Jim: more on screening ratio. Yes, seems to work on a number of these stocks. Your CR for example. With an ROE by Yahoo about 23% and a book value of $10, I can easily give you my screening opinion that this industrial manufacturer is worth more than the current $19 price. And am able to confirm that with a follow up to make sure the ROE in past years (18-21%) and book value figures give the same conclusion.
There are two screening risks. The first risk is that we are wrong when we say the stock is undervalued, i.e. selling at less than the calculated fair value. We would likely catch this in doing further research before we make the buy. If we have a number of these kinds of errors, we'll be doing excessive follow ups on stocks we'll later discard (not buy) or perhaps actually buy for an incorrect conclusion (namely that the stock is undervalued per the screen). The other risk is that the screen says the stock is selling for more than fair value, when in fact, the stock is actually undervalued. Here, to me the cost is not so great. We wrongly believe the screen and go on to the next stock. All we've done is incurred an opportunity cost. (Which yes, depending on what the company was, could be very expensive- but not money out of pocket.)
As I say, I use this as a screening tool. There are some companies I find that don't fit, but to me are good values anyway. TFX, another industrial manufacturer, with a book value of $15 and a ROE of 15-17% is not worth $34 by my formula even if it had a cost of capital of 8%. But given its great (imo) past record and low relative pe, it's a bargain (to me) at $34. If I didn't know about the company, I'd pass it right by. And some companies that do fit, I pass on. I've passed on Crane for example, because I've already got a bunch of these mid-cap, heartland industrial manufacturers, and I need a little time to digest what I've been buying here.
Paul |
