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

To: E_K_S who wrote (27497)	7/30/2007 11:01:54 AM
From: Jurgis Bekepuris	Respond to of 78768

I agree that debt to equity might be misleading. Here is what I did for ALL the homebuilders I knew: - Took assets at face value - Discarded any goodwill, mortgages for sale, and other assets. Some of these may be worth more than zero, so I am conservative. ;) - Discounted the inventory and land at 20%. This might not be enough, but without knowing specifics about exact markets and how many houses are there and where they are, it is very tough to do a better job. I am not willing to do it, but if someone suggests that I should discount company A inventory at 40%, while company B should be discounted at 10%, I will gladly plug this into my model. - Subtracted all liabilities. I took the resulting number as my "buy" capitalization. Interestingly, some of the "buy" numbers did not change much in the last 3 months even with the write-offs. I also ran the ratio of buy number to liabilities. This is again not a great measure - any investor should know that a company with non-zero liabilities can go bankrupt even if their assets more than cover the debt. But it still tells a lot, IMHO. In fact it tells that ALL homebuilders could go bankrupt. ;) But some are closer to it than others. ;) The result is that MTH was the only one trading at buy value and with quite high buy/debt rating of .40. MDC is the best capitalized with a rating of .80, but it is quite far from the buy price. Remaining companies fall in between. Most of them have buy prices at about half of current capitalizations, confirming your and others intuition that the bottom may be still far away. After all is said and done though, most of these companies move in tandem. So unless the weak ones with ratios of .11-.20 will go bankrupt, buying any of the remaining ones might lead to the same investment results without doing a lot of legwork trying to choose the best one. /shrug I am interested in any comments about my model. :) Good luck