Chaz:
If you want to look at historical multiples, the best sources are S&P stock sheets, or Value Line reports. If you do online transactions, your broker may offer the S&P stock sheets. Otherwise your local public library will have them and the Value Line reports.
I'll offer another approach. I'll explain it in excess detail. Pick a company that interests you, and do a quote on it right here on SI. Above the box with the quote will be several options. Choose "SEC" and then take the 10-Q nearest the top. For most companies this will be the 6 month report right now. Scroll down and select "cash flow statement."
At the bottom of the first third of the cash flow statement is "cash flow from operations" or some variation of that. Write down that number and call it Good (G). A couple of lines below it will be "investments in plant, property, and equipment" or some variation of that. Write down that number also. Go back up to that first third, and write down the number for any line which mentions stock or stock options. These lines might also have phrases like "proceeds" or "tax benefits." Add up all the numbers you have collected since G and call their sum Bad (B). Now subtract B from G (G minus B). This will be very close to the real, actual, genuine profit the company's operation earned for those six months. Double it to estimate what the company would get for the full year if things hadn't fallen apart. So now you have a Profit (P) where P=2 times (G minus B).
Go "Back" from the cash flow statement, and then take the income statement. Near the bottom will be the current number of outstanding shares. Write this number down. While you are there, it is worth noting how the number changed since last year. Small change or big, shares increasing or decreasing?
Go "Back" again, and then take "Balance Sheet." Write down the figures for cash, equivalents, and debt. You should have two to four numbers.
Take the number of shares and multiply it by the current share price. You will get a number close to, but slightly different from, the market capitalization given with the quote you get. That is because your numbers are a little more correct. Now you have the market capitalization (C).
(optional: To that number C, add the debt numbers you wrote down, and subtract the cash and equivalents, to get an adjusted C. After all, if you bought the company outright, you would inherit that debt and cash.)
Divide the P you calculated from the cash flow statement by your C (original or modified). This will give you a cash earnings yield (Y). Y=P/C. Compare that number to the current 10 year bond yield. If Y is equal to or high than that bond yield, you have identified a company that is giving you a cash earnings from operations that is right now equal to or better than a bond yield. Despite the current slump, you can expect the company to give you an even better cash earnings yield going forward, right?
Here is another approach, based more upon the historical data. Using either VL or S&P data, calculate a 10 year average ROE, making sure to include periods of previous slumping. Follow the SEC steps above to find the balance sheet, and near the bottom, find the equity. Multiply the current equity by the 10 year average ROE to determine the normalized earnings. Now using your calculated capitalization C from above, you can calculate a P/normalized earnings; just divide C by the normalized earnings you have just calculated. How does that P/E compare to the low P/Es you see on your S&P stock sheet?
The above methods are fine for any company with a track record (and the first part of the first method, the calculation of P, should be part of even a qualitative evaluation of a newer company). The idea is not to be stunningly accurate, since you can't be, but rather to see if there is any obvious mispricing.
Outside the realm of looking at silverback Gs and Ks, there are many companies (many non-tech) selling at seemingly attractive prices. There are numerous newer, tech companies selling for less than cash on the books. I'm not suggesting anybody look elsewhere, and it really adds risk if one lacks expertise in some area (especially with the newer tech companies - you can't count on them returning the value of their assets).
However, for all the discussion about how bad the market is, it will be possible to make money in places - if one has some knowledge or discipline. I forget where I read it, but supposedly if an investor had made monthly investments in stocks, starting at the peak in 1929 and continuing through the great depression, they would have compounded their money at 8% for a ten year period. I know people who made money (investing long) during the 73-74 market. We had a pretty good tech market slump in the early to mid eighties, and even I was able to make good money then. So I think everybody should use this time to sharpen their analytical skills and develop their methods, for that is the way to improve your returns.
- Pirah |
