Hunting for value
Everyone in the stock market wants to buy value. That is, a stock they can be confident will rise in price. But what is value is hard to find? Roger Montgomery discusses how to find value in the fluctuating stock market. Read the article.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Michael
:
Hi Roger,
I actually look at a value.able valuation, a discounted cash flow on conservative growth assumptions, and then look at what PE ratio these measures imply (mainly as a cross check on my valuations), all set up in a spreadsheet.
I think on its own the PE is not useful, but I do get some information out of it, and like the concept on inverting it and getting your ‘initial yield’. For companies that you are comfortable in their growth prospects, this yield would then increase over time.
I think this was described in Buffettology. Obviously the PE as a standalone is not useful, but in conjunction with other factors it can be. This is really the same as the ROE not being useful without knowing the debt level.
If your new service you have talked about includes the ability to sort companies by ROE and PE etc and download into a spreadsheet, that would add extra value to me.
Roger Montgomery
:
Hi Michael,
WIth regards to the Buffettology-like approaches, if you project earnings ten years out and then apply what you think is a reasonable P/E and then discount it back, how is that different to just using a P/E on the current earnings and avoid all the extra calculations? Look, they are all estimates. Consistency is the key and convenience, and reliability and accuracy of data and coverage of all stocks etc etc…
darrin
:
HI Roger
The first example in your article I understand.
Can you clarify the 2nd example. I don’t understand why you would buy a business worth $1 book value for and up to $2.
cheers
darrin
Marty
:
Hi Darrin,
The example states that the return on $1 book value is 20% so the return on $2 would be half that (10%). As the example also states, we are happy with that 10%, so that would be the max price we can pay. If you actually wanted a 20% return, you wouldn’t pay more than $1 for it.
That’s how I see it anyway.
Cheers,
Marty
darrin
:
HI Marty
Thankyou for your post.
Now I get it.
cheers
darrin
RobertD
:
Hi Roger,
I am having trouble reading your recent scanned PDF articles on my iPad. They open up and are blank on the iPad but work fine on the PC. I have done a bit of investigating and it appears the iPad (and all iOS devices) has trouble reading PDFs that have embedded images that are jpeg2000 compressed. Are you able to save it in a different format in the future such as an conventional jpg for us mobile readers :-)
Cheers
Robert
Roger Montgomery
:
Hi Robert,
I will have to ask the IT team at Montgomery Inc. to look into it.