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Strategies & Market Trends : The Art of Investing

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To: Gottfried who wrote (681)	5/12/1999 11:44:00 PM
From: Sun Tzu	Read Replies (2) of 10551

This is how the method works: At the moment AMAT has Price/Sales ratio of 6.5 and operating margins of 24.2%. Let's say that the expected amount of next year's revenue growth is 30% (do supply yourown number here). Then my magic number is: 6.5/(24.2 * 1.3) * 100 = 20.66 The idea is to minimize PSR and maximize OM and SGrowth. In other words, I am willing to pay more for companies that have more growth and better operating margins. This number by itself does not mean much. It is just a way to compare one company to another, even if they are in very different industries. Of course, the comparison is much easier if the companies are very similar, say between AMAT and LRCX, or NVLS and TER. There are two practical problems with this approach, which is why it is only one of several items in my computer models. The first is that revenue estimates are not easily available. So I tend to naively extrapolate the revenue trend from last year, which of course does not work for turn arounds. So I also rely on the stock performance as a measure of what the stock market is telling me about the accuracy of this extrapolation. The second problem is that not every industry deserves the same multiple; revenue growth for VISX who has a ton of pattents and is the only game in town is a lot worthier than at MER who is highly dependant on the performance of the stock market and their floor traders. To compensate for this I introduce other factors into the model. In the end I will have 10~50 companies to choose from. I will then concentrate my "subjective" analysis on them. BTW, the stock lists that I have been publishing are usually the raw outputs of the computer model. One of these days I will get all the data that I need and get my act together and finish programming a much more sophisticated screening program. I already know what it is that I should do. It is only a matter of doing it. In the mean time, the fact that some very inteligent people on the street are using models similar to mine, gives me confidence that I am on the right track. I hope this helped, Sun Tzu

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