The Value trail...

[npg]

Originally Posted by Rooster

I used this Graham formula:
V = Proj EPS (1 year ahead) * (8.5 + 2Growth) * 4.4/30 year AAA bond yield

For completeness sake it may be worth stating how you calculated the projected earnings as well as the growth ;)

Here is a list of companies under my microscope: PFE, HP, BER, UNP, BLG, WTM, AIG, MRH

As you can see I am currently looking to take a share in an insurer....

Actually, I took a position on PFE which I intend to build over the coming years. Maybe one day I'll post my thesis on PFE (if you read the OID then a position in PFE comes as no surprise).

Looking at the current climate it will pay off to be defensive, besides, who can argue with a 4.8% divi?

[Rooster]

I used the data from MSN for projected EPS. For growth, I used whichever data seemed most appropriate (and usually the most conservative) from analyst projections, long-term equity growth rates (or EPS of FCF).

Thanks for sharing your list! From the Greenblatt reading you suggested, I've been looking at spinoffs. One interesting one is the spinoff of Teradata from NCR. It is supposed to happen this quarter, some time.

[Rooster]

I have a position in Ensco (ESV) and it has been doing very well of late because of rumors that deep drilling oil companies are likely to begin to merge with each other to keep up with competitors who also are beginning to merge.

Capital One Finance (COF) is priced very reasonably and may be a good buy in anticipation of when the housing market eventually comes back.

[npg]

Originally Posted by Rooster

Thanks for sharing your list! From the Greenblatt reading you suggested, I've been looking at spinoffs. One interesting one is the spinoff of Teradata from NCR. It is supposed to happen this quarter, some time.

o_O. Maybe we should discuss this more. Have you had time to look into this one yet?

I am not at all familiar with NCR (I will look into it).

BTW you really want to look at PFE. You have a paper portfolio where you added VLO to. You might just as well add PFE right now and tell me in 5 years time whether I was a fool suggesting it or not.

A lot of guys like them are a buyer of PFE at 25$. PFE is 50% off it's all time high, but have doubled their earnings since then. If that doesn't sound mis-priced to you.... I also like the fact that I get a 4.8% dividend while I wait. That doesn't sound too bad to me. Pfizer have a lot of international business. This protects them against the slide of the dollar.

Anyhow, just stick it on that paper trade system, will ya?

[npg]

Originally Posted by Rooster

Capital One Finance (COF) is priced very reasonably and may be a good buy in anticipation of when the housing market eventually comes back.

I am not that familiar with the details of the credit business. What I would look out for is how they stand vs the coming bad debt scandal. There have been quite a few excesses in the loans industry. These high risks never pay off. To make matters worse,it takes quite a lot of detective work figuring out the proportion of the tranche of bad debt in a particular CDO.

What I also don't understand is the relationship COF has with the housing market....

Also, do credit card companies generate a float? How do they protect themselves against downside risk of defaults? If they have a float, what is the cost of that float and how intelligently is it invested?

[Rooster]

I will buy PFE, tomorrow morning for my paper trading account. I doubt that I know more than you do about the credit card industry. I was interested in Capital One's CEO's ability to find innovative solutions to almost any problem but I don't really understand the business enough to put money in it, yet. I read an article on Motley Fool that listed them as an excellent value if you look at their current price historically. If the housing market starts to pick up, then I will have to do more homework. Defaults seem to be a big problem for a lot of people right now.

[npg]

Sometimes I follow that equation quite successfully

motley fool article + jim cramer recommendation = bad idea

The reasons given for COF are not enough to make it a good buy. At some point Enron was historically cheap. That did not make it a good buy. For me to buy into such scenario I would need a stronger case, like for PFE at the moment.

But PFE is an incredible opportunity. That's why it is not recommended by these guys. They want more time building substantial positions. Once they are done they will hype it up of course.

Large caps have quite a bit of value nowadays. They hardly moved and are perceived as dead money. That's very good. Because as things tighten up people will realise that they had too much expectations on small caps and that that run may be over for the time being.

That's going to be the day when dead money 'ressurrects' :) Historically these have been flat for far too long. Yet their earnings increased by almost 100% or more since their last highs. One doesn't need a spreadsheet to figure out that the value is in these stocks. It's glaringly obvious.

[capp53]

Originally Posted by npg

For completeness sake it may be worth stating how you calculated the projected earnings as well as the growth ;)

Here is a list of companies under my microscope: PFE, HP, BER, UNP, BLG, WTM, AIG, MRH

As you can see I am currently looking to take a share in an insurer....

Actually, I took a position on PFE which I intend to build over the coming years. Maybe one day I'll post my thesis on PFE (if you read the OID then a position in PFE comes as no surprise).

Looking at the current climate it will pay off to be defensive, besides, who can argue with a 4.8% divi?

I was also looking at the insurance industry (PHLY). In reading their 10Q they stated investments in mortgage backed securities. Until we get a clear valuation on these securities I would lay off this industry. As for PFE I have found big dow stocks out of favor reward the patient investor BA, MCD to name a few. Just watch out for the democrats!

[npg]

Mortgage backed securities by themselves are not unreasonable since they provide a good steady income at good interest rates. What makes a mortgage backed security unreasonable is when it is structured like an Alt-A (or liar loan).

So the question to ask the company is how the mortgage backed security is actually structured and how conservatively it has been underwritten/financed.

I would doubt that a conservative insurer would go for a CDO at all, and if, one that has a large proportion of high risk tranches. Mortgages are very good business and have produced handsome returns for the likes like Wells Fargo. It's these highly speculative mortgages which are the problem in this case. Note that this is history repeating itself. Both under a 'Bush' administration.

If they are really that stupid then I would discourage anyone from investing in them. Even taking up a policy with such cowboy bankers seems inappropriate.

But yes, awaiting the outcome for a little longer is a prudent strategy here. This however, is also a question any CFO or investor relations department should be able to answer. Such enquiries should be conducted in writing since they can later serve as evindence in cases of dishonesty.

[npg]

This page from the intelligent investor is absolute dynamite!

On that page, this little gem is a true classic

Extremely few companies have been able to show a high rate of uninterrupted growth for long periods of time. Remarkably few, also, of the larger companies suffer ultimate extinction. For most, their history is one of vicissitudes, of ups and downs, of change in their relative standing. In some the variations "from rags to riches and back" have been repeated on almost a cyclical basis.

Now, when you project earnings into the future from past performance, there is a big danger that one assumes uninterrupted growth for long periods of time. Phil projects the earnings 10 years into the future --which is a long time frame. This is one of the reasons why I believe you need to be very careful when using this valuation. This can turn sour very quickly, and the 3 tools give you little protection. Their signal is sometimes ambiguous.

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