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

To: J Mako who wrote (44533)	9/24/2011 12:20:47 AM
From: Jurgis Bekepuris	Respond to of 78958

PSR: Well, short story is that for cyclicals (and even not cyclicals but low margin etc. companies) sales fluctuate much less than earnings. So PSR is good metric when you cannot evaluate P/E due to losses. Obviously this assumes that earnings will recover, so it should be applied to strong companies, maybe during recessions and market downturns when losses happen even to good companies. It is less clear whether applying it to weak companies during regular market turns good performance. In regular market low PSR usually means weak company with low margins (distributor). Ken says that PSR is not useful anymore because everyone started using it for investments and the edge is gone. I disagree at least in part. IMHO PSR is less useful because we have many more high margin businesses (in tech land) and because we have not had many strong recessions until 2009. So there are three issues. First, low PSR stocks during expanding economy are usually weak and bad businesses, so low PSR does not work well. Second, in current economy recovery of weak low-PSR company is harder due to international competition for low margin, low value products. Third, with high margin businesses PSR becomes less attractive as a metric, since even in downturn the PSR remains high and it is almost impossible to buy good businesses using this metric. I still suggest that you'd read the PSR story straight from the horse's (Ken's ;)) mouth though, since I have possibly quite misrepresented it. ;)