But do you really Value me?

All members present.

A while back we talked about how the market tends to jump after an election. The idea is that the market likes certainty, no matter how the election plays out. Well, that didn't happen. I suppose we can point to the Fiscal Cliff and Europe and her problems.

This week we wanted to take a look at stock valuation. We have been wanting to experiment with buying a single stock, and betting on the value of it to make a profit. While we do have some AT&T, we are doing that as an experiment in dividends. The point of this exercise would be to try and do our homework on a stock, pick it, and dump it for a profit at some point in the future. 

We looked at an article from the Motley Fool about how to value stocks. There are several methods and each of us took a stab at trying to understand a view and present it to the group. Here are our findings: 

Price/Earnings Valuation

P/E ratio looks at the share price for a company and the earnings of the company per share of stock. The P/E shouldn't be looked at by itself. It is a backwards looking metric. We're going to use it for the PEG ratio or the P/E Growth Ratio

You take the P/E and divide it by the projected change in earnings per share. A low number implies more future growth.

This should only be used for companies in a growth phase because P/E tells you little for established companies or shrinking ones.

For more established firms, the YPEG is used. It is a ratio of the projected P/E ratio over the projected % 5-Year growth.

Price/Revenue Valuation

When companies receive money for a good or service, they are generating revenue. Sometimes earnings (profitability) can take a hit temporarily due to things like higher taxes or product development. It may be valuable to look at the ratio of stock price to revenue generated to judge the actual health of a company.

Price/Sales Ratio, or PSR is a way of looking at stock price vs. revenue. It can be helpful when a company has not made profit in a year. As long as the company isn't going out of business, a low PSR can tell you if it is undervalued compared to its peers. The example the article used is the auto industry. There are years when none of the car companies make a profit, however they sell cars and eventually make a profit. The PSR seems to be a way of judging the strength of a company, and thus the ability to make investors money, based on sales and instead of profit generated. If that company can turn a profit, you will be in a good position, since you purchased it at a lower price. 

Cash Flow

This approach values a company based on amount of money actually moving around. It looks at earnings before interest, taxes, depreciation, and amortization. The taxes can effect the perceived value of a company. Look at this before taxes, since taxes can affect net income in so many ways. Say a company has a bad year. This means that their taxes will be reduced, which will carry into the next year. The next year will look more profitable, simply because of lower taxes. Cash Flow Valuation is a way of making sure that you are accounting for thos fluctuations by looking at the earnings before those are taken into account.

Equity-based Valuations

This method values a company based on liquidation value--assets! Shareholder equity is cash and hard assets,
intangible assets are things like trademarks and brand recognition. Some companies are worth more as parts than as a whole. This seems to be an indicator of how "safe" an investment is, say if things were to go completely pear-shaped, at least this company could be scrapped for parts, as it were. 

*As an aside, brand recognition could also decrease the barrier of entry into other industries. 

Member-based Valuations

This is a way of valuing a company based on projected income based on a subscriber base. This is the value of  cost per subscriber, based on average amount of time a subscription is maintained to determine the value of the company. We are looking at things like phone companies, cable, online subscription companies (see Netflix). You have to take into account things like infrastructure. 

Standing by themselves each of these stock valuations will not tell you the entire story. It will never be that simple. However, we can use these to give us a better picture of a potential investment, something to chew on in making the decision to lay down that 

cheddar.

Next week we should take a look at AT&T and these valuations, and see if we can get a 

better understanding of how me might apply these to a potential acquisition. 

Profit!