James: okay, let's talk about an example, say: HGGR
Now here's a stock - Haggar - that I've always thought was "cheap", and rightly so - just a clothing company in a competitive business. In my mind this stock is always showing up on value screens and always disappointing - it was a cheap stock, is a cheap stock, and will continue to be a cheap stock -- ergo a pretty lousy investment (and always a trap for guys like Hopkins). Well that has been my impression over the past decade. But is that impression correct? Is there a point where the price of the stock is below "true value"? Looking at some numbers - five years from '92-'96 - the ROE has "fluctuated" from:
13.3
11.2
16.3
5.9
neg (in '96 and '97)
So here's how I look at it. I figure the mean ROE for this company is about 9 to 10%. (Average of the five numbers (assuming neg=0) is 9.3 and about 10.1 if you toss out the high (16.3) and low (neg.) numbers.
Not really enough years for a good estimate or to see a trend, but it's probably good enough. I'm surprised about 9 to 10%. I thought the ROE for this company would be much lower.
By my formulas, and based on the stuff I posted earlier, I figure such an ROE 9-10% indicates that the company's fair value is about .9 to 1x book value. Well, the book is $19+, so the company's fair value IMO is about 17-19. Furthermore, the book has been growing, and in this '92-'96 period, the p/bv has been above one (i.e. stock has sold somewhat above it's book value). Since, the stock is about 13+ (vs. 17-19; psr first glance looks okay), I have to conclude, the stock is indeed a bargain, and there is a good shot to make a decent return here for the value investor AS THIS COMPANY'S MGMT MAKES this ROE move up to the avg. ROE. Hopkins has actually picked a winner for value investors? I have been wrong about the company and its stock? Geez, this ruins my whole Sunday!
James, here's where we might agree:
Past performance is no guarantee.... etc. etc. As we discussed with my pick of IGT which has high ROE -- there ain't no assurance it's gonna stay good. Samo with HGGR - no indication ROE is going to get better. HGGR is having a bad time of it now -- there is nothing that says they must or will return to a better situation (higher ROE or higher stock price).
Here's where some of us might not agree:
If you set your screens for only high ROE's or "moderate" (15%??), you will miss some opportunities to see some bargains in the stocks where ROE is low. Yes, I screen for high ROE --just like everyone else (which in itself is not a good sign), but for some types of analyses, all that is required about ROE is that it be known and that it does not fluctuate so much that one is uncomfortable in calculating an average over a reasonable time frame. Okay, gotta go. Too sunny out to be in.... Paul
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