the non-cash expenses associated with depreciation and amortization to EBIT. This is often used as a way to measure how much cash a company generates to cover interest expense. Amortization is often a legitimate add back to earnings when trying to determine a company's cash generating ability. However, adding back depreciation to cash flow is only valid when considered in conjunction with the amount of capital spending (a cash outlay) necessary to sustain the current business (see maintenance cap/ex). Therefore, EBITDA minus maintenance cap/ex is a more accurate way of arriving at cash generated to cover interest expense.

Maintenance cap/ex- this is a figure that represents the amount of capital spending necessary to sustain a company's current level of sales and earnings. Capital spending necessary for growth is not included in this number. This number is usually not disclosed and must be estimated based on information available through the company or other means. Using EBITDA as a cash flow measure without subtracting the capital expenditures necessary to keep the business running at the current level will always overstate a company's cash generating ability. The cash outlay of maintenance cap/ex can be higher or lower than the non-cash depreciation charge.

TEV/(EBITDA minus maintenance cap-x) is sometimes a better way to determine the multiple of total "cost" of the company(market price of equity plus assumed debt) to the pre-tax cash flow generated by that company. Capital spending for growth should usually not penalize the analysis of current cash flows because the benefits of that spending will not be seen until a future time and did not influence the current year's earnings. It is the analyst's job to determine whether the return from new capital spending for future growth will be adequate to justify the amount of spending.

Free Cash Flow - this figure represents cash available to shareholders before changes in working capital. It is computed by taking the net income, adding back depreciation and amortization and subtracting maintenance cap/ex.

Some helpful hints in filling out an application:

  1. Check out the recent Highest Rated ideas on the guest page
  2. We are looking for an idea that is compares favorably to our best ideas. A few of our historical favorites are as follows:
  3. Check to see if your idea has already been posted to the site, by going to ideas listed Idea Board. We will accept ideas that have been previously written up on VIC by our members; however, we will be looking for new insight or more detailedand thorough analysis than was presented in the idea and message string.
  4. Liquidations and companies trading at a discount to their cash are frequently attractive investment opportunities. However, we are trying to understand each applicant’s business analysis skills in addition to their stock picking abilities. Frequently, a simplistic liquidation does not provide ample opportunity to display such skills. More complex liquidations, which require valuation work, may show such skills.
  5. Small market capitalization ideas are fine, but as a general guideline, at least $250,000 worth of securities should trade on an average week. We understand that it is much more difficult to identify a compelling idea with $1billion of market capitalization, than one with $10mn of market capitalization and we take that into consideration when reviewing applications.
  6. Foreign ideas will be reviewed, however, their acceptance rate is much lower. There are many great international investing opportunities and a few have been presented on VIC. But, our circle of competence in evaluating ideas is with US listed companies, with US GAAP and US shareholder protections. If you have great foreign ideas, please save them for after acceptance.
  7. Risk Arbitrage situations often provide attractive risk adjusted rewards. However, the analysis skills used to determine whether a transaction is completed is often much different than the skills necessary to determine the underlying attraction of the business. Deals that provide little absolute return, but better annualized return are also less interesting. Earning 5 cents on a $2 stock in a month may provide an attractive annualized return of 30% (so long as it can be repeated each month), but we would prefer the 30% return in a single idea.
  8. There are many attractive investment opportunities in biotech and mining/commodity driven stocks, however, they often rely on specialized knowledge that makes them difficult to evaluate as application ideas. Many members enjoy reading such ideas and members are welcome to submit them, but it is generally very difficult to gain admission to VIC with an application idea of that nature.