Stewart, I don't think that book value is an antiquated metric, because I don't think it is a metric to begin with. I think that Wall Street "analysts" have seized on this accounting fiction as a convenient (if meaningless number) to discuss. Book value is a consequence of our conservative double entry accounting system, and its interpretation (which I didn't discuss) is further clouded by mergers and acquisitions. For example, if a company buys another company, depending on the accounting system used (purchase vs. pooling of interests) you could end up with widely differing book values because in the purchase method all assets are revalued to reflect market conditions which could significantly decrease the book value of the acquired company.
P/E is another number that is difficult to grasp because it compares a stock (current price) to a flow (earnings) in a backwards relationship. It makes no sense to compare the current price to last year's earnings. That's why it makes much more intuitive sense to use the forward P/E, but even here the "analysts" cause themselves problems. For example, if the metric is to have any meaning it should be 4 quarters' ahead earnings, not next year's earnings. Suppose for example that you have a stock selling for $100 and we are now in the third quarter, so the results of quarters one and two are known. Suppose further that the results for last year were earnings of $2.50. Many sources would list the P/E at 40 because they will use the $2.50 earnings until we enter the first quarter of next year. But the actual earnings might be $.75, 1.00, 1.30, and 1.70 for the last quarter. This would give a trailing P/E of 21. But suppose the forecasted earnings for the next six quarters would be $2.00, 2.10, 2.25, 2.50, 2.60, 2.75. Some sources will list the current p/e as $100/ (1.30 + 1.70+ 2.00 +2.10) or 14.1. Now my preference would be to relate the current price to the next four quarters: $100(2.00+2.10+2.25+2.50) which yields 11.3. So depending on which earnings numbers are taken you can get wildly differing numbers. Caveat emptor!
The only thing that makes any sense at all (to me at least) is the discounted value (risk and time value adjusted) of all future earnings in relation to the price of the security. This number is impossible to get, so we must rely on estimates of long-term growth rates and riskiness of the cash flows.
Taken together, these difficulties (along with several I haven't talked about) make valuation a daunting, if not impossible task. That's why I get a kick out of people who brashly proclaim this security or that is either under or overvalued.
Sorry for rambling on. This conversation is probably boring the life out of most people on the thread, so I will leave with one final thought:
GO DELL!
TTFN,
CTC |
