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Strategies & Market Trends : Gorilla and King Portfolio Candidates

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To: Mike Buckley who wrote (44722)	7/20/2001 12:17:13 AM
From: Seeker of Truth	Read Replies (2) of 54805

Mike and Thomas, here's my bumbling amateurish "metric" at work on the SEBL of today. Current earnings are at the rate of 15 cents a quarter or 60 cents a year. Right away I must emphasize that since I don't have the company report, 10Q or whatever, I'm taking a big jump and assuming that's all cash flow. I'll further assume, that since SEBL is a gorilla, that it will grow at 25% per year for a decade. Very very few companies have done better than that in any decade. That's a growth of 9.31 times as your pocket calculator shows. Today money sells for 25 times earnings. In other words we get 4% interest. Probably the true rate is around 3.7% but we'll assume that the market place knows that 3.7 is at least a little abnormally low, so 4% is about right for a more average situation over the next months. At 4% a year, in ten years our money grows to 1.48 times the original amount. This assumes the money is in an untaxed pension account or we are an oil sheik and don't pay taxes to anybody. I further assume that after 10 years Sebl will have become an ordinary company and will then sell for about the same P/E that money does. For most companies the shares should bring in the same cash flow return as the equivalent in cash. The risk in buying the stock is about cancelled out by the superior average inflation resistance of stocks over cash. The ratio of 9.31 to 1.48 is about 6.3. That means that if we buy SEBL at 25 times earnings we will sextuple our money in a decade. If we buy it at 38 times earnings we will quadruple our money in the decade. In view of the strong guarantee which the pongitude gives us, quadrupling our money looks good to me. So I'd buy it at 38 times sixty cents which is $22.80. Thomas is going to say "you'll let that chance to buy a gorilla escape", which I'm regretfully inclined to agree with. Mike will probably say that I've piled too many assumptions together; the "metric" has little value. That's probably right also. I'm so determined not to overpay, not to neglect valuation, that I'll miss the train. On the other hand my valuation method got me out of SEBL in the forties which means it isn't totally crazy. If I miss one gorilla, so be it. Any opinions?? By the way, it sounds like I'm in favour of trading. Absolutely not. There's nothing I'd like better than to be able to hold forever. But placing importance on valuation means that we may be forced out of our positions some times.

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