My opinion is different. I am a BIG fan of ROE. For companies that show a profit, ROE is usually the first metric I look at. Of course, I make adjustments for the business (e.g. intellectual property companies with relatively little hard assets might be expected to have high roe), and for debt levels (which pump up the returns on equity).
I believe you prefer EV/ebitda or something with those metrics?
They of course are used by many professional value investors. (As is ROE by some). To compare a company's history to itself, these numbers aren't generally available, to my knowledge. Which either would mean some effort must be done to dig out the historical EV and ebitda numbers -- and I'm not into extra effort -- or else, perhaps it's not important to get and look at these numbers. If I were to compare one company to a different company in a different business, or one company to its industry averages, then EV/ebitda likely is the better metric, I would say.
Reiterating my opinion, for readers of these posts, it's not about resolving which method is better or best, it's that if we have people using different methods and yet they still come to the same conclusion that a stock is a buy, then that is a signal to the reader that he or she might want look closer at the stock for a buy too.
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One of the things I like about roe, is that for companies with a history, it's easy to see how average yearly roe changes from year to year. So I can easily see if a company has sustained its roe over many years. And since I can also see if stated equity/sh (i.e. book value) is growing, I can make some conclusions as to whether I proceed further with an analysis. If I find a company that has high returns on its book value over many years, and if book value increases over time (yearly increases are nice), then that is a company and stock I want to look at.
Quest Diagnostics is a company that's increased book value every year for at least the past ten. Returns on that bv have decreased from the 20%+ area in '04-'06 time, to 16%-19% in more recent years. Meanwhile d/e has gone up a bit. These are not trends I like to see. OTOH, the stock price has fallen too, and the company does provide an important service -- possibly to see more demand as population ages and seeks more medical procedures.
MHS sports an ROE at least as good as DGX's. MHS's book value has been moving up over the past decade. However, in the past three years, it's really risen -- more than doubled -- and so has d/e. (Maybe there's an acquisition or or business model change that accounts for this?). It comes down again to what the investor is willing to pay for this kind of performance.
Here's where I am:
MHS: pass. Too expensive for me.
COV: hold (I have a stub position from '05). Too expensive. Maybe an add though a few points lower.
BAX: pass. Nice numbers, but as discussed here earlier, I'm one who does not like the company's recent history with product quality.
BEC: hold. Possible add if it drops few more points.
DGX: Good for a small buy at current price, imo. I'll follow Jurgis Bekepuris and will place an order for Monday for a small tracking buy.
LH: Alternative to DGX, and discussed here over many years. I'll pass- a little to expensive for me. Numbers (ROE) consistently high. As with DGX, p/e is now historically low, and on that, both DGX and LH could be reversion-to-mean plays. |
