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Best Value Metric - Stakeholder Value/ Earnings

Jan. 03, 2011 1:27 AM ETARO
Greg Herman profile picture
Greg Herman's Blog
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Generally, the first criteria that keeps me from being interested in 95% of stocks is the trailing P/E ratio. I love to find companies trading at or below a P/E of 5. This will ensure an earnings yield of 20% on any issue that I buy at this price. However, I will look at great companies that trade at a P/E of 10 or below, keeping my earnings yield in the double digits. However, many of the companies that meet this criteria are terrible enterprises with loads of debt. In the past I would go on to find this and waste a little time. I love to find companies with tiny debt loads because of their ability to generate significant free cash flow. By using the Stakeholder Value/ Earnings metric, I save myself the trouble upfront of determining how I should equate a company's debt load and incorporate it into its valuation. The "Stakeholder Value" simply is the market value of the shares, plus the total outstanding debt, and any preferred shares that the company holds. I just started using this metric, but think that it will lead me to making more disciplined decisions and leave less up to emotions and chance. Using this metric makes me like Aeropostale (ARO) even more. This also goes for any other company who is debt and preferred-share free.

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