A Professional Way To Measure A Stock
Lately I hear a lot of people talking about value investing, but see very few actually practicing it.
Here’s the kicker…
Once your asset base reaches a certain level, I believe that it’s almost impossible to manage this style effectively. Therefore, I’ve been working diligently to further automate my research process. It seems that yellow pads full of stock tickers and notes work fine for my current family-and-friends operation, but it looks like an improvement for more institutional type investing is needed moving forward.
As a result, I’ve been scouring databases and spreadsheets for some time now in an effort to transfer valuation information off the yellow pads and onto the computer.
Although I am more a data troll than wizard, the process is coming along nicely. One of the four values I calculate for every stock is the intrinsic value of a company as a going concern. It serves as a measuring point for safe and cheap stocks and points to what a company will be worth if it does get their business back on track.
In addition, it also helps identify some growth oriented stocks that are not asset heavy, but nonetheless, undervalued based on earnings strength and cash flow generation.
Let’s look at an example…
One interesting company that has popped up as I worked through the data is in the company Cash America (CSH). After falling short of the always highly accurate analyst estimates, CSH has been falling for the past few months.
In spite of this shortcoming, the pawn shop operator showed decent revenue and operating earnings growth through the entire quarter. In fact, as the economy has continued to struggle, its revenue rose by 18% compared to a year ago.
Pawn shops and payday loans may not be the prettiest business, but the sad truth is that they’re both necessary and profitable.
The company has far too much goodwill on the books to ever be a tangible book value bargain, but it is a solid company that earns solid returns on equity and trades very cheaply when compared to its intrinsic value. At the current price, Cash America changes hands at about 72% of my ongoing valuation.
Bottom line…
Using this method, there are a few companies that fit this bill. And if you play your cards right, in other words, use some call options to gain exposure to some of these names and you may be flying high.
A few names to look at include Fly Leasing (FLY) and American National Insurance (ANAT).
Don’t forget that intrinsic value is just one of the four calculations I use to value a company.
My primary valuation tool is tangible book value and always will be.
However, the IV calculation is a useful guide to determining what a company is worth as an ongoing business and it can help uncover bargain issues that are not asset intensive.
Safe Trading,
Marcus Haber
Category: Options Trading Basics
