The Value trail...

[npg]

This thread should provide for a useful forum where we can collect our ideas on value investing.

To start off, let's settle the intrinsic value discussion. I noticed that a lot of R1 readers have gotten the wrong impression. So let's clarify this, using Buffetts own writing:

"We define intrinsic value as the discounted value of the
cash that can be taken out of a business during its remaining
life. Anyone calculating intrinsic value necessarily comes up
with a highly subjective figure that will change both as
estimates of future cash flows are revised and as interest rates
move. Despite its fuzziness, however, intrinsic value is all-
important and is the only logical way to evaluate the relative
attractiveness of investments and businesses."

You can read the whole essay in this outstanding letter to shareholders

Chairman's Letter - 1994

If you still believe that you have worked out the intrinsic value after using a R1 earnings projection, then it's your own fault }:P

[supra082]

NPG you seem very knowledgeable from reading your previous posts... I was wondering if you had any comments on my value watch list:

HLX
UNT
MER
CHEUY
WMT
COF
BAC
JNJ
USB
HD
LOW
FBTX
CHK
IPCR
MTH
TYC
WB
IPCR
RDN
UFPI
PTSI
RAIL


I know the list is long so just scan over it and see if anything catches your eye. My strategy is to value invest and I think these companies are offered at a discount right now.

You had some interesting commentary on RAIL. I would like to throw another bit in: I graduated college recently and a chemical engineering buddy got a job at a power plant. He told me how new technologies recently developed can capture 90%+ of emissions from coal burning as carbide (or something like that). The carbide can in turn be sold to chemical companies to be put in baking powder, etc. I was told that GE is also involved in this area in clean burning coal plants. Coal is the most abundant viable source for powerplant energy generation worldwide. Also, the International Energy Agency expects a 43% increase in coal use from 2000 to 2020.

[npg]

Originally Posted by supra082

I know the list is long so just scan over it and see if anything catches your eye. My strategy is to value invest and I think these companies are offered at a discount right now.

I am not sure I can comment on all these selections. All I can tell you is that JNJ, WMT and USB are also on my horizon.

What's much more interesting, and beneficial, is why you believe these companies are offered at a discount right now and where you see value.

For starters, all of these are pretty much in the large cap area. A lot of fingers ironcically point at large caps stating that there is value to be found, and I tend to agree.

WMT is an incredible company. Although the stock has been flat for a considerable time. People sort of get disgusted because the market doesn't appraise it right and the price remained flat for a considerable period of time. However, WMT still has good business and produces great returns. So---without the bother producing any sort of calcluations---there is an ever increasing disparity between its intrinsic value (which is still growing) and a stock price that remains flat. Eventually such companies are going to be valued appropriately again. Judging from past experience this can make the price shoot up like a champagne cork. USG is another such example. It will be flat for quite some time and then quite likely shoot up like mad. So you gotta get on board and be patient.

As these stock remains flat and their intrinsic value grows, their intrinsic value increases with time. These are uinique high quality companies that are on sale right now.

Today there is that truly extraordinary situation where large caps are effectively undervalued. Small and mid caps have done very well but are overvalued now. Then there is commodities where money has been pouring in. Nothing happened to the large caps. That may change sooner than later. It's a bit like with Coca-Cola in 1982 (that's when Buffett took a substantial stake in Coke). There are quite a few large caps out there where you get a similar situation, with great future prospects at ridicolous prices. WMT is one of them.

You need a lof of patience though. Stuff like that can take up to a good 3 years to develop.

[npg]

Ben Graham's Ten Attributes of an Undervalued Stock

1. Earnings yield (reverse of the PE) that is doulbe the triple-A bond yield
2. PE that is 4/10th of the higherst average PE achieved by the stock in the most recent five years
3. A divident yield of two-thirds the triple-A bond yield
4. A stock price of 2/3 of the net current asset value (those assets that are immediately convertible into cash)
5. A stock price of 2/3 the tangible book value per share. This is calculated by adding up all the assets, excluding intangibles such as goodwill, patents, etc..., substracting all liabilities and dividing by the total number of shares out.
6. Total debt that is less than tangible book value
7. A current ratio of two or more (a current ratio is current assets divided by current liabilities)
8. Total debt less than the net current asset value
9. Earnings that have doubled in the most recent ten years
10. No more than two declines in earnings of 5% or more in the past ten years

Ben was always on the lookout to improve things. He loved the intellectual challenge of the stock market. The above approach is one of many he came up with.

I still use the first litmus test a lot (as outlined in the Intelligent Investor). PE * BV/Share <= 22.5. If it's below that threshold I start looking further...

[Rooster]

This creates a pretty short list!

[npg]

Better safe than sorry ;)

It's one of many ways to look at a security. The shorter the list, the less work to evaluate it. Sounds like a good deal to me!

[Rooster]

Are there any companies currently meeting all of the criteria? Here is a list of value companies for everyone's perusal. I don't think that any of these meet all of the criteria, though:

[sergei]

Where did you get those MOS numbers?

[sergei]

Where did you get those MOS prices?

[Rooster]

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