The key is whether those ROEs are sustainable and for how long. And I'm not sure your assertion is correct, that everybody here would agree that DOV is fairly valued and Coke overvalued. Speaking for myself, I'd buy Dover. But I know when I pitched the stock here I didn't convince many people, and those I didn't convince gave me a lot to think about.
The danger in that kind of shorthand you're looking at is that you wind up looking at a few ratios instead of looking at the business. I know you would never make an investment decision based on three ratios, but believe me, there are those out there that would, and that includes a lot of institutional investors who should know better. Buffett starts with knowing the business cold, knowing whether or not he can trust the management, and only then sets a target price. And I have yet to find any way to simplify this process. Learning to read a 10-K and a proxy, then interview management effectively, is a lot more important than any formula.
Starting with the numbers you gave me, if I knew nothing about these two companies, I would have no opinion on either until I had done enough research to know (or give up on ever knowing with any degree of certainty) two things:
1) Why is the ROE so high
2) Why is it sustainable at that level, if it is
After that, the numbers aren't hard.
JJC
Jim |
