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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (8861)	11/2/1999 10:57:00 PM
From: James Clarke	Read Replies (1) \| Respond to of 78615

<<Every once in a while there's a start of a discussion about the importance of interest rates and a focus on "the relationship between ROE and price/book value". I want to mention at this juncture that I agree with you, but going further, I believe that there should be a way - and there is a way (imo) - to link them. I've not seen any discussion of this linkage on the Value thread. I myself do use an arithmetical ratio that combines in one number a company's ROE, p/b, and a Cost of Capital factor.>> I do something that's probably fairly similar in a screen, though I don't incorporate a cost of capital factor - I guess perhaps because I think all companies with the kind of balance sheets I am looking for have roughly the same cost of capital at any given time. That cost of capital will vary as interest rates move up or down, but that I incorporate in my second stage of analysis. I am not going to go into what that screen is - I consider it proprietary and although it is very simple in the end it took me three years to get it to do what I wanted. Armed with this and my net-net screen, I can fish both ends of the market - very good companies that are cheap and very bad companies that are free. i.e. Buffett and Graham. These screens capture a fraction of 1% of the stocks on the market, but I have little interest in the other 99% anymore. The fact that you found Unifirst at about the same time I did should have told me we are fishing in the same pond. Because I had never seen the company mentioned anyplace else. JJC

To: Paul Senior who wrote (8861)	11/3/1999 10:33:00 AM
From: Daniel Chisholm	Read Replies (3) \| Respond to of 78615

I myself do use an arithmetical ratio that combines in one number a company's ROE, p/b, and a Cost of Capital factor. Paul, Jim, others: Can you give me a back-of-the-envelope guess at what would be a fair value for the following hypothetical (honest, it is!) company? Let's say you have a traditional mid size industrial company (i.e. a proxy for "traditional accounting is reasonably close to the truth") that has no debt and makes 17% ROE (let's say it has made that it the past and will make that in the future). Let's also say that they grow at or slightly above GNP growth rates. Let's say that a fair cost of capital is 9%. What is the company worth? (say, expressed as some multiple of book value) (What I'm really trying to figure out with this question is how to value highly profitable enterprises with moderate (perhaps I should say par) but reasonably certain future prospects). If I'm simplistic about it and see that the ROE is well in excess of the cost of capital, I could say that any price is justified, since the company is growing shareholder value at a rate of 8% in excess of its cost of capital. Pay up, sit back, shut up, hold on, and let the magic of compounding catch up to your entry price, and then power ahead. However, though I could be easily convinced that it would be rational to pay a premium to book value, I have not yet signed on to the "no price is too high" school either. (FWIW, "PEG" would say (assuming a 6% nominal annual growth rate) to pay a P/E of 6, which IMHO is yet another data point on how out-to-lunch PEG is. Try "PEG" on a long bond for something even more stupid - it says bonds are worthless!). - Daniel

To: Paul Senior who wrote (8861)	11/6/1999 5:46:00 PM
From: Allen Furlan	Read Replies (1) \| Respond to of 78615

Paul look at this one for me ,please. biz.yahoo.com Elamf is Mexican and has absolutely no following. They recently completed a reasonable acquisition. Without debt, well run and improving prospects and ROE of about 6 and p/b of .5 they are undervalued. Should be about p/b no less than .8 which gives the stock a 60 % upside in the next year. How do you see the valuation? I have been patient with this one and recently added to my position. Thanks, Al.