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

To: bruwin who wrote (57564)	7/18/2016 2:26:18 PM
From: E_K_S	Read Replies (1) \| Respond to of 78954

Many of my undervalued Buys are all about getting their revenues back to historical levels (reversion to the mean) and/or begin a new revenue growth phase (company may be transition to a new product/service) and/or selling non core assets and stabilizing revenues w/ expenses. As a result SG&A expenses are almost always way too big for the current revenue streams. The stocks I buy have already sold off down at/below BV and I then look to see what is management's plan to get future Revenues inline w/ expenses. It can not be just about cutting expenses and/or selling non-core assets but that does help in the short run. From past Buys, they may hire a new CEO, a lot of cuts and cleaning house (this usually results in a big one time loss) and sometimes there is bridge loan financing and/or some type of complete debt re-structuring. You have to see what management's strategy is, past history helps and how long it will take (could be 18 months) to implement their plan. I will look at the risk/reward, the current market cap (small is better but current FCF becomes very important) and if these changes are company specific or require some sector move higher too. I will also keep a short leash and keep my exposure small. Revenue "turnover" is only important if the company sell's widgets. Many sell services: (1) contracts for services (ie construction STRL) and/or software services (migrating customers to the cloud ADOBE/QSII) and/or reoccurring services (ie pipeline fixed fees based on vol. KMI/WMB). So you have to drill down into these revenue streams and like you say, see if these compulsory expenses (I view them as operating expenses) fit w/ the new estimated revenue streams. Many time service contracts can be renegotiated so counter party risk is reduced and/or future revenues more predictable and not subject to commodity risk. I own one company that does sell a product and their SG&A is very high mainly due to first year marketing of their new product. I must determine how many quarters I give management to grow their revenues while spending (ie SG&A) at these high levels. It could take 18 months to get revenues in line w/ expenses but can be very frustrating if/when there are more one time charges and/or revenues are just not growing fast enough. I continue to monitor BV , asset base, debt and if there are any hidden jewels that could be sold. Finally, I like to follow those companies that have activist/value investors own shares and of course if insiders are buying. Remember I use a modified GN calculation and will allow a few quarters of losses. Graham wanted 10 years of positive earnings. For those losing quarters, EBITDA and FCF must be positive and hopefully growing. Then when the new revenues kick back in and start growing, EPS turn positive and accelerate higher . . . then you start selling. Good Investing EKS