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

To: bruwin who wrote (56614)	1/10/2016 11:25:20 AM
From: E_K_S	Read Replies (1) \| Respond to of 78745

Re: Book Value & retained earnings I look at BV over five years and want this number to be increasing. However, as pointed out, you want some form of tangible BV that reflects the best 'value' of the assets generating the revenue streams. Tangible BV should not include Goodwill that inflates BV (see the discussion for CBI). I will argue that BV also needs to be adjusted for many of the other intangible assets like software, patents and/or other assets that may in fact be liabilities like contaminated real estate and/or divisions that are in litigation that may result in large future litigation settlements. Long story short, is you really need to drill down into the revenue streams and how long lived they are and if that growth is really sustainable. That's why the retained earnings number (over time by quarter/by year) is important. This is the actual bottom line of earnings that are re-invested into the company. I have had so many companies that take one time adjustments to earnings for things such as re-structure, reserves for future litigation (look at what VW did), environmental clean up, obsolete software/patents and/or discontinued products, and many other so called one time write down to earnings. So for me, the key is the predictability of both revenues and earnings, the retained earnings at the end of the day and how that translates into tangible Book Value. When I do a Graham Number valuation, it's all about long term earnings and many times one time adjustments will result in a loss for that year, so the analysis is not valid. The GN valuation also use BV as one of it's inputs when in fact a better value is some adjusted tangible BV number. When you do all of these adjustments, I get no hits on my screens. I scan hundreds of companies a month, so I do quick scans similar to Paul's criteria and then I do look at these other items; goodwill, BV vs some adjusted tangible BV, one time adjustments vs the impact of future earnings and a few other news items I use to exclude candidate 'value' buys. It's not a Black & White decision. Sometimes I find that management and/or the activist investor(s) see potential value/growth that are just not there in the balance sheet. However, I will follow them into the investment and watch how they change and re-structure the company to produce that value. It's all about the future earnings potential . EKS