Students of Roger Montgomery's (Buffett's) intrinsic valuation method

[Tysonboss1]

I personally don't see them getting 25%, but that is just me. Its not necessarily the asset base that is the issue, it is the flow rates that are likely a problem.

There is a good presentation released by BHP on the 14th,

Part 3 of the presentation has some infomation about the shale businesses, a few key points are.

A shale well normally has first production within months of drilling, and the pay back of investment is less than a year, an individual well can produce economically for upto 50years.

The Petro Hawk drilling program is being expanded 4 fold, by BHP.

 

[Vargulf]

With the shareholder equity figure (m) how do you tell if it is a start of year figure, average or ending equity figure?

 

[Ves]

With the shareholder equity figure (m) how do you tell if it is a start of year figure, average or ending equity figure?

There should be notes for this item in the Annual Report. As far as I am aware listed companies are also required to include a "changes in equity" statement which will show the opening balance as at 1/7/XXXX and the closing balance as at 30/06/XXXX (these dates will obviously change if the company has a different reporting period).

 

[McLovin]

There should be notes for this item in the Annual Report. As far as I am aware listed companies are also required to include a "changes in equity" statement which will show the opening balance as at 1/7/XXXX and the closing balance as at 30/06/XXXX (these dates will obviously change if the company has a different reporting period).

If it's being taken from the annual report then it will be equity as at balance date. You're correct, there will be a statement of changes in equity which will show open and closing equity (and the various components of it) for the last two years.

 

[Vargulf]

There should be notes for this item in the Annual Report. As far as I am aware listed companies are also required to include a "changes in equity" statement which will show the opening balance as at 1/7/XXXX and the closing balance as at 30/06/XXXX (these dates will obviously change if the company has a different reporting period).

Cheers for that. I'll have to start downloading bulk annual reports!

This leads me to my next question I wanted to narrow down my watchlist to ten or so stocks. Is there a way to use commsec or any other broker/analyst site to view all stocks eligible to a value investor? Currently I go through M Roths Top Stocks and find about 20% that warrant further investigation. Plus the ones I have heard Roger suggest? I have enough to be going on with for analysis but if there is a method of finding all potential stocks? Or is it down to manual searching and an aching back?

 

[Vargulf]

Morningstar. Free account (registration required, but no money). It's the same data you'll see popping up on all sorts of different services. The only thing to be aware of is that you should choose a couple of 'straightforward' stocks and drill down into the details so you full understand how each number is derived. Eg, is DPS the total divs paid so far this financial year, or total divs paid last year, or total divs paid over the last 12 months; does it include or exclude specials, etc, etc. Just important to understand what their labels mean.

Is it possible to get more than two years of historical data. Two years isn't enough for me. I'm not great with websites maybe I'm missing something but every company I go to and then go to historical only shows 2010 and 2011?

 

[New Stratos]

This leads me to my next question I wanted to narrow down my watchlist to ten or so stocks. Is there a way to use commsec or any other broker/analyst site to view all stocks eligible to a value investor? Currently I go through M Roths Top Stocks and find about 20% that warrant further investigation. Plus the ones I have heard Roger suggest? I have enough to be going on with for analysis but if there is a method of finding all potential stocks? Or is it down to manual searching and an aching back?

If you use Commsec you can filter the shares for a variety of criteria and even build up multiple criteria.I'd give you step by step isntructions but they've updating the site right now.

Commsec gives you up to the last 10 years of data for each share their (morningstar) data covers. search on the share symbol and look under research or some such tab when it comes up.

 

[Vargulf]

If you use Commsec you can filter the shares for a variety of criteria and even build up multiple criteria.I'd give you step by step isntructions but they've updating the site right now.

Commsec gives you up to the last 10 years of data for each share their (morningstar) data covers. search on the share symbol and look under research or some such tab when it comes up.

Righto cheers Ill wait till after the update and investigate how to use Commsec to it's fullest. How does everyone find Commses figures are there particular figures that shouldn't be used? If you plan to buy well below the intrinsic value you calculated are they accurate enough?

 

[McLovin]

Righto cheers Ill wait till after the update and investigate how to use Commsec to it's fullest. How does everyone find Commses figures are there particular figures that shouldn't be used? If you plan to buy well below the intrinsic value you calculated are they accurate enough?

The numbers should not be relied upon except for filtering.

 

[Ves]

I do use Excel, mainly for doing DCF's and I have a ready reckoner that spits out a P/E based on inputs (of course I could do that with a calculator and pen). What I avoid is creating hugely complex models with 100s of variables that produce very pretty graphs and lots of numbers but are not much use beyond that. my theory is, f you need to be that accurate, then your margin of safety isn't big enough.

Slightly off-topic, but whilst we are talking about P/E ratios.

I often see analysis saying things like "this stock is trading in the top quartile of it's P/E range" or "this stock is trading at it's lowest P/E in history" and everything in between, of course.

Do you know if there is an easy (preferably) free way of working out historical P/E ranges for companies?

Could be useful for a very basic screen too.

 

[craft]

Slightly off-topic, but whilst we are talking about P/E ratios.

I often see analysis saying things like "this stock is trading in the top quartile of it's P/E range" or "this stock is trading at it's lowest P/E in history" and everything in between, of course.

Do you know if there is an easy (preferably) free way of working out historical P/E ranges for companies?

Could be useful for a very basic screen too.

P/E charts are available but I don't now of any for free.

 

[McLovin]

Slightly off-topic, but whilst we are talking about P/E ratios.

I often see analysis saying things like "this stock is trading in the top quartile of it's P/E range" or "this stock is trading at it's lowest P/E in history" and everything in between, of course.

Do you know if there is an easy (preferably) free way of working out historical P/E ranges for companies?

Could be useful for a very basic screen too.

Commsec does have average P/E ratios for each of the last 10 years in the "Financials" section. I imagine they're as reliable as the data that goes into it. I don't know any that will give you charts for free though.

 

[Ves]

Thanks guys - I'll have a hunt around and see if I can find anything else.

I have seen the ave. annual P/E on Commsec. I also noticed that they have a similar thing for dividend yield now as well.

They're both helpful in a sense, but the graph that craft posted is the main thing that I am after.

 

[Intrinsic Value]

I think Skaffold was about $1300 for a year.

He hasnt been blogging much of interest lately, (honestly who wants to read about collins food) so the traffic has died.

Yep 1300 a year...but I dont think he will get too many takers.

He really stuffed up with MCE and no amount of backpedalling on his blog can alter that fact and many would have lost big on this stock in the short run.

I did buy his gold pick SLR and sold half the other day for a nice profit but his rating system with the A1s etc is really flawed as has been discussed here before.

There are some good posters on his blog as well who have mentioned some interesting stocks.

Unfortunately I have no time these days for research as I am working in Singapore and they work me like a dog here...no free time and no time for surfing the net at work!!

 

[Vargulf]

A Business can have a high ROE because:
1. The business has had good luck;
2. The business has been more operationally efficient than its competitors;
3. The business has a temporary competitive advantage;
4. The business’s earnings are high because the industry or the economy is at a cyclical peak;
5. The business is in a new industry and competitors have only started to enter the industry.
6. The business has a sustainable competitive advantage

The problem is that most of these reasons are likely to be unsustainable. This is because:
1. The business’s good luck can easily run out;
2. Competitors can become more operationally efficient, or the business becomes less efficient;
3. The business’s temporary competitive advantage disappears;
4. The business’s earnings falls because the industry, or economic, cycle turns; or,
5. Competitors enter the new industry.

Only a business with a sustainable competitive advantage can sustain a high ROE long term.
To value all occurrences of high ROE the same is illogical because the high ROE’s will persevere for different time periods depending on what underlies the current high rate.

As to your first point, I'm sure there are some new 'value' investors going out with the valuation method in Value.able and applying it to any and every stock. But can't we assume that if all the books points are taken on board (i.e the first half of the book) that we will only apply it to companies who we have already deemed have a strong and continuing comp adv? One of the main points of the book were that you only begin to value companies who had a very long term stable high ROE continuing strong cashflows and little debt that can skew the results.
If we are looking at a low debt business returning high (over 20%) ROE consistently over the past 5-10 years are you seriously saying in this hypothetical case that the ROE results are not informative and P/B is? And that all this can be put down to good luck and the other unsustainable reasons you numbered for 1-2 years high ROE?

Changes to ROE is more important to a valuation then just about any other variable. Mistaking a high ROE as sustainable when it is not can put your valuation out by many multiples. This is the risk of buying high multiple P/B stocks.
If you are going to pay any more than the replacement cost of a business assets you had better be pretty sure it has a sustainable competitive advantage.

To make the assumption that the market will automatically apply the historical P/B ratio to future incremental capital deployments is very dangerous. All new investments have to be considered on their own merits.

Isn't this the argument that was being made earlier? That company P/B tells you little you didn't already know, IF you are looking at a sustainable high ROE business? P/B is going to be high isn't it? Unless the market has somehow become disillusioned with the stock. Or the whole market has slumped (i.e. now). Both of which scenarios just make it less reliable as a basis for investing in a stock don't they?

Once an understanding of the business competitive advantage is made The Price/Book ratio is probably the most useful of the superficial ratios IMO, though it is often distorted by Goodwill so Price/NTA is better.

Market P/B multiple in conjunctions with future investment opportunities tell you an awful lot. (but you have to look past Indefinite Life Intangibles on the books)

Historical ROE and payout ratios tell you squat.

Ok so are you saying once you have done your groundwork, (which I just assume everyone does who is a value investor), a low P/B (or Price/NTA) can represent a discounted stock and that is why it can be useful?
What struck a cord with me from Buffet books and then Value.able is a scenario such as Vegemite and Marmite having the same book value if all their production equipment is worth the same. And both having a high P/B if Marmite happens to be a popular stock in the short term. This is so inaccurate when it takes in no account of the power of the Vegemite brand?

I must be missing something with this whole P/B point can someone explain what that is?

Cheers

 

[Vargulf]

Yep 1300 a year...but I dont think he will get too many takers.

He really stuffed up with MCE and no amount of backpedalling on his blog can alter that fact and many would have lost big on this stock in the short run.

That's one thing I never got about his MontQualR's or what ever they are. He spends half his book talking about high competitive adv being king then he goes and highly values companies that rely on contracts with other businesses for sucess. Surely this is especially risky in the current financial environment?

 

[Ves]

I must be missing something with this whole P/B point can someone explain what that is?

Cheers

A lower P/B (compared to the same stock when it has a high P/B) basically means you can buy more of the same stock with the same amount of capital. When buying at such a time and combining this with high-expected future returns you get more than you paid for with less risk.

This after all, is the aim of value-investing is it not?

 

[Ves]

What struck a cord with me from Buffet books and then Value.able is a scenario such as Vegemite and Marmite having the same book value if all their production equipment is worth the same. And both having a high P/B if Marmite happens to be a popular stock in the short term. This is so inaccurate when it takes in no account of the power of the Vegemite brand?

In this scenario you would have to ask - How did Vegemite get such a strong brand name in the first place? Was it through rigorous advertising? Quality control? Something else? Does Marmite have the same costs? How much is this brand worth? If you decide that their brand name leads to a competitive advantage (which it quite often does not - ie the differentiation myth) you need to put a value on it. Simply put, in the case of a strong brand name it might be best to go back through the financials and attempt to figure out much they spent (by looking at the P & L) on advertising or anything else that contributes to their brand name. You could annualise this over a five year period and capitalise it in the company's book value. You might find you get a completely different picture after doing this. Accounting records often hide (or dubiously create) hidden assets.

 

[Vargulf]

A lower P/B (compared to the same stock when it has a high P/B) basically means you can buy more of the same stock with the same amount of capital. When buying at such a time and combining this with high-expected future returns you get more than you paid for with less risk.

This after all, is the aim of value-investing is it not?

It is... Ok this makes sense. Should I gather then that a low P/B is used (or preferred) rather than an intrinsic value formula for alot of posters on this site? When in conjunction with expected future returns?
Also craft and others have also mentioned 'expected future returns' a lot. Are you just talking forecast earnings growth after the fundamentals have been analysed not ROE? Or is this a step by step theory put forth in a investment book that is being referred to. If so which one.

I was planning to use high ROE's over a 5 year period (with little or no capital raising) as an initial screen for narrowing down stocks. Is this advised against?

Cheers

 

[Vargulf]

Simply put, in the case of a strong brand name it might be best to go back through the financials and attempt to figure out much they spent (by looking at the P & L) on advertising or anything else that contributes to their brand name. You could annualise this over a five year period and capitalise it in the company's book value.
You might find you get a completely different picture after doing this. Accounting records often hide (or dubiously create) hidden assets.

Ok but in hoping to hold long term value or growth stocks I would still far prefer investing in Vegemite. They probably do invest more in advertising. So your suggestion of adv related spending into book value is useful, cheers. But doesn't that provide a pretty negative outlook when Vegimites book value may be similar to Marmites (assuming they are the same production size) because Vegimite's BV hasn't taken into account the benefit reaped from the advertising not to mention their intangible assets like brand, loyal customer base e.t.c. I am right in thinking intangibles aren't included in BV hey?