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

To: TimbaBear who wrote (11731)	1/6/2001 12:24:50 PM
From: TimbaBear	Read Replies (1) \| Respond to of 78497

Then I went through the rest of the financials looking at many things like: What was the pattern of revenue over the last 5 years, was it increasing for at least 4 of them? I noted the net profit margin, interest rate coverage, dividend pay-out ratio, book value(although I don't value this figure very much), and listed the dividends of those who paid them and observed the patterns there over the last 5 years. Next I went and got the average daily trading volume and current price of the stock as of Friday's close. Then I added my derived figures for "Net Current Value" and "Net Hard Value" and compared that sum to the current price and noted whether my value was a discount or premium to the current price. Having arrived....where and at what, I'm not sure....I'm uncertain as to what might be the next step in the winnowing process. Some questions: 1).What is the belief of the board regarding "Current Assets".....is this number usually a solid enough figure that I wouldn't need to discount it in this evaluation process?....I know that I can get better insight by reading the 10Ks, but in preliminary screening like this, I wanted to get down to those companies worthy of spending the extra time first. 1a). Sort as a corolary to the above....I'm assuming that inventory is usually considered a "current asset"....is this usually carried at cost? And should I attempt to devise an adjustment to it for inventory turn-around frequency?....or for quick sale value? 2). This is really stretching, but I don't know, so I'll ask: the "Other" assets figure I lump in with PPE and discount them both 50%, is this a "fair" treatment on my part of "Other" assets? The reason I discount PPE 50% is to simply quantify the myriad issues (and their impact)regarding the liquidation of property and equipment: sales commissions, sales time, uniqueness of use, etc. I am assuming, for now, a relatively liquid and somewhat favorable market for real estate. I know that "Other" can mean virtually anything, I just wondered if anyone out there has gotten a feel for this area and how to quickly account for it. 3).Now that I have arrived at a number that represents, to me, a close to rock bottom value of a company, what do I do with it? I mean, should I try to factor in "enterprise value" (which I haven't really gotten a good formula for). What I guess I'm trying to ask here is: Having arrived at this number, is there a further way to refine it so I can measure more clearly whether the current price is a discount to fair value or a premium to it? I hope I haven't been as confusing as I have sounded in my mind with this last question! I thank all of you in advance for your input.

To: TimbaBear who wrote (11731)	1/6/2001 8:45:56 PM
From: Paul Senior	Read Replies (1) \| Respond to of 78497

TimbaBear. So can you share the names of the 16 companies? Based on your screening criteria, I can't believe they would be new to this thread.

To: TimbaBear who wrote (11731)	1/6/2001 9:55:53 PM
From: Don Earl	Read Replies (3) \| Respond to of 78497

Timba, Just a few IMO type comments: First there is NO substitute for reading the filings. Screens are a great way to sort some of the wheat from the chaff, and checking Market Guide generated profiles can be useful for a quick glance, but the stuff you really need to know are in the filings. The main reason for using any kind of screen is to narrow down which filings you want to study. If you've put as much effort into studying the market as you claim, you should be able to spot "red flags" in filings in a minimum amount of time. If "red flags" don't show up in the usual places, keep reading to see if the company matches what you expected to find with your screen. One of the things that crossed my mind on your post is why a company trading at book, with a PE under 10 have a debt/equity ratio of .5. If a company is really generating that kind of net earnings, debt should be almost nonexistent. My guess is that if you go back over your list, most of the companies on it don't have any cash to speak of until the ratio starts to approach zero. As a rule of thumb, I automatically eliminate any company with preferred stock or convertible notes outstanding. I'll also generally avoid companies with senior notes outstanding for anything other than VERY short term trades or unless they have VERY high amounts of cash on the balance sheet. Good management doesn't cut their common shareholders throats by leveraging assets again and again while cutting out another level of equity holders each time. Those type of companies are in business to sell stocks and bonds to the public and any stated business purpose is just smoke and mirrors, as are often the reported EPS numbers. "Related Party Transactions", insider trading, and compensation are also good touch stones to get a feel for the quality of management. Cash flow not including borrowings or sales of securities is probably your best indicator on how profitable a company is. EBITDA strikes me as a flawed way of looking at a company. Interest is a fixed, recurring cost and so are taxes. Depreciation and amortization, with the exception of goodwill write offs, are also fixed costs on equipment or assets that eventually have to be replaced and are an essential part of the business model. While goodwill is a nearly worthless asset in a liquidation, in a company with positive earnings it's worth a third of it's value in tax savings and "free flow cash". In the same vein, PE can also be a misleading indicator. A company could report zero earnings, write off $30 million in amortization of goodwill, and see $10 million in positive cash flow as a result. It's also important to understand "Generally Accepted Accounting Principals" as they apply to a given sector. Some sectors rarely trade above 10 times earnings for the simple reason that GAAP skews the earnings picture. A "red flag" would be those places where what a reasonable person would consider a normal operating expense is "capitalized" as an asset and never reaches the bottom line. For example; energy companies can be pretty bad in that area. You can just about figure book value to be secured line of credit, plus cash, less unsecured debt. Something else I also believe is worth looking at is management. Everyone in the market knows management can make or break a company, but I doubt most investors ever get around to looking at the DEF 14A filings to see what sort of background is behind officers of the company. What kind of experience do they have? Does their length of stay at other companies suggest loyalty, or do they tend to bounce around in an opportunistic manner? Are they running a bunch of little side businesses that would tend to divert their energy away from the company? Pretend you are a personnel manager and ask yourself if you would hire these people to run your company, because if you buy the stock, that's exactly what you've done. Listening to conference calls are also a good way to get a feel for company leadership. Probably the hardest thing to judge is if a particular company or sector has potential "sex appeal" to investors. Like it or not, the appreciation of a company's stock is eventually going to depend on investor sentiment. A company's fundamental value let's you know if it's a going concern, but somewhere along the line there has to be something to push investor buy buttons. From reading some of your comments, you appear to have been in the market for awhile and have spent considerable time finding out what works and what doesn't. Perhaps most important is that you know how you react when an investment goes with you or against you. For every loss I've taken, or profit I've missed, there has usually been a place where I knew exactly what I needed to do at a certain moment and didn't do it. That's also true for every profit I've taken or loss I've avoided. I'm a firm believer in doing the research and reading the filings, but the best system of research in the world won't teach you when to pull the trigger. Some events are impossible to predict, but there are always ways to improve your position, cut losses or take profits when something happens you don't expect. Last weeks rate cut would be a good example. Reading the news items on the NASDAQ site, it looks like a bunch of folks at Reuters are eating sour grapes because they got caught with their shorts around their ankles. The moral of the story is that even those with access to worldwide news services to hype their opinions can't predict when the market will bounce 14%. You can bet they're hedging their bets as a result of the new information though. DISCLAIMER: All of the above is my opinion and is subject to change without notice. In my opinion, opinions should be viewed for entertainment purposes only and not treated as investment advice.