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Tom Au, CFA
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In the early 1990s, during the middle of a secular bull market, I began work on "A Modern Approach To Graham and Dodd Investing," that was not particularly suited for the decade of the 1990s, but was ideally suited for the following "Lost Decade" of the 2000s.
My book:
A Modern Approach to Graham and Dodd Investing
  • Using Graham and Dodd Methodolgies to Evaluate Energy Stocks 0 comments
    May 14, 2009 5:35 PM | about stocks: COP

    Ben Graham and David Dodd emphasized asset values, and dividends,rather than earnings growth in their analysis of stocks Such an analysis is particularly suited to highly capital intensive operations such as utilities and energy producers (oil driller John Paul Getty was a big Graham and Dodd fan). This piece will discuss how to evaluate energy companies such as Conoco Phillips.

    Because they are basically cyclical, energy companies shouldn't sell much above asset values. Warren Buffett made a mistake when he chased oil prices, and hence Conoco stock almost to the triple digits. But the price volatility forced the company to write off assets  that weren't economically viable at year-end 2008 prices in the $30s under the so-called "ceiling test."

    The new book value was only slightly above $35 a share. Offsetting this is soemthing called the standardized measure of discounted future net cash flows disclosued in the annual report. That's over and above depreciation charges for fixed assets on the books, so an investor is getting almost $20 a share more. in cash flow. Think of this situation as $35 of book value,  almost $20 of dividends. The actual dividend  is $1.88, and a rough rule of thumb is that the future cash flow will be ten times the dividend.Not a bad deal in the mid-$40s  for a Graham and Dodd investor.

    Another person on this site who uses similar evaluation methods is Kurt Wulff. His proprietary "McDep" model measures market value of equity plus debt (or enterprise value) versus the net present value of reserves. Ideally, this ratio should be less than one.

    Such valuation methods lead him to identify relatively cheap reserves in emerging markets like Russia, Brazil,  and... But his favorite plays seem to be in Canada, where reserves are are nearly as cheap, and carry much less political risk. Most American and western European energy concerns are expensive by comparison, although there is the occasional "special situation" that is not.

    Long Conoco Phillips

    Themes: Energy, Kurt Wulff Stocks: COP
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