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

To: James Clarke who wrote (6504)	3/31/1999 4:59:00 PM
From: TAPDOG	Read Replies (1) \| Respond to of 78517

Anyone follow FRD. It's trading for about book value. It's small cap and I'm wondering if it's down because of some recent news or because small cap funds seem to be bailing. Fabricating steel in the oil patch may not be the trendiest business this year, but they still make money and the dividend is over 5%. Any opinions?

To: James Clarke who wrote (6504)	3/31/1999 6:54:00 PM
From: Freedom Fighter	Respond to of 78517

James, >>The market currently trades at a higher ratio to book value than it ever did. And everybody just comes up with reason after reason why book value is irrelevant.<< I don't think it's irrelevant at all. I especially agree with you about financials like Merrill Lynch etc... I do think that for some companies that possess a lot of intangible R&D (like software companies), the book value understates the asset values. But in general I think P/BV is flashing the same warning signs as almost every other standard of value. Wayne

To: James Clarke who wrote (6504)	3/31/1999 7:32:00 PM
From: Walter in HK	Read Replies (1) \| Respond to of 78517

JJC, on Book Value, I was addressing only the distortion effect. Not whether or not market to book is too high. I used to look at 10 years of ROE in Value Line (one glance) and if they were around 20 % without a hick-up, it had to be a good management. That was my first screen . Under 1 second. Now we have these Ego-driven, dishonest maniacs and the Auditors let them get away with two things: 1 - They write down Pension Benefits or anything that went wrong (“restructure”), against equity. Value Line doesn't even count “one-time” charges in income, even if they occur ever two years. All of a sudden the Stockholders' Equity is down. The charge should be amortized or it should in some way be made visible, recognized that the management goofed. 2 - They buy their own stock back, on the market. Say, spend $ 100 Million and the book value is $ 25 Mill. Of course, the 25 Mill should be deducted from equity. But what do they do with the 75 Mill ? Also deduct it from equity. As a result, the denominator in ROE becomes smaller, sometimes substantially so, and the % earned looks better. The CEO is a hero. Why, when they buy another company by buying up all it's stock, they would have an intangible asset, called Goodwill, and have to amortize it over 15 or more years. Even GAAP says so. I don't see why that should not apply to one's own stock. The amortization of “Goodwill” = I paid too much (may be OK for a strategic reason) is reflected in those years' Income Statements. That would be the Honest Way and would give us an informed picture. So, now, if I see something attractive, say General Motors with 35 % ROE, you have to go back and look by how much the denominator was screwed. After adjustment, the ROE usually is very pedestrian. Its funny how often you see Stockholders Equity down, even when there were more profits than there were Dividends. It has become a meaningless vessel, that pot we own, in may instances. This distortion is, of course, a partial explanation for the high Market to Book ratios that we often see now. Do you ever look at that ? And is there a better way to remove the distortion, than having to go back and adding up all those “One-time” charges and “goodwill” write-offs? Walter in HK