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

To: Jurgis Bekepuris who wrote (33597)	2/22/2009 4:46:38 AM
From: Paul Senior	Read Replies (3) \| Respond to of 78911

AIRT as a catalyst for a general discussion of margins. "Overall, the company is probably a buy if one can stand the low margins." I'm having some difficulty here. -g-. I've spent more than eight years considering,developing, reviewing my margin formula. I'm not saying I've been right or I've got it right, or that I know what I'm doing... only that I've considered the subject and I use net profit margin as a factor, sometimes a key factor, in determining my buys. Right now I view all this as perhaps irrelevant. It's as if I've worked up a formula that says if clouds are grey and ominous, and if such-and-such barometer readings occur, then carry an umbrella. Whereas the nub of it is that we're in a thunderstorm and nobody's needs a formula to tell them to carry an umbrella. So as regards stocks, in this market, if one sees low margins that even appear as a negative in any way, the person might/should move on. There are too many other companies that beckon. (Aside: And AIRT does not appear strong on net profit margins by my formula.) ---------------------------- It's late at night, and I'm up, so I will just clarify maybe, what I have said about previous stocks as regards profit margins. When I have said xyz has high margins or margins look good, it is not that I have some number in mind as a bogey, as, for example 14% is good, 3% is bad; or just that net profit margins are good because this year they are at 10% and last year they were 6%; or that they're 20% for abc drug company and that's bad (because the sector average is 25%). Rather, I feed every stock idea into a formula I have that helps me determine a purchase price for the stock based on its net profit margins. In the sense it's a formulaic output, my evaluation of margins as "good", "high", "unsatisfactory" is not an arbitrary call. (I believe) For me, it's the same thing with margins as with roic (I use roe). We have the Greenblatt model which says buy high roe stuff, avoid the low. I prefer to have the decision on a continuum. That is, if I'm a value investor, my opinion is that at some point (at some low stock price) almost any going-concern will be a buy. (aside: Although maybe there's an argument in this tailspin market nothing should be bought at any price. -g-) What that low purchase price for a low roe company is, can be ascertained, I believe. As regards margins, I find I like net profit margins better in some ways than operating margins. I have seen a report just recently that seems to indicate margins are better predictors of stock market performance than Mr. Buffett's favorite, roic. Similar to the way I will factor low roe into a stock decision, I will consider a company with low net margins and low stock price. What is "low" margins? Low absolutely? (grocery stocks are always 'low'), low relatively (a stock to its sector? low to itself?). And how does "margins" relate to value? Also to be considered: when and how does the margin figure combined with the (low) stock price indicate a buy? And again, what "margins" am I looking at - current, average over several years, operating margins, net margins? And further, how are we defining these terms "operating margins", "net margins"?) I've made some decisions, developed a simple net profit margin formula, and have made investments based on it. Right now, nothing seems to be working. Nevertheless I find using margins (any definitions thereof) to evaluate stocks on a value basis to be an interesting but complex subject and a work-in-progress for me.