I noticed this board doesn't have much traffic. Hopefully, this will get some views. I tried posting in Ben Graham's Zoo but got no response.How much do you fuss over numbers? Me, probably not much.I tend not to do many calculations. If I find a good buy in my mind, it's so obvious I don't need to run the numbers.Just a few quick glances here and there is generally enough for me. Most of my decision making comes from less quantified things.Only numbers I really look at are P/E ratios and P/3 year E average.Otherwise, I think a good value at a sensible price jumps off the screen.Do you agree or disagree?
Yes, I use PEs as part of the review process to spot overvalued stocks especially.Much depends on how much time you have to spend. Once I have identfiied a stock of interest by my own methods, I double check the final five or so by checking analysts recommendations. Usually they agree with my choices but occasionally they are negative on one of more of them. Then I know to dig deeper to see what is up with the stock.Surprises can be nasty. And with so much information out there to research it can be easy to overlook significant information.
My knee-jerk response is: I don't worry about numbers. But then when I really look at what I'm doing, I'm all over the numbers.I look at previous years EPS and Sales. Are they growing and at what rate?What has the price been in the past 5 years? What about the PE? Is the current PE too high compared to the previous years?Quarterly, I should (but don't always) keep up with sales and EPS compared to previous quarters. How are those trending?But I'm not one to look at inventories, depreciations, net profits, returns on total captial, operating margins, etc.Mike
One number I always check is long term debt. I don't feel comfortable owning a company with too much debt.Another thing: if I'm not sure how a company makes its money, I ain'tbuying.David (who didn't buy First Marblehead for just that reason)
Thank you everyone for your responses so far.pauleckler - I've dug deeper many occasions, but didn't really know how to interpret what I'm getting. I've done a lot of calculations, comparisons, and looked through a bunch of numbers. Maybe it's just that I don't know how to interpret it, but as a whole, I don't put too much stock into *most* of it. I try to keep it basic.Mike - I definitely agree with your last sentence. But I don't know about looking at sales and revenues too much. Generally, when I buy a stock - I like to buy companies I have no problem with owning for life. Basically, a company that wont change much. So I don't think I look for growth tends over small periods, like a quarter to a couple of years. One question though: Why don't you look at net income growth?dwjohnst - I agree 100%. Sounds like my style. I *hate* personal debt in my life, so I wouldn't want to own a company with too much either. And I have to understand it. Simple, simple strategy. Historically, it has actually proven to be one of the most profitable strategies as well.
I always check out the net book value per share as well as the ratios above.Be careful of the pe's as they were much lower in the late 60's and early 70's when we had stagflation, so a low pe now may not be low if history is to repeat itself.
Why don't you look at net income growth?Net income is equal to the income that a company has after subtracting costs and expenses from the total revenue.But that income can be used to pay dividends, or used as retained earnings. So I figure, why bother? I've got my total revenue, and I can see if the dividend is being raised....Mike
I'm going to have to disagree with your strategy here Penny. While I agree that the P/E ratio is a very important metric, I believe that it is only the first step in discovering a truly undervalued company. Just because a company is trading at 8 times earnings when it use to be trading at 12 doesn't necessarily mean that it is undervalued. There could be a perfectly rational reason for a company to be trading at 8. Lets take China Petroleum for example. If all I look at is the P/E, this stock looks like a great buy at only about 7 times forward earnings. A price to book of 1.75 is attractive as well. However, if an intelligent investor starts to do a little research he or she would find out that the price of fuel in China is dictated by the communist government and not by the free market. So, while integrated oil companies in the U.S. are able to raise fuel prices when crude is hitting record highs, our friends at China Petro can do nothing more than watch their gross margin disappear as their cost of goods sold increases and their revenue remains constant. I do not believe China Petro to be undervalued. Studying the financial statements and industry characteristics of what you believe to be a good value stock is what separates the ordinary investors from the greats like Warren Buffett and Ben Graham. There is an enormous amount of information buried within the "numbers," one simply has to develop the financial acumen to interpret it.
It still comes down to the numbers are really only a tool. They let you reject candidates that are clearly not worth further consideration.But good stock picks are not made very often based solely on the numbers. The final decision also has to consider your feelings for how likely the business of the company is to improve.No matter how you slice it, investing still comes down to a judgement call. It cannot be reduced to a mathematical formula.
Mike - I have to slightly disagree with that statement just for two basic reasons. EPS can be manipulated into showing growth by share repurchases even though the company is netting less money (and therefore becoming less valuable) and revenues alone don't make much of a difference. GM is the 3rd largest generator of cash in the US but has consistently lost billions over the past few years.Intrinzic - I didn't say P/E is a buy/sell signal I just said it is one of the only statistics that I actually consider to be worthwhile in determining value, because it directly relates the purchase price to earnings. Your PetroChina example, in my mind, supports my hypothesis rather than goes against it. Let me explain: Basically, I'm saying most of my decision making process goes to judgement, general outlook, resistance to change, management, my ability to understand the business, and price. It does not rely on short-term economics, formulas, and or statistical signals to buy. China's regulation of gas prices is an *intangible* that can't be considered by statistics, calculations, or other numbers. You can only consider it though personal judgement. I wouldn't go out and buy up all the low PE stocks. Just the ones that I feel comfortable with.paul - Exactly!
Though I tend to agree that it's easy to go overboard with the numbers, I always go further than P/E. Penny, I understand your explanation behind your thinking and I get the sense that you do more work than your original post lets on (at least to me).In terms of P/E, I have a friend that I'm always talking about stocks with. This guy knows business and knows valuation really well, but he also tends to be a bit lazy, and every time I tell him about a stock he looks at the P/E from Yahoo!Finance, and I think that's where a lot of people end up turning.This is a fine place to start, but as other posters have mentioned, it's just a starting point. I always feel it necessary to dig into the numbers and really find out the drivers of the business and the financial statements. I agree with Buffett in that we want to get a picture of the company's earning power, not just its accounting profit for a given period.For those not familiar with the concept, Buffett talked about what he called "owner earnings" back in 1986: If we think through these questions, we can gain some insights about what may be called "owner earnings." These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges such as Company N's items (1) and (4) less ( c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in ( c) . However, businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change.)http://www.berkshirehathaway.com/letters/1986.htmlTo get a little more specific, let's think insurance companies for a second. The industry goes through definite cycles -- when capital is hard to come by, the best positioned companies do well, when capital becomes easier to come by competition heats up and returns decline. The problem is that when the cycle starts to turn, trailing earnings are still high, while current and forward profits start to fall. So P/E for the insurers is really low even though they're heading into a period of lower earnings. The flip side is also true -- when they're coming out of a downturn, P/E multiples often expand and can even look expensive because trailing earnings were so low.The result in most cases is that an insurer's P/E will be fairly misleading as far as a true read on the value of the company. So what makes the most sense is to take a look at the earnings history of the company, examine cyclical fluctuations, and use that to figure out the true earnings picture for the company.So I'll probably put myself in a middle camp here -- I prefer not to do extensive models to figure out valuations, but I also definitely go beyond valuation multiples like P/E, P/sales, EV/EBIT, etc, etc.Matt
That's a *great* point about cyclical businesses. Someone who knows more about them than me already probably knows that, like yourself.The businesses I like are steady and not particularly cyclical. I feel like I can understand something like Wal-Mart, Smucker's, or Toyota better than I could a bank or an insurance company.What I invest in are things I've dealt with my whole life and are easy to understand. I have a better idea of what's a good price for these consumer industries than other, more complicated things like finance, fiber-optics, internet information companies, or non-oil/utility energy companies like natural gas or solar power.As a side note: Double check Yahoo! finance stuff. I really only use it for quotes, shares outstanding, headlines, and the portfolio tracker.A lot of times it's dividend it incorrect, and so is the P/E and income statement, balance sheet, and cash flows.I use Morningstar for the real financial data.
I figured I'd throw my two cents into this discussion. I'm a math guy so I don't mind digging through numbers and the one I really focus on is EPS. I try to estimate the growth rate based on past performance and I try to spend a few minutes looking at the balance sheet to see how quickly the company has grown over the previous few years. I look at the P/E ratio, but I really only do that to get a sense of where I think the P/E ratio will be 5 years from now (I do all my calculations based on a 5-year window).My first priority when evaluating stocks is to get a sense of what it's going to be worth 5 years from now so that I can work backwards to what I feel comfortable paying for it today. I work backwards by factoring in my margin of safety.
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |