TLassen

Enterprising Investors: 10 Undervalued Stocks

Following my quick financial ratio analysis on debt, liquidity, profitability and cash flow ratios, I agree with the author that NOV is a possible undervalued stock. Scores 80% on my strategic score (which is simplistic!)

To establish future value, I use EPS as performance metric:
PV EPS: $3.06.
Market consensus for 5 year CAGR is 12% follows then FV EPS (5Yr) at $5.39, discounted against WACC at 9.26% brings 5 year Price target around $58.25.

However EVA (ROIC-WACC) presents a problem. NOV is currently only adding 2% to it's Capital Base. I would pass on most companies that can not add as a minimum 10% in Economic Added Value. Discounted for MVA, $ 35 is great entry point.

Microsoft: Free Cash Flow Analysis

Thank you for an interesting article. I consider myself a fellow value investor and I also focus mainly on Cash Flows in order to determine intrinsic value. As we both know one of the pitfalls with discounting cash flows is determining growth and discount rates. Having said that, investors have to also keep in mind that Free Cash Flow is not extra cash leftover at the end of the cycle, but an indicator of how well a company managed its profit (net income)

Have a couple of questions and comments that I would like your input on. My comments are not meant to criticize your methods; I am interested in learning about the methodology you use.

The FROIC seems a good measure of returned value, however, it is essential to compare it to a hurdle rate such as WACC (weighted average Cost of Capital) You state that you look for min 20% FROIC but it would appear to be more meaningful it you were to subtract a company’s capital cost from the cash flow returns. If a company has a FROIC of 20% but has a WACC of 15%, it means for every dollar the company returns internally (IRR) the company is only creating $ 0.05 added value. When FROIC minus WACC is positive it indicates a company is adding value, if negative it is losing value and investors would be better off looking elsewhere.

Regarding the 15 x FCF minimum, I am wondering why 15 x, not 12.5 x or 10 x? What is the significance of 15 x FCF? There are two ways to express any ratio of course, as a factor or as a yield.

When using a P(rice)/FCF of 15 x, FCF/P(rice) equals .066%, so essentially when you are using a static factor you are just discounting the average FCF in perpetuity by .066%. While there is no problem with using an average discounted FCF in perpetuity, again it would make more sense to use WACC as the discount factor. The WACC can vary significantly between companies and provide a more accurate picture of the true Cash Flow of a company.

Or expressed the other way, to determine maximum price you wish to pay for a Company, once the WACC is found for a company, use the inverse number as the multiplying factor x FCF. As an example, Company XYZ has a WACC of 8% so multiplying it’s FCF of let’s say $5.45 by a factor of 12.5 it will give $68.12 or the max value you should pay for company XYZ

General Electric Generally Down

Bespoke....3000 or so followers. Wow.
Please read a book or two, suggest you start with "Fooled by Randomness" maybe that will put and end to these types of posts.

Why Apple Is Worth $80

Forward Est EPS of 7.67 (sept-10) multiplied by sector EPS puts AAPL at $159, so as a minimum that would be fair value.

Most Value investors never learn. The question is not whether a Company is trading over or under it's intrinsic value, the question is WHY the market is trading any given company at those irrational levels.

Seems to me, with the Cramer's et al talking up AAPL it is a perfect 'castle-in-the-sky" investment.

Nouriel Roubini, One on One: More Doom and Gloom

No it's cheaper for the Chinese to buy gold and other commodities, it is not because they are diversifying out of the USD, the commodities are bought to meet the demand needed for their expanding economy.

They will move out of the USD when it strengthens again in the future, not now when it is at a low relative value to their currency.


On Oct 24 02:23 PM E Nuff Sed wrote:

> As far as I am concerned the Chinese are idiots and regularly fleeced
> by the Americans. You just have to look at the 2Trillion of treasuries
> in US dollar treasuries they are sitting on. Now they are buying
> commodities and gold in a desperate bid to diversify out of USD (therefore
> accelarating its fall) and creating another bubble in the process.
> Where is the demand? Their internal market is too small to absorb
> all these commodities. It is going to end very badly for them.

Inflation, Precious Metals and the Mayan Calendar

Marc....May I call you Marc?

What are your thoughts on the likelihood of inflation, and the level of inflation, within a 2 year time frame. If you were to quantity it, what percentage chances would you put on inflation within 2 years being higher than:
a ) higher than 3% b) 'normal' inflation 1-3% range and c) lower than 1% or deflation.


"Inflation is coming in the future and the monetary policies in the G-20 countries virtually assure it. Black Swan events and the rise and fall of the dollar will factor into the deflation versus inflation debate over the next few years as well. How soon inflation will be a major problem is a tough call"

Good to be back....

welcome back OT
had the same problem of course, yes Firefox seems to be better than IE. I didn't bother with SA, had my 20 year old fix the problem in no time !

Large Caps Could Lead the Market Much Higher

j-dub.
Do you agree with the following statement: The market cycle moves ahead of the economic/business cycle. Yes or no? If yes, then there is nothing wrong with this disconnect you see between the market direction compared to the relative doom and gloom you are surrounded by.

My point was, responsible advisors should ensure to advise their clients to keep risk vs reward in mind, therefore the need to think in terms of what-if's

I may agree with you that there are serious economic and political problems in your country (I'm Canadian) but I will never bet against the US. You will get through this tough period.

pur some rye in that cool-aid and u will be just fine, eh? LOL


On Oct 18 04:56 PM j-dub wrote:

> He is.
> However, I am not going after him because he is talking fundamentals-pe's.
>
> That's great and that is exactly who bizarro world is going after=SOMEONE
> WHO THINKS IN REAL WORLD TERMS.
> If bizarro world can recruit enough that initially believe the market
> run is a hoax, the bizarro world takes over real world and real world
> becomes bizarro world.
> Anyone who thinks in realistic terms should thinks thrice before
> drinking the kool-aid and that is the opinion I am offering.

Large Caps Could Lead the Market Much Higher

j-dub
Think the author is expressing a very responsible view. Money managers and investors need to learn to think in terms of probabilities. Learned a long time ago, the market does what the market does. Don't fight the market, but make your investments and trade decisions with 'what-if' scenarios in mind.
Thanks for good article AB. In agreement with you that low rates mean higher PE levels.


On Oct 18 03:13 AM j-dub wrote:

> "I continue to think that the economy will be challenged for quite
> some time and that the earnings estimates out there are too optimistic.
> But what if I am wrong?"
>
> In actuality, you are not really doubting yourself, are you Mr. Brochstein?
>
> You don't think, you know that this is the case. Reality , logic
> and reason force that economic case upon us as a country.
> So what you are really thinking in your heart of hearts is:
> "Can the market can continue to disconnect itself from reality or
> will reality catch up to it?"
> You assume that reality must take hold, as it always eventually does.
> But maybe, JUST MAYBE, you think, "this time is different."
>
> I have bet very heavilly this past week that it's not. No responsible
> money manager should seek out new models proving that it is.

VIX - the reaility and options trading.

No, 1 std dev means there is a 65% probability the market will be within +/- 20%. There is 95% probability it will be within +/- 60%. Remember Six Sigma, means +/- 3 std dev.


" I most preface with the reminder that volatility is just an annualize expectation for 1 standard deviation. If I said the VIX is 20% with the S&P being 1,000. That expectation is that the S&P would remain between 800 to 1200 over a 1 year period (barring cost to carry). It is really nothing more than just an expectation of range on an annual basis reflected as a percentage"

Option Players Not Buying Rally

Thanks for a great article I just happened to come across today. Maybe to late for a response from you.
Please educate me in interpretation of Implied volatility and Market direction. My instinct would tell me the fact that the market has rallied dramatically, IS supported by the implied volatility. If we had seen IV increasing as the market was rallying I would understand your point of the article. Please correct me if I am wrong, but the options buyers are exactly 'buying the rally' as expressed by the relative IV staying low.

"The second thing to look at is how the market is trading and what the option traders are suggesting will happen in the future. If you look at the dramatic run-up in the S&P 500 of about 25% between July 8th and September 23rd you will see that during that time implied volatility (VIX) initially sold off, but has remained flat since about the middle of July and has traded in a range between 22% and 30%. This does not mean that the market will fall dramatically, but it does mean that option traders expect volatility to come back. Volatility can only come back if the market corrects and is choppy, not if the market continues to grind higher or trade in a mild range"

Do or Die Time for the Markets

Author wrote:

"As I've said before, if the S&P 500 breaks above the 88-weekly moving average and stays there, then we’re in a new bull market. However, if it’s turned away and falls below the 88-weekly moving average… then look out below"

so in other words, if/when the 88-weekly ma is broken and confirmed, you are ready to jump in the market with both feet? Great I will sell you some of my equities I bought in April for a nice profit.

And once the 88 MA is broken then "As I’ve stated time and again, I fully expect the collapse to occur this fall" this staement does not apply anymore?

DVK is absolutely right above, you should be able to identify a trend without a MA and work it to your advantage.

Portfolio Building: Risks, Not Risk

It's the regressive fallacy, the belief we can construct probability (expected return or risk) from empirical data. To conclude the market comes with a 16 standard deviation based on only what we have observed historically will "lead us astray"

Nicolas Taleb, in his book Black Swan, describes in detail his views on taking the concept of normal distribution in gaming situations and applying it to real life, such as in the Market. The rules in gaming situations are defined, they don't change, so mathematics can be used to construct probability, statistics are used to validate the math behind the expected probability.

In life, there are no defined rules, those rules may exist are subject to change at any given time, thus there is no math that can construct probability. Given the absence of structure we have no choice but to turn to empirical observed data only.

I agree with the author, experienced investors should look to manage their risk factors.

David Merkel wrote:
"Modern Portfolio Theory has done everyone a gross disservice. It is not as if we can predict the future, but the use of historical values for average returns, standard deviations, and correlations lead us astray. These figures are not stable in the intermediate term. The past is not prologue, and unlike what Sallie Krawchecksaid in Barron’s, asset allocation is not a free lunch. With so many people following strategic asset allocation, assets have separated into two groups, safe and risky"

The Fed's Ponzi Scheme Has Run Out

Well Mr.Thomas, if you don't understand the difference between an action with a criminal intent and one which you don't comprehend or agree with...good luck to you.

"The feds scheme is a zero sum game" this statement is not only offensive but of course completely misguided. Zero sum principle is best left where it belongs....in gambling theory.

"The Fed wanted us to believe that by deftly lowering and raising inetrest rates it couldmanage the economy and reduce volatility"

at least you are half way there. That is exactly the role of the Fed's. They manage an inflation target monetary policy . They control the easing and tightening of the money flow to commercial banks. Nothing 'deftly' in that, this monetary policy is adopted by all industrialized countries in the world. You may not agree with this Keynesian policy but this is economic reality.

Anyhow, I have no beef with your overall article, you make good points, but I think you go way too far with the inference of criminal intent

7 Dividend Stocks Increasing Cash Payouts

Don't usually respond to comments like yours. Div4life writes articles that are well researched, articulate and informative. Most of us "brain-dead' followers, read, analyze and use these articles as part of our overall continuing education.

Took the time to read some of your other comments you have posted. Interesting to say the least. Suggest you contribute to SA by writing an article yourself.

I am sure on SA there are many potential "followers' that will agree with your political, economic and investment views.


On Oct 03 01:46 PM dragonpaw wrote:

> Crowing about 2-3% dividend payouts and pushing this crap as though
> this were the proverbial light at the end of the tunnel. Who are
> your "followers"; the financially brain-dead?