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

To: Spekulatius who wrote (32740)	11/12/2008 1:41:37 AM
From: E_K_S	Respond to of 78659

Hi Spekulatius - The problem I am seeing with quite a few companies now is that overall debt loads are quite high especially when you look at current debt/equity ratios. I have always measured this risk based on the company's free flow cash and their capability to service their debt. This way of looking at it does not work too well in a slumping economy. You can not expect the free cash flow to hold, so in some cases several of these companies will not be able to service their debt as cash flows fall. I guess you need to look at the companies core assets (real producing assets vs fake: like goodwill) and evaluate their future revenue production capability. You do raise a good point about hedging the play by buying up some type of debt position. I suppose you mean corporate bonds or preferred shares. Have you evaluated any investment options for OSK (bonds or preferred shares?). Another deep discounted value play mentioned here is HRP the REIT. This is a similar case. Huge amount of debt($13/share debt) but current cash flows seem sufficient to carry it. BV is $11 but stock is now $3.15. They own some very good core assets in Hawaii (one of the largest land owners) but the company may be levered with too much debit which will not be easy to reduce in the current environment. Perhaps this is a situation where you look at buying the debt or one of the preferred shares. The only safety valve these companies have to save cash flow shortfalls is to reduce their dividend payouts. It appears that Mr. Market is expecting this across the board based on the current high dividend yields we now see given the current market prices. Value is good but safety is better. I guess the prudent investor in this environment would buy value as long as the company's total debt is low (30% or less of market cap), the core assets are "real, tangible & undervalued" and the potential revenue stream(s) provide enough upside to buy now and hold. The unknown is just how far and deep this recession will last in the US and around the world. EKS