that true value is found when corporations continuously make money and the price of their shares are low compared to historical ratios?
A company does not need to make money continously too be cheap, they don't have to make money at all, in
fact, If a company goes to enough of a discount it can be purchased and broken up for the underlying asset
value. But the underlying assets have to be there.
During the a complete business cycle, most companies will have reduced revenues, earnings, and lower
profit margins during the "winter" season. In fact, many companies lose money, and sometimes quite a bit.
An important aspect of whether companies, and assets are a good value, depends upon the quantities of Money
in the economic system, as well as the holders of the Liquidity (Money) have to have the desire to spend it on
companies, and assets that they believe will earn a higher rate of return. That's one issue that several have
mentioned recently, that the banks can have more money to lend and at lower rates, but it does not help, the
debt laden businesses that are excluded from borrowing it.
Value much like beauty can sometimes be in the eye of the beholder. If a company is selling at 80% of
book value, it may not look like a good value if there are 10 of them to choose from, and one believes
that it's moving in the direction of being worth only half of book value. And if 10 companies are for sale, it
means that there is too much supply for what ever they are producing. Half of the companies may have to
be scrapped before the other half can be viable, ongoing businesses. If businesses and people stop spending and
curb consumption, then the economy and values of assets contract.
There is clearly a psychological aspect to human behavior and the business cycle. Individuals, Companies and
Governments make bets, assumptions, and forecasts everyday as to which version of the future will unfold.
But History is a good guide or at least the best one we have, and you raise the excellent point that we can
compare companies and there share prices to historical ratios.
Would it make sense to say that true value is found when corporations continuously make money and the price of their shares are low compared to historical ratios?
that's why some wall street analysts look to the past and have found that the semiconductor sector, which has
historically been cyclical in nature, often bottoms in price when the stocks sell for about 1 times sales.
technicians note that using Dorsey Wright's point and figure percentage bullish readings for the Semiconductor
sector, bottoms occur when the percent of bullish stocks declines all the way down to only 4 to 8%. (8% is
where we currently are, so there is some evidence that we're getting close to an inflection point)
Using Historical Ratio's we've seen at the end of the last two large bear markets of the past 40 years, Dec 1974
and Aug of 1982, that when the S & P 500 sells for 80% of book value, prices have gotten cheap and it's a
good time to buy for a secular bull market.
But that does not mean that lots of money were not made buying the market in May of 1970, so long as one
sold the following year or so.
John |
