Intelligent Investments: The Lack of Value Stocks

Tuesday, November 21, 2006

The Lack of Value Stocks

Today I had time to run some of my favorite stock screens. I have noticed a steep decline in the number of opportunities currently in the market. The same crap comes up time after time. Looking back, I wish we were back in early '03. Oh well, guess I'll have to make do with the market we got.

In the meantime, there are a couple of stocks that I have been watching approaching levels where I would consider putting in some seed money. One stock I am looking at is trading at 5.12 trailing earnings, P/B of 0.93, a price of $6.10 but a book per share of $6.80, ROE of 22%, and 0.6 P/S. The drawback is the high debt, with over $300 million in debt and just $85m in cash, the stock is a little risky. I'm going to do more analysis this holiday break and let you know.

Coach was up another 1% today on strong volume. I'm wondering if its going to be another Amazon where you see this pop from Thanksgiving to New Years for the holidays and then struggle in January. I dont think it will and I believe I'll hold it.

Getty Images is up .77% today. This position has been moving slowly but steadily upward since Sept. as it got pounded this past summer on slowing growth prospects.

Overall, the portfolio did decently gaining 0.35% ($839.85) versus 0.20% for the Russell 1000 and 0.16% for the S&P 500.

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Buffett's Value Formula (?)

Warren Buffett hasn't exactly published his formula for what he calls the intrinsic value of a company, but he has dropped a number of hints. He apparently multiplies estimated future earnings by a confidence margin between zero and a hundred percent (a bird in the bush being worth 0.5 birds in the hand, and all that; bush birds are the earnings you hope for, and hand birds are the earnings you're confident will materialize). He then compares these probable earnings with something he has total confidence in, by using a U.S. treasury yield as his discount rate. In calculator form it looks like this:

This calculator doesn't use fancier math than the original one did. Its advantage is that it forces you to be explicit about your earnings expectations. It also automatically provides you with a hard-headed investment strategy: always invest in government bonds, unless you can find something else you are confident will yield more cash.

One other hint that Buffett has dropped over the years is that he can estimate value in his head in about five seconds; so whatever he does he keeps it simple, slugger.