< never pay more than 4 times sales,>
I, personally do not believe in multiples of sales as an accurate measure of performance. Industries are much to varied. Let's take the coimputer hardware manufacturers such as Compaq or Dell (very low, single digit margins), and compare them with industries with much higher margins (like software - up to and over 33%). How can you accurately comare sales of the two industires, or companies within the industries. Four times sales in MSFT means a lot more than four times sales in Dell. That is why I choose VALUE (net return after taxes minus cost of capital) as a universal measure. It is much more ubiquitous and a lot less convoluted than other measures.
<never buy any company that doesn't have a reinvestment rate of 12%>
I think I agree, in part, with this statement. Personally, I would raise the threshold past 12%. But, when you say reinvestment, you mean reinvestment of what? That is the key question. Microsoft is reinvesting roughly 28% of its growth in marketing and R&D, but that number over 100% of their accounting earnings (here we go back to the general flaw in the traditional earnings method of valuing a corporation). It is these aggressive reinvestment policies that have madeMSFT so succesful. They consistently comeout with a leading product (market sharewise), and then obselesce it wihtin two years (if they don't do it,the competition will).
<I see little opportunity at todays level.>
I see oppurtunity, my favorite stocks are up nearly 20% in less than two weeks. The problem is that the market has truly gotten overheated with an abundance of speculative and inexperienced money.
Here are some numbers from the latest incarnation of the valuation model:
Microsoft
Jan 12th - Jan 27
% Change: +16.47%
5 yr. Earnigns Growth: 55.50%
Rate of Equity Value Creation: 56.34%
Sustainable Growth: 67.50%
Call Fair Value: Feb 100 - $1.47
Put Fair Value: Feb 100 - $2.79
Intel
Jan26 - Jan 27
% Change: +2.05%
5 yr. Earnigns Growth: 22.50%
Rate of Equity Value Creation: 17.21%
Sustainable Growth: 29.81%
Call Fair Value: feb 160 - $3.02
Put Fair Value: feb 160 - $8.39
The valuation model used is available at rcmfinancial.com , once there (if you have not already done so, submit your email address in the form and contiue to the download page (link available at the top of any page). |
