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

To: Paul Senior who wrote (19899)	10/18/2004 11:08:58 PM
From: E_K_S	Read Replies (2) \| Respond to of 78666

Paul and Carl another factor I use in addition to those that Paul mentioned is I try to find a value buy when the business cycle for their industry is at or near a low. For examples I picked up some LSI recently as the semi cycle has been bumping on it's low for some time and LSI sells at a bit below book value. Their facilities have been upgraded and their product mix is good. Their huge depreciation expenses hit earnings but their free flow cash flow is still positive. Once the cycle begins to turn up, then they are poised for a 24-36 month run of growing earnings. At least this is what I have observed in the last two semi cycles going back to the early 90's. Another example is with the building stocks. These stocks follow the long term interest rate cycle and when interest were high and falling, this was the time to pick up these companies. With 40 year lows in interest rates, many of the builder stocks have gone up 10x's (or more) from their cycle lows. I suppose there was a lot of pent up demand because I have only seen this type of huge swing one other time in the late 80's. I believe we are observing a cycle low in many of the commodity grain prices (i.e. corn and soy beans) as I stated in an earlier post. The sector(s) that would benefit from these low prices are companies that use these commodities as a major input in their production like beef and chicken producers. I have observed this swing once before in the mid 90's and an efficient producer can generate significant profits from sustained low grain prices. However, these markets generally self correct w/i 12 months as farmers grow less the next year (or weather damages a bumper crop) and input prices to the producers swing back to normal ranges. Now, with the use of hedges and forward contract buying, many of the large producers minimize these cycle swings. Transportation companies do this with oil futures. Sometimes a smart management will forward hedge more than normal if prices are at extreme lows and this is usually disclosed in their 10K after the fact. Pilgram Pride (The 2nd largest Chicken operator) announced today that they are raising their 4th QTR outlook because of favorable grain prices. biz.yahoo.com The market is very efficient so a value investor will not try to trade on these "cycle" factors but just utilize this and the other value metrics to help in making their investment decision. The key to a successful investment is to identify a "value" company, that has good management, with hidden assets (or under utilized assets) that is profitable even during the hard times and then pile in when the business "industry" cycle is out of favor. There have been a lot of good ideas posted on this board. I generally find two or three outstanding value picks in a year (that I act on) even though I am looking every day. EKS