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

To: sjemmeri who wrote (11792)	1/10/2001 11:37:23 PM
From: James Clarke	Read Replies (1) \| Respond to of 78481

The reason free cash flow is so much a part of my analysis is that it is real. You can't buy a pizza with GAAP earnings. Where it is most valuable in analysis is when free cash flow doesn't match earnings. Xerox and Armstrong World come to mind there. Negative free cash flow was a huge warning flag which was there for anybody to see long before the stocks collapsed. Earnings are not always in cash, and it will save you from a lot of mistakes to understand why and to check that before buying a low P/E stock. A company with free cash flow has options that a company without free cash flow doesn't. They can buy back stock. They can pay down debt. They can bottom fish and acquire competitors on the cheap. An important warning. Free cash flow numbers that come through screens or Yahoo or similar databases are notoriously wrong. Sometimes I wonder where they're getting their numbers. I firmly believe that you've got to do the calculation yourself. I own one company with a roughly $100 million market cap which generates $30 million of free cash flow per year. I own another with a $170 million market cap which generates about $35 million. I don't worry much about these - I just check the cash flow statement once a quarter and wait for them to double. As for valuation, there's no formula, just judgement. I like to take the inverse of the free cash flow multiple to make me think like an owner. Rather than saying the stock trades at 12 times free cash flow, I think in terms of an 8% free cash flow yield. i.e. if I owned this whole business I could put 8% in my pocket in year one and not harm the franchise. For some companies 5% might be enough, for others I might require 10 or 12%. Unless that free cash flow is obviously a peak number that will never be repeated again, I rarely require more than 10% yield. And that usually provides a good deal of downside protection because at 10% the company can buy back a lot of stock and makes an obvious takeover target. And then we have Apple, which somebody asked about. Here is one where a very simple cash based analysis comes together beautifully. $17 stock price, $11 of cash. So you're paying $6 for the business. It generated approximately $2 a share of free cash flow each of the last three years. Obviously they hit a rough spot, and I have no idea how long that will last. But the stock is just too cheap. I just think we have a case here where the people who bought the stock at 60 had no comprehension of valuation, and now they're selling at this level having lost a lot of money and demonstrating that they learned absolutely nothing from the experience.

To: sjemmeri who wrote (11792)	1/11/2001 10:00:20 AM
From: Kapusta Kid	Read Replies (1) \| Respond to of 78481

Steven and Paul -- While the idea of buying stocks which have already moved up is somewhat counter-intuitive to a value investor, O'Shaughnessy's rationale makes sense. You have found a "cheap stock". It could get cheaper. The relative strength tells you that whatever caused it to get really cheap has probably changed or been corrected. Like Steven, I'm building portfolios based upon JPO's screens; actually, they're more like lists at this point, since I don't think we're anywhere near the bottom. I still remember 1990 and buying good companies with a PE = 3. I know, that's market timing. But "the bottom" will be in when blue chips start making my lists. I may have to wait a long time; until then, I'll cherry pick, as Steven does.

To: sjemmeri who wrote (11792)	1/11/2001 11:17:24 AM
From: Paul Senior	Read Replies (1) \| Respond to of 78481

O'S funds. Steven, Pete, et. al., fwiw, here's where O'Shaughnessey's funds/methods have gone: hennessy-funds.com Criteria for each fund and top holdings (outdated) of each fund are described. I put each fund symbol into Morningstar to see if an updated and maybe more inclusive listing of stocks would show up. The Morningstar lists also seem outdated, and I saw no stocks that interested me for reviewing further at today's current prices. Paul (aside: Just looking for ideas -- I expect the published fund holdings lists to be outdated because I assume the fund managers adjust holdings annually after running stock screens against fund criteria at start of year.)