Ah, you are right, Madharry... and I am not.
I always look at p/bk, p/sales, but here - as with other gambling stocks, I forgot now that I often look at other ways that I have to evaluate them.
I don't use profit, profit growth, or cash flow. I use profit margins - which I often like to use when the standard Graham measures don't seem relevant. And for gambling stocks - you are also correct when you allude that there are none to be seen that look good on p/bk, p/sales.
There's no academic research that I know that would support me, but sometimes relative profit margins provide a tip-off to me that a stock is in buy range. And sometimes this works out. Basically, I have a multiple I'm willing to pay for the profit margin I see. So I'm willing to pay a lot more for a company with a profit margin of 21.8% (per Yahoo), than I am for a company like lottery company SGMS (which I own) with a profit margin of 10.6%. And by "pay a lot more" I can quantify that for any stock by combining profit margin metric with a price to value metric - that is, I try to evaluate how much each 1% profit margin is worth.
The big issue for me is can profit margins (I try to use average over the past few years) be sustained? As an example, Scientific Games (SGMS) gets its share of new contracts, and contracts run for several years. To me, these give more confidence that the lower SGMS margins can be sustained than higher-margin CRYP, a small company in the competitive internet gaming business, a company about which I'm not so confident or knowledgeable.
In addition, at least a couple of the gambling stocks I am holding also have special interest for me: CZR being bought out, WMS being controlled by Sumner Redstone, IGT the dominant slot maker. So you would be correct that Graham value criteria don't apply here. |
