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

To: Paul Senior who wrote (20159)	12/3/2004 12:11:09 PM
From: E_K_S	Respond to of 78525

Good overview on book value analysis. I further filter the screen down by two other components that impact the "true" book value. Specifically, I look at (1) the company's goodwill accounting and (2) other undervalued tangible assets (like real estate, under utilized plant and facilities and company owned natural resources). The reported book value can be overstated by aggressive goodwill accounting and any recent acquisitions by the subject company should be scrutinized as they probably allocated a significant amount of their purchase dollars to goodwill which in many cases is a worthless asset (especially in the high tech area). Reported book value can be significantly understated if many of the underlining assets, which are booked at cost, have appreciated over time. These types of assets may include land (real estate not including buildings), natural resources (i.e. trees, oil & natural gas, precious metals) and other undervalued fixed assets not adjusted to current market prices. Finally, I analyze book value along with both cash flow and free flow cash flow. If a company has significant plant and manufacturing facilities which are under utilized and current free flow cash flows cover the direct operating expenses (including depreciation), there is an opportunity for the current or new management team to create more value from these assets. Any increase in plant utilization or investments in new technologies to make these facilities more efficient will increase cash flow(s)and eventually result in better earnings. If the cash flows are negative and the company has a high amount of leveraged debt, I will usually look someplace else. Unless the stock is significantly under valued and I know management is actively reducing their debt obligations, I might take a small position and watch to see if a turnaround occurs (specifically if the free flow cash flows begin to turn positive). The other underlining assets must be quite undervalued for me to even look at such a purchase. One example recently was my purchase of El Paso (EP) that I picked up in March 2003. This is still work in progress, however, management has continued to cut debt by selling some of their underlining assets. What is eventually left, should result in a smaller and more profitable company that still has significant undervalued assets. My initial price target is $15. Dave pointed out to look for small capitalization stocks that are priced at or below their book value. This is true in my observations (especially if you adjust the book value according to some of the criteria I listed above). It is easier for a small company to have their non performing assets valued at market rates by hiring a new management team to "fix" the problem or package the company so it can be sold. Most often you get a larger company buying the smaller company just as a pure "value" asset play. There is no one best or absolute method of analysis but if you follow a lot of the basics mentioned in this thread you will limit your downside risk. Eric

To: Paul Senior who wrote (20159)	12/8/2004 12:14:22 AM
From: Steve168	Respond to of 78525

Thanks Paul, Dave, Eric and Spek for your thoughts on low Price/Book value investing. I certainly don't take book at face value, drill into every item and apply discounts accordingly. I also check cash burn rate and the trend of it, hope to see management cutting cost and reducing cash burn. The big question is when to get in? While it is still losing money but lose less every quarter? or breakeven? My experience is once it breakeven, the price is already doubled from the bottom, so I tend to start buying a little early. For people like the latter, you may want to take a look at OSTE, stock recovered from $3.5 to $5.5(about book value) while returning from loss to breakeven. Please let me know your thoughts. thanks,

To: Paul Senior who wrote (20159)	12/13/2004 10:34:39 PM
From: Paul Senior	Respond to of 78525

delete: duplicate

To: Paul Senior who wrote (20159)	12/13/2004 10:38:43 PM
From: Paul Senior	Read Replies (2) \| Respond to of 78525

For anybody who's interested, here's a link to Piotroski's (I apparently spelled his name incorrectly in previous posts)performance as compared to others' styles in screens developed by American Assoc. of Individual Investors: aaii.com According to the screening methodology, Piotroski leads the value category with 56.6% YTD return. In considering all screens and categories, his method is only being bested by one - a "speciality screen", Murphy Technology, with an 81.7% YTD return.