| | | Graham Osborn, I value these companies based on their high margins.
Chinese demand for consumer products will continue. Alibaba growth will continue (in my view).
My favorite quickie short screen (Cap > 100B, EV/ Rev > 10, exclude financial institutions) turns up 6 stocks:
If this works for you, okay. Since I foresee BABA revenue continuing to grow at a rapid pace, I would view that 15x number for BABA declining as the revenue increases outpace the growth in enterprise value.
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Fwiw, there's some information at alphaarchitect, wherein they question the use of profitability (gross profits-to-assets) as a desirable factor in making some investment decisions. One of the base articles (for gross profitability as a predictor) is: rnm.simon.rochester.edu. Another is the five-factor asset pricing model of Fama and French. poseidon01.ssrn.com
The alphaarchitect stuff is in an article entitled: "Using Profitability as a Factor? Perhaps You Should Think Twice": blog.alphaarchitect.com
I have used profitability (high net margins) for many years for stocks with high price:book value, high or no p/e's. I have posted such many times here. I would say my results in using profitablity (margin) analyses have been relatively okay-- satisfactory but unsatisfying. Unsatisfying because I've not made the big enough bets that I should have that the method and stock selection would work out as well as they did. Even now with BABA, my position is very small and I'm afeard to make a big bet.
There would be perhaps two ways to look at these stocks: One, where you see enormously high price-to-sales (17x per Yahoo!), not much history, huge market cap, not much earnings --> ergo a potential short --> how might I use metrics to assist me in justifying shorting it? Another way, where I see its profitability, the company's possibility of maintaining that, the rapid rise in sales, the potential for further sales increases, its first-mover advantage, it's okay balance sheet (more cash than debt), (maybe all offset though that it could at some point be a target of the Chinese governt)-->so how might I use metrics to help justify it to myself as a value and so to buy it? Here is where I use profitabilty (high margin) as a decision-tool. |
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