Assessing Share Price

Hanley

I've started reading the Intelligent Investor, and one of the techniques mentioned in assessing whether a share is over or under valued is by using tangible net assets divided by number of ordinary shares (I think specifically it's the fully diluted number of ordinary shares).

Just wondering what peoople think of this method?
How reliable is it?
And how easy is it to actually apply?

A Random Walk

Assets per share? The price of a company should be based both on current assets plus the discounted future expected returns. Assets per share can be helpful in assessing financial strength and stability but gives no helpful indication of future expectations.

Intelligent investor is a great book but bear in mind that it was written at a time when prices were quite depressed and amazing deals were to be had. There are few opportunities at present to apply the book directly. It is most useful in getting you to think logically about how a company (and shares) should be valued.

You're probably not going to find any simple "magic bullet" indicator. It's all about pulling together the various indicators and understanding how they fit together. E.g. look at interest cover, dividend ratios, eps growth, seasonal behaviour, cyclical behaviour, p/e ratio, peg ratio, quick ratio, level of debt, management payment structures and so on.

Hanley

Thanks ARW. I'm lucky enough to understand HOW most of those things you mentioned work and how to calculate them since I'm in the final year of an accounting degree. I just really don't know how to apply it to real world situations yet.... So that's what I'm trying to get a handle on really!!

I believe Graham's argument was that since a share in a company is you owning a portion of the company, the price you pay should be linked to the value of the assets and liabilities of the company. If it goes too far away from this either way then you should buy or sell depending on which way it goes.

One of the things that actually struck me that technique was the lack of a DCF analysis in estimating what the price "should" be.

I think the asset per share value as an indicator of what market price should be might be a better indicator when it comes to "stable"/established industries like publicy quoted utilities and the likes. If it's a dynamic industry or during a volatile time then it's probably of little worth.

Am I making sense?

Hanley

A Random Walk wrote: »

You're probably not going to find any simple "magic bullet" indicator. It's all about pulling together the various indicators and understanding how they fit together. E.g. look at interest cover, dividend ratios, eps growth, seasonal behaviour, cyclical behaviour, p/e ratio, peg ratio, quick ratio, level of debt, management payment structures and so on.

I'm not really looking for any magic bullet, just trying to establish if there's an preliminary indicators that are useful!!

EPS growth should be relatively stable year on year right? I assume it becomes less relevant when stock splits and the likes happen.

I've a few more questions about this whole topic but I'll leave it at that for tonight. Cheers!

A Random Walk

Hanley wrote: »

I'm not really looking for any magic bullet, just trying to establish if there's an preliminary indicators that are useful!!

It's been a while since I read Graham I tend to buy indexes these days as it's has proved easier and more profitable for me, but it is fun to buy individual stocks occasionally so I can maybe give you an idea of my approach to screening stocks. The results have been mixed, so hopefully others will chime in

Firstly I'd usually only look at US stocks, simply because there is more public information and it is easier to locate. I'd run a basic screen for a few indicators. Yahoo finance makes this very easy with their screener tool:

P/E less than 25 - I'm not usually comfortable with companies which are significantly hyped
Low levels of debt or rapidly reducing debt levels
Strong EPS growth over 5 years + (check out CRH for a perfect illustration)
Consistent earnings - I like to see slow steady growth and no major ups and downs
Strong insider ownership
Market cap of $400m-$4bn - that's a nice size, not too big with room to grow but not too small to be blown over easily.
I'll usually look for at least some dividend, not because I want the money but because it indicates some stability and maturity

That's usually enough for an initial screen. In a more detailed analysis I'd read every annual report and analyst report I could find. I like shares in companies I can understand (manufacturing, simple financial services e.g. Insurance). I eliminate any company with a hint of dodgy management or financial accounting shenanigans. I look for insider ownership (I've no problem with them selling some shares). I'd look for good interest cover and ideally a small dividend. I'd take the balance sheet apart and ask if there is anything missing e.g. is the depreciation charge low for a manufacturing company, is R&D spending rising or falling, is there cash hanging around the balance sheet for no reason. I'd also look at the basic ratios and make sure there are no red flags. I'd consider the industry and the companies competitive position - is there room for them to grow. I'd look at their product makeup and ask what happens them if a major competitor for their product arrived. I'd read the stock forums, there's a lot of rubbish usually but can be some interesting tidbits or warnings or pointers for further research.

In short I'd spend several hours or days pouring over the details of a single target, usually to discard it. It's not trivial effort if you want to get into it.