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Strategies & Market Trends : Fundamental Value Investing

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To: Dr_of_Microcaps who wrote (1712)	1/12/2012 4:27:32 PM
From: E_K_S	2 Recommendations of 4719

Schnitzer Steel Industries, Inc (SCHN) -Nasdaq If this was the stock you were looking at for a fair value estimate then the Graham No provides $58.81/share which is 33% below its current price of $44.28. The GN is just a starting point for me. Tangible BV is better than the stated BV, I used the YAHOO BV of $ 39.93/share. You really want to pull out goodwill and other non-asset figures. For earnings per share I used $3.85/share. You could use the analysts estimates for 2013 of $5.09 but for me that is too far out especially in a cyclical business like steel production. That moves the GN much higher to $67.62/share. The steel industry is a cyclical business and wide price swings during the multi year cycle is not unusual. The GN assumes that the BV remains constant or grows over time. The basic assets for steel companies generally fall into this category unless there is some disruptive new technology for producing steel. I recently bought Gerdau S.A. Common Stock (GGB) -NYSE . I choose GGB because they are a low cost "world" producer and will be the preferred vendor of steel for the 2016 Olympics (to be held in Brazil). At the time GGB was selling for $8.20/share and their GN was $11.16. That revealed a 36% discount to it's GN fair value. I sold my previous shares in GGB in 3/2010 at $13.32. That represented a 242% gain from my buy 18 months earlier at $5.50/share. Many times these stocks overshoot their GN fair value target and/or they continue to fall to new lows as the economic cycle worsens. Timing Buys and Sells are difficult. Therefore, I like to use the GN calculation as a way to alert me the company is selling more than 30% below it's GN fair value. Hope that helps. Remember the Graham No is just a first start for determining Fair Value and does not work for companies that sell higher than 1.5x BV (tagible BV is better if you can calculate it) and/or has a PE higher than 15. You can smooth the earnings figure by looking at five year "average" periods. It's also good to see the BV per share increasing over that five year period too. EKS.

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