Identifying a good company
Enjoy the next in our 2013 exclusive subscriber-only white paper series.
How can you pick the best stocks and buy them for less than they’re worth?
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.
CK Chan
:
Hi Roger, I have read your book Value.able and find it very insightful. I have a few questions though, which I hope you can enlighten.
(1) Can the method applies well for non-growth stocks? i.e. those stocks with growth rates similar to GDP or even less (such as the slow growth type company classified by Peter Lynch) ?
(2) Can the method use to value cyclical stocks? How should we approach that in view of the fluctation inherent to these stocks?
(3) Can the method use to value cash-generating business (cash cows) with minimal growth e.g. utility companies, transport company, etc?
Thanks and best regards
CK
Roger Montgomery
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Yes, yes and yes. FOr number 3, substitute cash flow in place of GAPP profit if the depreciation is overstating the capex…
SAM WHITE
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Hi Roger, Can I ask have you posted an article regarding the up coming Virtus Heath IPO ?
Would be great to hear your thoughts
Thanks Sam
Roger Montgomery
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Hi Sam. Montgomery has applied for shares in the IPO
Nick Pop
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Hi Roger
Just finished reading your book and really enjoyed it. I love the way you use real life examples to explain the concepts. Anyway I have started to put into practice how to calculate intrinsic value of companies but i am having trouble getting close to the estimates on scaffold. I know we all use different required rates of return but this should still compare closely with scaffold. For example IMF i have used a 10% req return and have come up with 1.05 (1 year) and 1.22 (2 year). The 1 year is close but the 2nd year is total out (2.79 on scaffold). Have i missed something? The estimated EPS is 15c for 2013 and 17c for 2014. Also where would you get longer term estimates of EPS? Commsec/morningstar only have 2 year estimates
Roger Montgomery
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Hi Nick,
Skaffold’s models are a tad more complex than Value.able! For broader digestibility Value.able kept the intrinsic value formula deliberately simplified.
Nick Pop
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Thanks Roger
I guess you want us to take up the membership in scaffold!
I can’t justify spending that much just yet with such a small amount of money to invest. Hopefully I will be able to save some money over the years and have larger sums of money to invest.
Are you likely to write another book expanding on Value.able?
Roger Montgomery
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And we look forward to you joining soon! Regarding the book, at the moment our sole focus is being great stewards with our client’s funds. David, Tim, Russell, Ben and Madeleine are all 110% focused on generating the best risk-adjusted returns possible.
Mark Clemens
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Really liked this article.
Jim Le
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Hi Roger,
Thanks for the article – How identify a good company.
It’s insightful and easy to understand.
It would be better if you explained how intrinsic value is calculated if a company do allocate some of the earning for dividend and retains the remaining of the earning.
Regards,
Jim
Roger Montgomery
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Hi Jim,
Grab a copy of Value.able here
christophe capel
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Great paper Roger, enjoyed reading it to start my weekend. Explaining something many see as quite complex (invest in shares/businesses) in simple yet effective words so anyone can understand it.
If I may make a small suggestion, in one of the last paragraph: “The formula for estimating intrinsic value is just simple arithmetic…” where you then go into explaining the formula and how it works, showing the formula visually and providing an example for an actual business at a point in time might make it a little bit clearer.
Again, a great paper and a great read. Thanks.
Greg Lee
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Hi Roger just read this paper and like Chris I am having trouble understanding the “simple arithmetic” in the formula for calculating intrinsic value
I have been looking at APA. Any chance you could demonstrate how thw formula is used to calculate the value for this company
I am using the financials supplied by commsec
Thanks again for the interesting reading material
Roger Montgomery
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will endeavour to write a piece on that.
Paul Holbourne
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Roger, you place a lot of emphasis on “return on equity” as a measure of intrinsic value. James O’Shaughnessy in his book “What works on Wall Street” stated that his findings from back-testing the US market found that ROE only mattered if a company had an extremely low ROE. Otherwise it wasn’t important in valuing shares.
Roger Montgomery
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I guess thats what makes a market Paul! Grab a copy of Value.able here
Tom Leonard
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You say I can read this for free but I click on ”here” and nothing happens – what is the problem is it free or not. Tom
Roger Montgomery
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Hi Tom,
Others seem to be able to access. Hope you have managed to solve it.
Mark Horton
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Sorry about my last comment as I have just flicked through Value.able and realised all and no renivestment scenarios are covered in part 3.
Richmond Warren
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Loved the read Roger, l belong to an investment club that follows very similar methods as you do, thats to say we follow the Warren Buffett way of investing.
Mark Horton
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I enjoyed the paper thankyou Roger but with regard to calculating intrinsic value does the formula change if the company in question has a low dividend payount ratio?
Roger Montgomery
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Yes it does.
Lester Green
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Roger,
I have been a member for some two years, having initially read your book ‘Valueable’. Your book, your methodolgy on investing and the whole Skaffold platform has been a magnificant source of inspiration to me. I might add that my own investment returns are currently tracking your Montgomery Fund returns, so all round I am a happy chappy at the moment.
There is however one small concern that is keeping me awake at night….page 184 of you book, table 11.2.
I am one of those guys that likes to confirm figures….I must know the formula behind the numbers…..and here’s the problem. I can’t verify your numbers in this table. I know you are right, I just can’t figure out where I am wrong. I have bought Mr Simmons book….I have applied his formula….but I just can’t get parity with your numbers.
Any chance you can solve my insomnia? I will be externally grateful.
Keep doing what your doing….it’s a marvellous product……with a definite competitive edge.
Lester
Roger Montgomery
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Then, hypothetically, wouldn’t one lose the “competitive edge”?
Lester Green
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Not if what you are doing is constantly moving the boundaries. I would be disappointed if you were not naturally doing this.
Any chance you can now answer my original question?
Karin Hefftner
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On the ABC’s “The Business” this week, Sir Richard Branson told Ticky Fullerton that he always tells people that to become a millionaire you need to be a billionaire and run an airline.