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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Seeker of Truth who wrote (30138)	8/19/2000 10:44:09 AM
From: Tom Chwojko-Frank	Read Replies (1) \| Respond to of 54805

Given a choice between a stock CURRENTLY growing its sales and profits at 50% per year, and a stock which is now growing at 25% a year but in a couple of years looks highly likely to start growing at 100% a year for several years, an intellectual would favor the latter, because a calculation will show a superior return. But I suspect that the market place, more often than not will favor the first stock. A stock that has unrealized potential is discounted with respect to the company that has actualized is growth. The "intellectual" (sorry, but I think that sounds pompous, how about "rational person"?) would not necessarily favor the latter. It has greater risk associated with it, and must be balanced against the potential. Further, my reading of the manual implies that Gorilla Gamers should favor the companies who have crossed the chasm already, and will continue the growth, or, in the case of buying baskets, several stocks with the faster growth and higher risk, quickly leaving those that fail. But how much higher? We have no answer. We can make a good guess at orders of magnitudes. Naturally the long term is paramount, but we can't neglect the near term. No, but the near term concerns with a held stock can usually boil down to the question: "Will this stock be a Gorilla (or King or basket stock depending on the game) in the near future?" If the answer is yes, then the price doesn't matter (much). If the answer is no, then why hold it? Let's assume that eventually all companies become average companies. That's a very poor assumption, especially since we're dealing with gorillas. There aren't enough of them to make statistics meaningful. A statistician would say that someone with one foot in fire and one in ice is on average comfortable, and baseball announcers frequently trot out meaningless numbers, like the batting average for a player on Tuesday night games with a waxing crescent moon against left handers on astroturf. Tom CF (All in my opinion, never humble, in my vice of arrogance, but always ready to yield to better reason.)

To: Seeker of Truth who wrote (30138)	8/19/2000 4:24:17 PM
From: Pirah Naman	Respond to of 54805

Malcolm: I think you raise good questions. At times we are limited in the number of companies we can put new money into, and it makes sense to add some money to the cheapest gorilla. Even if somebody thinks that a gorilla is always undervalued, selecting the one that is most undervalued might add a little to their returns. I think that instead of working with P/E and profit margin, it would be better to work with free cash flow, since reported profits (and losses) are sometimes illusory, i.e., the company reports profits yet has been a cash drain or vice versa. I wrote some posts on this, sorry to reference myself but I'm too lazy now to look for a better treatment: Message 13520970 Message 13522633 Message 13526190 Message 13551881 I disagree with the idea that "we can't extrapolate numbers forward more than 2-6 quarters." No matter how short or long a time frame we choose to extrapolate, there will be some error. Choosing to not try to extrapolate does not reduce error - it means operating on guesswork or faith. In many cases, this means assuming the best case - talk about error! Better to try at least a little bit. To paraphrase Buffett, the idea is to be vaguely right, rather than operate totally blind. What you can do to make the value estimation easier for yourself is to only project free cash flows for as far out as you feel comfortable and then look at the price relative to the sum of those free cash flows. You can easily enough find out the current rate of free cash flow being earned, and to that you can apply the rate of revenue growth, or the rate at which free cash flow has been growing. Or make up your own growth rate(s) (a high and a low) based on your expectations. Since you don't need to do this for many companies (as there are not many gorillas or kings) this isn't too much work, and you can keep your calculations in a spreadsheet and simply update periodically. As long as you don't take the numbers too literally, you'll be OK. If you have two companies that you value within a few percent of each other after doing something like this, you wouldn't use the numbers to choose betwen them, as you know the numbers aren't that good. But if you evaluate two companies and they turn out to be very disparate in relative value, then you might use that as your deciding factor. - Pirah PS. Sorry to be so late with this, but I have been away - congratulations to Uncle Frank and all for the SI award.