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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Art Bechhoefer who wrote (45944)8/28/2001 6:46:52 PM
From: Stock Farmer  Read Replies (1) of 54805
 
Regarding use of net change of book value to establish a "worth". I suggest caution because some elements of book value have questionable worth.

Not to say Book/Share is without merit amongst the valuation toolchest, but that as with all other methods, it's important to review the constituent components.

Goodwill for example. How should that be treated? JDSU shareholders might have something to say about that. If a company goes and purchases completely worthless pyramid.com for ten billion in shares, well under purchase accounting, book value goes up by 10 billion (goodwill), shares go up accordingly. Net change in book/share is zero, yet all shareholders are diluted so intrinsic value per share goes down. Hmmm....

If book/share is to be your primary tool, then at least I would suggest augmenting it to steeply discount the "gooey" assets appropriately.

One thing I do find greatly useful is to watch the change in ratio of book value amongst asset classes.

So perhaps we can agree that assets/share form a key element of valuation (this is what you are buying after all). Then add the prospective ability of the company to increase assets per share into the future (discounted forward free cash flow)... and then measure how well they do by watching the changing disposition of assets amongst the various classes.

John.
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