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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Seeker of Truth who wrote (45913)8/28/2001 4:55:48 PM
From: Art Bechhoefer  Read Replies (4) of 54805
 
Malcolm, your discounted cash flow method, which is also akin to present value of future estimated earnings, is a tried and true method for determining a reasonable expectation of future stock price. Another way of looking at the issue is to calculate the estimated change in book value per share. This method gives some additional useful information:

Some high tech firms that experience giant revenue growth year after year can do it only by expending vast amounts on research and development. The earnings, especially in an off year, may be dragged down by these continuing and necessary expenditures. What an investor should look for in the final analysis is not revenue growth, earnings growth, or discounted cash flow but net change in book value per share. This measurement adjusts for the issuance of more stock or more debt, as may be necessary for fast growing companies unable to generate sufficient free cash flow internally.

Net change in book value per share is a measure of shareholder wealth resulting from ownership of the shares in question. Combined with more traditional measures such as price-earnings ratio, price to sales ratio, etc., it helps investors make an informed buy, sell, or hold decision.

Art Bechhoefer
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