Intrinsic Value Investing: Recognizing Potentially Mispriced Stocks 196 comments
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Rick Newman with U.S. News and World Reports put together an interesting piece about 15 companies that may not survive 2009 because these firms all carry large amounts of debt with very little cash on their books. These 15 firms all have been labeled with "very high" credit risks by Moody's.
By using The Applied Finance Group's (AFG’s) intrinsic value chart, one would have identified many of these companies as possessing great investment risks, long before they became red flags among the masses. Let's take a look at what AFG thinks of the 8 publicly traded firms by using AFG’s Intrinsic Value Chart and a brief explanation of the chart.
AFG’s Intrinsic Value Chart: identifies how far a stock’s trading range deviates from its intrinsic value (target price assuming immediate decay), which helps you recognize potentially mispriced stocks and pursue long and short opportunities.
• The Blue Bars represent the high and low trading range for a stock for 1 year.
• The red dotted line represents Applied Finance Group’s (AFG’s) historical Intrinsic Value through time.
• When the red line (Intrinsic Value) is above the blue bars (trading range) the company looks to be undervalued.
• When the red line (Intrinsic Value) is below the blue bars (trading range) the company looks to be overvalued.
AFG’s Intrinsic Value Chart also contains a company’s Value Score (ranked valuation attractiveness), Economic Margin Change (expected improvement of economic profitability), and Accuracy (how well AFG’s default valuation has tracked the company) information.
A quick takeaway from the charts is: From AFG’s perspective, Trump Entertainment Resorts (TRMP), Sirius XM Radio (SIRI), Six Flags (SIX), and Rite Aid (RAD) shares are currently worth nothing. Krispy Kreme's (KKD) intrinsic value is below its latest trading price. Dollar Thrifty Automotive Group (DTG), BlockBuster (BBI), and Landry's Restaurant (LNY) shares appear to be worth more than where they are currently trading.
AFG’s valuation framework estimates a company’s equity value by subtracting debt and other liabilities from the total enterprise value. The total enterprise value is estimated by discounting projected future cash flows, utilizing analysts' consensus, Economic Margin methodology, and the Decay concept which addresses the perpetuity bias in the traditional DCF model. In the case of TRMP, SIRI, SIX, and RAD, those companies are so leveraged that the values of their future cash flows are not sufficient to pay off their debt obligations.
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This article has 196 comments:
Current inability to roll over reasonable maturing debt, and the inability to finance transactions in a normal and expected manner, makes a shambles of any sort of value investing.
If you can't finance it, maybe it's not really worth what you think.
What do you think? It is almost show time for SIRI and the elevator ride up. Are you ready?
Here is what the author says... "The forecast data then becomes available for years 2009 - 2013 using our default algorithms built around analyst EPS forecasts.""
Fifty percent of the time, analyst forecasts for the next year out are in error by 100% and more. I've been at this for 30 years. There is no mathematical short cut which gives anything close to a fool proof way to invest. The safest investments are those that have a huge economic mote and which are trading below tangible book value. And even that is risky if the value of the assets decline as they did with banking. The best formula for safety right now is 1. Minimal debt. 2. Priced below "tangible" book value. 3. Highly visible earnings such as sales that are currently under contract.
Does anybody subscribe to WSJ online and can you give us an executive summary of what the articles are saying?
Thanks
Ah fresh air! Still no word and the bid sits at .14...Better put a pot on...and/or get a snickers...
SoCal Relmor...you up yet?
>> John Malone's Liberty Media Corp. was near a deal late Monday to invest in Sirius XM Radio Inc. in return for just under half of the company, according to people familiar with the matter.
Though negotiations continued over the final details, Mr. Malone appeared poised to edge past rival media baron Charles Ergen for a piece of the troubled satellite-radio operator. The parties hoped to announce an agreement before the New York market opens on Tuesday.<<
Key = >>just under half of the company<<
I guess were about to find out.
2 seperate loans
Stock offered
board seats
Any guess that announcement coming during trading hours?
stock offering
half stake, just under...
Malone might be on board now.
If you win then is there any lottery ticket where the last prize is less than the ticket amount? LOL.
LMaze
Preferred shares. 2 board seats. Basically they are buying Sirius and keeping it below 50 percent to avoid FCC problems.
Seriously I'm very happy for each of you, especially Rel who if ever I had to be in a foxhole, I want you next to me.
LMAZE
On Feb 17 08:08 AM cos1000 wrote:
> The Deal is done and is on the wires as I type. Two loans first for
> 280M Senior Secured, Malone and Mcffei to join Sirius Xm's Board,
> deal does not require FCC approval, Karmazin call Liberty's investment
> a vote Confidence (understatement)
On Feb 17 08:23 AM relmar2003 wrote:
> SO basically Malone, but not this second, bought all remaining shares
> of Sirius. Cos1000, anyone..Is this how they see it. No futher dilution
> necessary now? Correct?
I wonder a little about the pricing of the preferred stock when they convert and do you think that they will R/S?
I also think that NAB influenced media will hammer away at the dilution issue in the coming hours and try to bash the deal to help out the shorts
On Feb 17 08:29 AM seri wrote:
> Relmar - I can't remember how many shares were authorized but I thought
> it was 8 billion (or something like that). 40% would equal 3.2B which
> is more that 3.5B outstanding.
Media is not your friend. Downgrade is so you dont buy today. Today they downgrade? Not Tuesday..Today..LOL LOve how predictable they are.
I love it!!
My .31 cent close is looking about right still as a good guess....
Dont expect more than that.
People are fickle.
Mel really pulled it off, and I would bet he's not done, I hope that the 30 million for "general corporate purposes" is going to be used to sign radio talent, on a regional basis to develop and maintain subscribers. Remember Howard's original deal called for THREE channels not two, there are some very well known regional DJ's out of work because free radio is dead. Just some thoughts, remember Mel said on Kramer that if you bet against us you will pay...
I wish I could consult the marketers at Sirius, now I know the way Cos feels when he says he could advise the finance department at Sirius.
I'll be tempted to sell and sit on the sidelines for a while (at which point the stock will go to a 1.00, I'm sure).
On Feb 17 08:54 AM ZealonsUnited wrote:
> I had the brass balls to buy 42,000 shares at .059. Never told my
> wife because it was a gamble of lifetime. But I know this, we have
> Sat radios in our vehicles and couldnt live without them. I need
> .90 to break even. I really need it!
On Feb 17 09:07 AM seri wrote:
> I need .40 to break even but only because I bought some at .056.
> Don't know what I'll do if it hits .40.
>
> I'll be tempted to sell and sit on the sidelines for a while (at
> which point the stock will go to a 1.00, I'm sure).
-- The first phase includes a $280 million senior secured loan from Liberty to SIRIUS XM, $250 million of which will be funded today. The proceeds of that loan will be used by SIRIUS XM to repay $171.6 million of its maturing 2 1/2% Convertible Notes due February 17, 2009, and the balance will be used for general corporate purposes, including working capital and transaction costs. The loan will bear interest at a rate of 15%, mature in December 2012, and be secured by the assets securing SIRIUS XM's existing term credit agreement.
-- The second phase provides an additional loan of $150 million to XM Satellite Radio, SIRIUS XM's wholly owned subsidiary. Liberty has also agreed to offer to purchase up to $100 million of the loans outstanding under XM Satellite Radio's existing credit facilities from the lenders.
Upon completion of the second phase of the Liberty investments, SIRIUS XM will issue Liberty an aggregate of 12.5 million shares of preferred stock convertible into 40% of the common stock of SIRIUS XM. In addition, Liberty will receive seats on the SIRIUS XM Board of Directors proportionate to its equity ownership. It is expected that John Malone and Greg Maffei will join the SIRIUS XM Board of Directors. Liberty's obligation to consummate the second phase of its investment is subject to various closing conditions.
On Feb 17 08:29 AM jswede wrote:
> you'll see plenty more dilution in May and Dec.... also more interest
> rates going from single digits to mid-teens.... 2.5% to 15% is steep...
IMHO
I was working on something else but in the bknd I heard Faber just said either part or all of the loan was LIBOR plus 200 (2%).Maybe that's the second part...15% seems awfully high doesn't it?
He also said there is some contingency regarding May debt..I missed it...
Naturally the overall market is tankng today!! What else is new??
Best of luck to all. It's been a long ride.
Carry on.
You're a true champion out there on the WC...early call!! Our timing today is not the best with sharks out. Could hurt us out of the gate...I'll hold through it.
Thanks for having the dog properly dispose of Ergen....I hope he enjoys picking all the meat off the carcass...
There is not such thing as intrinsic--or inherent--value of a stock, bond, or commodity. The market puts a value on these. Based on one's analysis, one may believe that the potential value of the investment is above, below, or on par with that value. As reflected above, AFG uses a model to make that assessment. It's model gives a buy, hold, or sell signal on stocks based on a series of assumptions, calculations, and comparisons. Nothing in it is intrinsic.
As a strategic value investor, I do try to look for potential investments that appear undervalued, primarily by examining fundamentals, but also trends/momentum, especially in the underlying economy. Nonetheless, when I'm done, I don't presume to have found an intrinsic value, just a value relative to the market of that kind of investment. That valuation doesn't cut across investment types, eg--stocks vs. bonds, so I have to dig further to decide whether I should be in one type or another investment.
Nothing has intrinsic value. It's all relative. Those suggesting they understand the intrinsic value of an investment are selling something that does not exist.
On Feb 17 09:31 AM sl62 wrote:
> killer...
>
> Thanks for having the dog properly dispose of Ergen....I hope he
> enjoys picking all the meat off the carcass...
The market is weighing it down and people are going to really dig into the terms of this deal. It looks good...but who knows if there are any land minds in the fine print.
I am still trying to decide whether or not to buy more. Don't worry about timing the peak...it is an impossible task. Just figure out a price you are happy with and pull the trigger...that goes for both buys and sells.
Carry on.
Hahah.... just saw your post on Barrons and Eric Savitz blog. You blasted them!
This is not a one day affair. The correction will happen over days. It's a long day and MM's will be setting up traps, etc...not just a straight shot up.
Here's take down 1 right now...trying to get people to panic and sell off. And it always works...
right on...
9:35 AM ET 2/17/09 | Briefing.com
RELATED QUOTES
9:55 AM ET 2/17/09
Symbol Last % Chg
SIRI 0.19 82.17%
Real time quote.
. Argus downgrades SIRI to Sell from Hold. The firm notes that SIRI faces bankruptcy due to a number of debt maturities in 2009. While it is possible an acquisition by Dish Network or Liberty Media may be worked out, these are long shots in this environment and, the firm thinks, unlikely to rescue current shareholders, who have been essentially wiped out already. The firm believes that valuation metrics are of little value in this case, since they think the market is pricing in a bankruptcy filing. from?
I am buying a Sirius sat radio in the next week or so.
I already have Direct TV...so I will just make sure to splurge on the MLB package next month.
I echo that sentiment! I had a buy in at the open I set up last week in case they took their sweet time today announcing...but unfortunately they didn't! Suuuuucckkkks for me. I'll have to purchase at a higher price
Laggards and they probably hate SIRI. They were going to be big boys and be the first to call a sell today and they look like a piece of my stool now...
gotta get rid of the bottom feeders before this thing moves today. there are a ton of people out there that bought in the .11 range and looking to score the quick slam. mm will take them out this morning and then we'll see some modest movement ahead. might take a few days for the market to digest the deal and change the negative sentiment that has plagued siri for so long. this isn't going to happen in one shot. strong q4 numbers will ignite the movement we were hoping for today. only a week away...
I could not pull the trigger fast enough. Now I have to wait for it to go back up.
On Feb 17 09:57 AM cos1000 wrote:
> I just took .25% of my shares of the table at .2245. Can't resist
> the upside and with the market breaking key technicals, S&P 820,
> not a good day for anything to fly. I don't want to tell anyone else
> what they should do, but managing your shares for more shares is
> always a good strategy. If your over extended on balance, a good
> time to re-balance. There will be a lot of good deals after this
> market shakes out, and cash will be king. JMHO
I also saw on the news that GM and Chrysler might be getting a 7B bailout today?
use what I just did on this volatile stock as a way to play.... it's not for everybody and make sure your system lets you do quick turns without classifying you as a Day Trader. I can only do a couple of these every few days because my trades take 3 days to settle. There's a lot of stuff to keep an eye on....... good luck
Like others say. Figure out your comfort level. But it is nice to see the variety of strategy.
at some point in the future we are going to need a Sp over a buck. what are your thots on the path there? a natural market increase or the rev split?
koop
high .158 held up pretty good on this recent take down, might revisit... or low .16 if it breaks .158 then who knows....
Its tough to pull the trigger.... try it with small amounts first, sought of like back testing but in real time. Once you get some confidence and success, it gets easier. Each trade needs to be looked at in its own frame of reference. The idea is to take some off and by more back..... growing your base. You can't do it all the time but with news like this its a perfect opportunity. Level ll is also important to have access to to see momentum.....
On Feb 17 10:11 AM koop127981 wrote:
> relmor, cos, kiiller, sI..
> at some point in the future we are going to need a Sp over a buck.
> what are your thots on the path there? a natural market increase
> or the rev split?
> koop
for many, things aren't great. many have supported this stock for many years and have a lot of dough wrapped up in it. to not look ahead to the dollar mark is foolhearted.
koop
On Feb 17 10:14 AM Blue23 wrote:
> Guys...I mean this with all due respect...but quit talking about
> $1 stock right now. Things are great...the company has SURVIVED...it
> is not THRIVING. There are still company hurdles to get over and
> macro hurdles to clear. We need to be happy we're in the game and
> not get greedy.
The financial statement also left a lot of debt out of the picture. Gonna take a little time today and find out exactly how much debt was taken off table.
nothing is easy in this economy right now..that's a given. Just looking for some random thots on if you guys think siri will be able to get to the buck w/o split. at some point in the future the maratorium on under a buck will end.
koop
On Feb 17 10:21 AM cos1000 wrote:
> Good news on 4th Q and May 09 debt deal being done without any dilution,
> autos seeing something better down the road, and / or some innovative
> product programming application to generate additional revenue.
> Something on the internet with WiFi would be nice. Otherwise its
> going to be a tough road to a buck in this economy..... IMO
I'm not a hater, just a realist on this one! If anyone reads anthing else in the SEC filings please let me know. I would be willing to be educated on this one.
Blue23....
Sound advice. This not a sprint. We didn't go from 1.50 to .05 in one day and we won't get back as such. Plenty of opps up ahead to drive higher. There will be new, higher price targets set, buy upgrades and the Q. All will move this stock higher...
On Feb 17 10:38 AM Bababooie wrote:
> So . . . after reading financial that was posted. Only Feb Debt is
> resolved. A 250m amount was provided to pay off the 172m debt in
> February, plus an aditional amount for attorneys, and other office
> expenses (a party maybe?) This rise is just about where it should
> be with only the February debt resolved.
>
> I'm not a hater, just a realist on this one! If anyone reads anthing
> else in the SEC filings please let me know. I would be willing to
> be educated on this one.
Heres what we know now..
Sirius will be in business until 2011, minimum now.
They have there third party supporter, with synergies and package deals coming from an investor with similar markets.
Mel will keep his job.
Board now has outside influence, from people who are "outside the box".
Echostar cannot force Sirius to do anything now.
Sirius will not be touching COH this year to pay debt, at least not a significant portion, unless its to pay Dec. which would mean they were probably generating free cash flow.
GM Ford, etc.. are not going out of business.
Some contracts WILL be reworked now. Or Malone will put the hurt on ya!!!! Tell that fat bi*** Oprah to take a pay cut, or cut her.
With Malone in @ 40% or whatever of the company I am much less concerned about the later debt - BUT IT DOES STILL EXIST.
My humble opinion again, yes these prices are steals. But this baby ain't flying to $1 in the super near future.
We're going to be needing another thread soon...
Carry on.