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

To: EddyRiquelme who wrote (48432)	6/24/2012 12:01:20 PM
From: Paul Senior	Read Replies (1) \| Respond to of 78702

I estimate or guesstimate or presume margin of safety in a number a ways depending on what the company's business is. I never try to calculate something called "intrinsic value". It's not necessary to figure out what a company's intrinsic value might be in order to have a feel for what margin of safety might be. "...intrinsic value is not something that comes up at all in the intelligent investor (it isnt meant to be too complicated) but intrinsic value does come up in Security Analysis." If you were to follow Dr. Graham's later work then and be an "intelligent investor", you would not have to be concerned with "intrinsic". I suggest you follow Dr. Graham's "Intelligent Investor". "Retained earnings is what buffett means when he talks about the cash that can be taken out of the business correct?". I don't know. I'll say, maybe that's an approximation. Possibly too simplistic. "Buffett states that focus on the balance sheet is more effective when working with smaller pools of money what does he mean by this" More effective than what? More effective than with working with larger pools? More effective than focusing on the income statement? Not clear to me.

To: EddyRiquelme who wrote (48432)	6/24/2012 12:41:51 PM
From: E_K_S	Read Replies (4) \| Respond to of 78702

Hi EddyRiquelme - My reply is in the form of an example of a current value candidate stock I am researching. It does not exactly address your question on calculating the company's intrinsic value but rather what I look at for a "margin of safety" not necessarily as reported by the numbers published in their 10K report report. GT Advanced Technologies Inc. (GTAT) - Is this a "no brainier" value Buy? 2011 Annual Report GT Advanced Technologies Web Site The more I think about the question of "value" and what is the absolute way to measure that, I am coming to the conclusion that one formulaic approach (w/ a binary result: Yes - Undervalued vs No- Not undervalued) just does not happen. With all of the accounting tricks, scrupulous cheating managements (the Chinese accounting acceptable practices come to mind) and GAAP vs Non-GAAP reporting, just makes me cautious especially when looking for an investment with a "margin of safety". Now more so than in the 70's or perhaps the 80's, I am skeptical when things look too good to be true. That's why I do not put too much into those absolute balance sheet numbers and/or those one time excellent revenues that were just released. Maybe this is because I stepped on one too many land mines when I thought the value proposition was too good to be true. Therefore, when looking for a margin of safety, I now look at a lot of the intangibles that are outside the reported numbers in the 10K. These include: (a) does the company do business in China, (b) who are their top 10 customers, (c) how long has the company been in business, (d) do they have 10 years of positive earnings, (e) is the operation diversified, (f) does management have a vested interest in the company and many more items that I roll into my "buy" decision. Here is an example of a company I have been studying as a possible value buy. GT Advanced Technologies Inc. (GTAT) goo.gl Look at these value components: goo.gl This is one of mu favorite: BV up 300% in 3 years! goo.gl Statistic Result (Most Recent Available) Market Cap $465 Million Revenue/Earnings (TTM) $955.7 Million / $183.4 Million Cash/Debt $350.9 Million / $75 Million Trailing P/E 2.8 2012 Earnings-Per-Share Guidance $1.30 to $1.40 Backlog $1.8 Billion PE is around 3.5, the company has over $3.05/share in cash, $1.8B in back orders, 2nd generation technology ready to deploy that is 15%-20% more efficient . . . all is good. What's wrong w/ this picture? Top 10 customers all located in China. All revenues reported reflect underling contracts w/ these companies w/ no detail on receivables, returns if not sold (or wanted by larger customers), who eats the potential losses of the finished product when it becomes obsolete from next generation products?, Do those standing orders really have value or could they be a huge future liability if/when manufactured and returned to GTAT because they could not be sold? W/O seeing the details of those top 10 supplier contracts and if they are enforceable in China, those future revenue streams (and perhaps current revenue streams) are suspect to me. The positive is w/ their next generation technology new orders are coming from Europe (including Germany) and India. This looks like a no brainier value proposition. Here is what Motley Fools think ( goo.gl ). I am still skeptical especially when management will not use some of that cash to buy back shares. What's your take? EKS P.S. I have been using the Graham number recently to determine fair value. Graham felt that using this approach (be advised that 10 yr positive EPS, use TBV rather than BV and PE<=15 must be used as constraints in doing the calculation) provided a "fair" level of safety in all types of markets. goo.gl