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Web logs are growing at an exponential pace on the internet, with an unpredictable and dramatic rise in new users and new services. Market commentators are already predicting that certain blogs may be crossing the border between up-to-date news and insider trader, and corporations have started looking carefully at employee blogs.

`What regulators may be scared of is the potential for this new media to leak stock price sensitive news to the market,` Mr. Jenyns explained.

Web logs are growing at an exponential pace on the internet, with an unpredictable and dramatic rise in new users and new services. A study by Jeffrey Henning recently predicted that there will be a total of 53.4 million blogs by year’s end, with thousands presence created weekly. But it’s what these blogs contain that interest traders.

Blogs can cover topics as serious as the war in Iraq or as ridiculous as pictures of things placed on cats, but they are the way people all over the world have begun linguistic their thoughts, their feelings, and their day-to-day news. And this day-to-day news, which often includes work-place information, is what is worrying regulators, and corporations.

And while the media digests the landmark Martha Stewart insider trader trial, the spotlight is now turning to blogs – potentially the new hotspot for insider trader. Market commentators are early predicting that steady blogs may be crossing the board midst up-to-date news and insider trader, and corporations have started looking easy at employee blogs.

`What regulators may be scared of is the potential for this new media to leak stock price sensitive news to the market,` Mr. Jenyns explained. `Just think alongside it, thousands of trading blogs and hundreds of dutiful bloggers from fortune 500 companies making posts every day. These bloggers talk casually everything from their private lives to the inner working of the businesses. Sometimes this news is unreleased to the market and can potentially tip traders to buy or sell stocks.`

Insider trading is the purchase or selling of stock based on information not to be had to the public, often done by a leak. With this danger obviously increased by the helpfulness and popularity of blogs, regulators have begun watching the blog communication carefully. However, even in the face of such scrutiny, some trading experts take for financial blogging can do the trick the everyday traders.

Jenyns explained, `For the first time in history, there is a level playing field. Brokers and their top clients no longer have the edge. In trading, the edge is all casually having rehearsal news. Now the latest information is unoccupied to anyone with internet access, and people are sharing not only their news, but their experiences with the market. With blogs like mine, everyone can have an `edge`.

Can blogs revolutionize stock trading? David Jenyns of SystemTradingBlog.com thinks so.

A couple months ago, I posted a blind stock valuation. Basically, I just gave you 7 important financial figures for each of the last 6 years and asked you to value the stock as best you could. I didn’t give you the name of the stock.

And – although I didn’t tell you this – I multiplied all figures by 10 to eliminate any bias caused by you realizing this was a very small stock.

I promised I would give a copy of Ben Graham’s The Intelligent Investor to the reader who sent in the best email telling me how much the stock was worth.

The stock was actually a foreign microcap called Watlington Waterworks. It’s a water company on the island of Bermuda.

Bermuda is a rich island nation – actually a territory of the United Kingdom – 650 miles off the coast of South Carolina. It has a population under 70,000. Bermuda’s economy is based around insurance and American tourism. Its currency is convertible into U.S. dollars at a fixed 1-to-1 ratio.

There is no fresh water on the island. Bermuda’s water comes from removing salt from seawater and collecting rainwater.

This is an analytical exercise. Not a stock tip. In all likelihood, your broker doesn’t have the ability to buy stocks for you in Bermuda.

Here is the information I provided about the company:

And here is the best email a reader sent in:

1) Growth in sales and earnings is roughly tracking inflation.  This is a mature, roughly no-growth business so I will pay no premium for growth.

2) FCF is consistently less than earnings.  So this is a business with a significant amount of long-term assets which causes CapEx to exceed accounting depreciation due to the effect of inflation.

3) FCF in this case is a more relevant determinant of value than earnings.

4) The FCF yield on equity has averaged roughly 10% over the 6-yr period presented.

5) My hurdle rate for investment is 10%, therefore I am willing to purchase the company at 1X equity.

6) So I would be willing to pay up to 181/10.5 or approximately $17.25 per share.

7) An additional consideration: The company is carrying very little debt and has stable earnings.  As a control buyer or an activist investor, I would give strong consideration to leveraging up my equity.

The stock trades on the Bermuda Stock Exchange. Shares last traded hands at $13.95 a share.

Most readers sent in valuation estimates in the $20 to $30 a share range.

Thanks to everyone who participated.

Talk to Geoff About Blind Stock Valuation

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