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By definition, value investing is the process of selecting stocks that trade for less than their intrinsic value. Value investor extraordinaire Warren Buffett has used this style to become a billionaire. It's important to keep in mind that value investing is not concerned with how much the price of a stock has risen or fallen necessarily, but rather what is the "intrinsic" or inherent value of the stock, and is it currently trading below that price, i.e. The efficient market theory suggests that share prices always reflect all available information about a company, and value investors refute this with the idea that investment opportunities are created by disagreements between the actual stock prices, and the calculated intrinsic value of those stocks. Finding Value Stocks Value investing is based on the answers to two simple questions: 1. Article: By definition, value investing is the process of selecting stocks that trade for less than their intrinsic value. A value investor typically selects stocks with lower than middle point price-to-book or price-to-earning ratios. Of course, it is not nearly this simple. Value investing is the corner stone of long-term growth. Those who practice it survive the ups and downs of the market and are more likely to emerge wealthy than those who ride the market, in principle, due to the higher quality of the companies falling under the prerequisites of the value investor. Value investing is essentially concerned with getting the most profit at the lowest cost. The solid ground of value is profit. Value investing is an investment style which favors good stocks at great prices over great stocks at good prices. Value investor extraordinaire Warren Buffett has used this style to melt into a billionaire. It's important to keep in mind that value investing is not concerned with how much the price of a stock has risen or fallen necessarily, but rather what is the "intrinsic" or inherent value of the stock, and is it currently trading here that price, i.e. at a discount to it's intrinsic value. The important point here is that when looking at stocks that are trading at or upon their intrinsic value, the only hope for gaining value is based on future events, since the stock price represents what the conduct is worth. However, when dealing with stocks that are undervalued, or attendant at a discount, unforeseen events are unimportant in that without any new earnings or other profits, the shares are ere then "poised" to return to that inherent value which they have. The question now, of course, is "why would stock prices not permanently reflect the true value of the messmate and the intrinsic value of its shares?" In short, value investors accept implicitly that share prices are frequently wrong as indicators of the underlying value of the squadron and its shares. The efficient market theory suggests that share prices night and day reflect all close by information involving a company, and value investors refute this with the idea that investment opportunities are created by disagreements midst the material stock prices, and the purposeful intrinsic value of those stocks. Finding Value Stocks Value investing is based on the answers to two simple questions: 1. What is the modern value of this company? 2. Can its shares be purchased for less than the for real (intrinsic) value? Clearly, the important point here is, "how is the intrinsic value rightly determined?" An important point is that companies may be undervalued and overvalued regardless of what the overall markets are doing. Every investor should be appreciative of of and prepared for the inherent market volatility, and the simple fact that stock prices will fluctuate, sometimes quite significantly. Benjamin Graham has often said that if investors cannot be prepared to bless a 50% decline in value without built for comfort riddled with panic, then investing may not be for them...or rather, successful investing, as it often takes significant losses in a particular security before now gains are made, due to the idea that value investors do not try to time the market, and are focused on the underlying fundamentals of the companies. Furthermore, the quality of the companies targeted by the value investors' screening methods should be, over the long term, less volatile and susceptible to market "panic" than the midmost stock. This is also a two way road of sorts. On one hand, there is no sense in worrying thereabout depressions, upturns, and recoveries due to the underlying quality of the value investments. On the other hand, investments should only be made in companies which can flourish and do well in any market environment. Doing solid investment research and making equally solid investment decisions will take investors much further than trying to forecast the markets. How Many Different Stocks? In terms of diversification, there are many discrepancies over exactly how many different stocks a solid portfolio should be made up of. My personal view is that there should not be as many stock as normally make up a mutual fund. Many will disagree with this, but what it's worth, I think that owning a portfolio of 100, 200, or even more companies not only serves to limit risk, but it really limits the possibility for reward as well. Also, as Warren Buffett has said many times, the more companies you own, the less you know on each one. As I write this, there are 42 stocks in our recommended portfolio. This number may very well grow in the rise months, as it may decrease in number, but one thing to keep in mind is, out of the thousands of companies idle for purchase, only a very small percentage meet the stringent requirements of the diligent value investor. This is both a fortunateness and a curse. Very often, there is simply nothing to buy, and this is fine. The trap to keep from falling into is to lower your requirements for a stock when there simply isn't meeting the normal requirements. This is how many an investor has fallen into making poor investment decisions, putting money into companies not really fairish for their respective portfolio, and it will inevitably have a long term effect on gains. The Balay System. - Original, new investing system making money on every selected race, whatever the horse does! Online Trading For Financial Freedom. - Online stock trading, daytrading and short term investing strategy for beginning and experienced traders alike. Someone who reads the blog sent me this email:
One of the people I email back and forth with quite a bit is Gurpreet Narang. Here is his write-up on Journal Communications. Gurpreet Narang's Report on Journal Communications (JRN) And now my thoughts. You're absolutely right when you say:
That's really where you turned your thinking in the right direction. Asset-earnings equivalence is the way to understand Journal Communications (JRN). This is both good and bad. On the good side, the asset values – when you actually go out and look at what radio stations and TV stations sell for – are well above the value of the company's stock in the market. But now the bad news. A company doesn't just earn money on its assets. Its earnings often become more assets. Over time, earnings are reinvested in the business as assets. This is not true of all businesses. The best businesses do not require much reinvestment. But – even when a company does not require reinvestment – management often chooses to reinvest in the field it sees itself operating in. Many companies don’t define themselves in terms of what drives their profits. We call Google, Microsoft, and Apple tech companies. Really, Google is an advertiser supported media company. Microsoft is a business services company. And Apple is a luxury consumer goods business. That’s how they make their money. But it’s not where they intend to put their money. They see themselves as tech companies. That tells you what new assets they will buy with their old earnings. One of the concerns with any business is where the cash thrown off by the assets will eventually end up. I have no special love for dividend paying stocks. But I do like it when you know – or think you know – where a company will put its cash. I write about a company like Birner Dental Management (BDMS) or Omnicom (OMC) or Fair Isaac (FICO) because I think I know the assets they have and the cash flows they will produce. That’s true. But there's a bigger point. I think I know where they will put that cash. I think investment outside of their narrow field will be limited. I think BDMS will pay dividends, buy back stock, and buy or open some dentist offices every year. I think Omnicom will acquire some ad agencies – but will ultimately decide it can't reinvest most of its earnings. I definitely think that is true at FICO. Especially under the management that came in a couple years back. What does this have to do with Journal Communications? Everything. Journal Communications is named for the Milwaukee Journal Sentinel. It is largely owned by employees. It only became a publicly traded company – with different classes of stock – in the last decade. This is a business tied to newspapers. If you could separate that newspaper I would feel fine about the business. If you had Warren Buffett or Henry Singleton running the place, I'd feel fine. The theory that you could reallocate cash flows from the newspaper, radio, and TV stations into buying more TV stations – that’s a great theory. The math on that theory works. But it's a theory. And I worry that it won't pan out in practice. The key here – as in my Barnes & Noble (BKS) mistake – is the human element. Just how much were they willing to sink into the Nook? As it turns out, B&N seems willing to sink years of free cash flow from the stores into the Nook if that's what it takes. They'll end up spending a good portion of the entire market cap of the company on this device. And you may have noticed Amazon came out with something even newer and better called the Kindle Fire. Amazon will keep doing this every year. Barnes & Noble will need to spend a lot to stay in place. That’s not the kind of business you want to own. It will earn a lot. But then it will go out and blow those earnings. We have the same sort of problem here. The newspaper is making money. But it won't keep making money. Newspapers in the U.S. only work as dominant local papers. They are advertiser supported. The death of classified advertising as much as circulation declines killed these papers. This is sometimes misunderstood. People say that you have to make Americans learn to pay for their news again. The problem with that idea is that Americans never paid for general news. No one in the U.S. actually paid for the cost of their news. Subscribers paid maybe 25 cents per dollar of a newspaper company's revenues. That's less than half what it cost to produce the paper. You would've had to more than double the price of papers just to run them as non-profit enterprises. It was never about readers alone. Readers never valued newspapers enough to make them profitable. Advertisers valued readers. And newspapers had readers. So advertisers valued newspapers. It was about having the biggest megaphone in town. And renting that megaphone out to advertisers. That's how profitable papers worked. Online media works the same way. The business of Google, Facebook, etc. looks exactly like the business of local media. It just isn’t local. But you still have to be either broad and dominant or narrow and necessary. The Milwaukee Journal Sentinel was broad and dominant. It was the Buffalo Evening News of Milwaukee. That’s changed. The advertisers have moved on. The readers have moved on. The paper is making money for now. But it’ll start losing money soon. It could conceivably lose a lot of money. Exactly how much money it loses depends on how much the parent company is willing to subsidize losses in the newspaper with profits in TV and radio. That's the question you should focus on here. Do I understand this company? Its management? The culture? How do they see themselves? Do they have an interest in running a money losing paper for years and years as long as shareholders can subsidize those losses with TV and radio? That's the question. As for the value, it definitely exceeds the stock price. If you had control of the company, you could profitably increase its value far beyond the current market cap. All you need to do is starve the newspaper, keep the balance sheet clean (a big advantage over JRN's competitors), and take the cash flow from radio and TV and direct it away from newspapers and toward intangible media assets that might actually hold their value over time. This news about McGraw-Hill selling their TV stations to Scripps for $212 million might help you value that part of JRN's business. Scripps says the effective price is really $190 million because of tax benefits. Scripps also says this is 8 times cash flow. I would look at the price-to-sales multiple for something like a TV station. Free cash flow margins are very high at TV stations. The amount that needs to be reinvested is minimal. It's like having a government charter to exploit an area. The multiple here is basically 2 times sales. If you believe Scripps about tax advantages the $190 million price tag is 1.96 times the $97 million in revenue those stations had. We can apply the same roughly 2 times multiple to JRN's TV stations – which had revenue of $105 million last year – and get a value of about $210 million for the TV stations JRN owns. That just gives you some idea of how much these properties might be worth. You can do the same thing with the radio assets by searching Google News for reports of radio station sales or by checking the enterprise value to sales ratio for pure play radio station companies in the U.S. All of these companies are heavily indebted. That's one of JRN's big advantages. Almost no one who just owns TV stations or radio stations in the U.S. has a clean balance sheet. They are totally unprepared for any long-term downward trend in station revenues. And they may become motivated sellers at some point. This would be a big plus for JRN. If they were going the route of shutting down the newspaper when its time came and focusing on other media assets. That’s the big question in this investment. It's easy to fool yourself into thinking people will do the rational thing. Businesses are alleged to be much more rationally self-interested than they really are. The truthth is: businesses have crazy hopes and fears just like the rest of us. And they can be just as self-destructive when their identity is threatened. Talk to Geoff About Journal Communications (JRN) Article Index: | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24 | 25 | 26 | 27 |
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