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Strategies & Market Trends : The Art of Investing -- Ignore unavailable to you. Want to Upgrade?

To: Gottfried who wrote (681)	5/12/1999 11:44:00 PM
From: Sun Tzu	Read Replies (2) \| Respond to of 10550

This is how the method works: At the moment AMAT has Price/Sales ratio of 6.5 and operating margins of 24.2%. Let's say that the expected amount of next year's revenue growth is 30% (do supply yourown number here). Then my magic number is: 6.5/(24.2 * 1.3) * 100 = 20.66 The idea is to minimize PSR and maximize OM and SGrowth. In other words, I am willing to pay more for companies that have more growth and better operating margins. This number by itself does not mean much. It is just a way to compare one company to another, even if they are in very different industries. Of course, the comparison is much easier if the companies are very similar, say between AMAT and LRCX, or NVLS and TER. There are two practical problems with this approach, which is why it is only one of several items in my computer models. The first is that revenue estimates are not easily available. So I tend to naively extrapolate the revenue trend from last year, which of course does not work for turn arounds. So I also rely on the stock performance as a measure of what the stock market is telling me about the accuracy of this extrapolation. The second problem is that not every industry deserves the same multiple; revenue growth for VISX who has a ton of pattents and is the only game in town is a lot worthier than at MER who is highly dependant on the performance of the stock market and their floor traders. To compensate for this I introduce other factors into the model. In the end I will have 10~50 companies to choose from. I will then concentrate my "subjective" analysis on them. BTW, the stock lists that I have been publishing are usually the raw outputs of the computer model. One of these days I will get all the data that I need and get my act together and finish programming a much more sophisticated screening program. I already know what it is that I should do. It is only a matter of doing it. In the mean time, the fact that some very inteligent people on the street are using models similar to mine, gives me confidence that I am on the right track. I hope this helped, Sun Tzu

To: Gottfried who wrote (681)	5/13/1999 7:36:00 PM
From: Sun Tzu	Read Replies (4) \| Respond to of 10550

Ok, while I am waiting for AMAT to open its mouth, I did my evaluation method for AMZN. Since this is a mostly "concept" stock, then if you believe in the company, you have to give them the time to develop their idea. As such, I am evaluating them for the time horizon of 2~2.5 years, which is the high end of my investment horizon and I do not believe anyone should discount a longer time span when making an investment. At its core, AMZN is a retailer, or if you will, a speciality retailer. The retail industry has had long term sales growth rate of 14.6% and the speciality retailers have had one of 19%. It stands to reason that Amazon's revenue growth rate will come down to these levels in about 5 years. Since they are expected to grow their revenue by 60% this year, I am estimating that they will grow their revenue something like (1999:60%, 2000:50%, 2001:40%, 2002:30%, 2003:20%). So AMZN will have revenues of $2.94B in 2001 and will be growing them by 30% in the following year. The operating margins for the retail sector are 5.48%. Given Amazon's "new economy" business model, I grant them operating margins of 10% (which is very very rich). BTW, I got the 10% number from looking at the average margins for the service sector, which is what the retailers are part of. Now the most richly valued major retailer that I could find, speciality or otherwise, is Wall Mart. WMT has operating margins of 5.26% (again showing how generous I was to award AMZN OM of 10%) and has been growing its revenue by about 16%. WMT trades at P/S of 1.44. So the magic number for WMT is WMT --> 1.44 / (5.2616) 100 = 1.71 So we use this number to solve for Amazon: PSR/ (1030) 100 = 1.71 Therefore AMZN's PSR = 5.13 Since AMZN will have revenues of $2.94B as calculated above, then it's market cap in 2001 will be 5.31 * 2.94 = $15.1B Which is substantially below the current $23 Billion. There, You now know how Sun Tzu evaluates his investments! The magic is gone. Sun "I showed you mine, now you show me yours <VBG>" Tzu