Valuing Stocks

[OpalSky]

sheesh... its like the Marie Celeste in here!

I'm currently reading through 'Streetsmart Guide to Valuing a Stock' by Gray, Cusatis & Woolridge. Its an American offering - I wondered if anyone else had read it? Any thoughts on its method? How accurate it is etc?. What do the "pro's" use?

OS.

 

[Skimbleshanks]

Gosh, you're brave ... posting about funnymentals!

It'll be interesting to see how many fans of funnymentals there are lurking on these boards (I'm sure there are plenty), so I do hope they all come out of their closets and show themselves! (well, you know what I mean)

 

[RogerM]

OpalSky - it was Easter Monday and glorious weather - at least in Devon - get a life! My mind's still working overtime Skim

I take into account fundamentals for longer term holdings, of which I have precisely none at the moment. I think it was Benjamin Graham who once said that in the short term the market is a gambling machine, but in the long term it is a weighing machine. Books I really rate for fundamentals are "Superstocks" by Kenneth Fisher, and "The Zulu Principle" by Jim Slater, which was responsible for getting me into trading in the first place, and which is still the finest book on fundamental stock selection written for the UK market - particularly for Growth Stocks.

 

[OpalSky]

Roger... maybe I should have called in for coffee! I was in Devon over Easter (Torquay - in a not so Fawlty Towers - very nice!). Made the trip on two wheels as opposed to four hence made it back pretty effortlessly yesterday. It was a nice trip in the sun.

When you look at fundamentals do you just look at the trend of the accounts/reports or take it a step further and work out a theoretical share price?

Thanks for the book rec's.

OS.

 

[JungleJim]

Dear OpalSky,

The investment club I belong to uses Fundamentals to create a shortlist of possible investments and then use TA to decide when to buy. So Fundamentals are used to decide what to buy and TA is used to decide when to buy. We only use a fairly elementary set of F'als but before implementing our strategy we had shares that were down by 90% on what we paid (and none of them in profit). Since implementing our strategy we have shares either just below what we paid for them or well within profit and going up. So here is our strategy:

1. Only invest in companies whose Market Capitalisation is between 10 and 50m.
2. Only invest in companies that pay a dividend.
3. Only invest in companies that have increased their EPS 4 out of 5 years.
4. Only invest in companies that have increased their dividend 4 out of 5 years.
5. Have an HPEG of below 0.75 (we have to use HPEG rather than PEG because the software we use only gives a Historic PEG).
6. The company has a low RiskGrade.

You will probably recognise some of them from the Zulu Principle (we refer to it as ZP). I hope this has helped.

 

[ollie]

JungleJim

not sure what you mean by "riskgrade" how do you work it out?


Ollie

 

[OpalSky]

Wow, someone to talk to at last!

Ollie - Not sure if its the same thing, but I know if you look up share charts on the Reuter's site, they show a RiskGrade (tm) chart as well. Its a proprietary system for benchmarking financial risk and takes into account currency, interest rates, volatility etc - check the site for the full 9 yards - e.g.
http://www.reuters.com/financeQuoteLookup.jhtml?ticker=DXNS.L&qtype=sym&infotype=info&qcat=quick

If I read it correctly a number from 100-700 is 'average' , anything over 700 is extremely risky. 0 is a sure bet. I guess as with most of these scales the absolute number isn't important, its how different equities/instruments compare on the same scale.

JJ - Thanks for the reply. Since posting the original question I've read the ZP and got a reasonable feel for what to look for in terms of company's figures, gearings etc. Like you say, you do have to tailor your methods somewhat to the data you have access to.

I guess the engineer in me always wants to work things out from first principles hence my interest in whether anyone apart from professional analysts actually bothers to gather a companies accounts/history and calculate the discounted cash flows for X years and compute the share price manually (eg when the Florida court case against BATS and the other tobacco companies was dismissed in May, the share price went up 9% overnight - why only 9%, and not 12% or 20%?). Analyst's must have done some calculations as to a 'fair price' in light of the different environment the company was working in now. The 9% rise represented the consensus of peoples (re)valuations of the companies future profitability.

I feel I have a very loose grip on how this all works and can be calculated, after reading Gray et al. It seems a lot of trouble to go to and my feeling was that, after doing a sample calculation on a company's stock, if I was out by 15% on the current price, I'd never be sure whether I'd overlooked something or done something wrong (most likely) or whether the stock was truly under/over valued.

So for the moment I'm sticking to that other engineering principle - keeping things simple, and just looking at the usual earnings, gearings ratios, the calibre/history of the management team and a sense of the commercial climate in which the business is operating.

Nuff said. Time for some kip.

OS.

 

[OpalSky]

Jungle Jim,

I should have asked the obvious. Are you happy with the results your club is getting? Without divulging more information than you're happy to, can you quantify your averaged rate of return? Over how many years? How many companies are in your/the clubs portfolio?

regards,
OS.

 

[Car Key Boi]

I'm a Fundamental Tard

and i work in a similar way to Jungle's investment club, that being i use Fundamentals to decide WHAT i trade, but i use some basic TA to decide WHEN i trade and when to get out

the only difference is that i'm not looking to invest, i'm not looking to buy & hold

in fact, usually i'm looking to go short coz it suits my personality. There's nothing i like better than to look at a company's profile and think "yeah, that baby's going DOWN, i'm gonna short it the next time it hits it's resistance level"

i must confess thou, i don't take the time to manually work out a share's value myself - i let the numerous analyst bois do that for me

but i check the news to get a feel of the market sentiment for the stock, and any delevopments like the Florida decision that yuo mentioned

so i like to trade when i have the fundamentals and the TA working for me. I'm not saying it's the best style of trading for everyone, i think it all depends on yuor personality and what style suits yuo the best

and if yuo're an Engineer Boi, then i would guess that day trading is not yuor style coz yuo gotta be quick, real quick, yuo just don't have to time to work everything out in a precise manner

OpalSky, the Car Key Boi salutes his fellow fundamentalist

 

[OpalSky]

Hey Car Key,

Yeah, its handy being able to go both ways ;-) long and short I mean. I've just started SBing UK stocks - swing trades, typically for a few weeks at a time. Like you say, on these shorter timescales fundamental data is of less importance.

I was interested in share valuation as a means of scoping out longer term, potentially more lucrative opportunities (certainly in terms of effort) compared to lots of short term trading... or am I at risk of being ostracised as thinking more like an investor, and less like a trader?

Saw your work on the Capriati-mobile. You're not giving her a hard time over here as well are you? She needs to keep her eye on the ball.

OS.
(PS Car Key in camouflage = khaki?)

 

[Car Key Boi]

hey dude

well, if yuo're looking at the long term in regard to shorting a company, then i don't think yuo'd be ostracised for thinking like an investor

in regard to the Capster, she's actually one of my favs although she sure has a mouth on her. Our Jennifer can cuss like a trooper! troof! but that's when she plays her best. So i was hoping that keying her ride would bring out the best in her game

and i don't wear khaki, no need to I'm so stealthy, i make a Ninja look like a flaming elephant