02-15-2014, 10:19 PM
Great topic, DW -- glad you caught it.
Valuation is such a tricky topic. For me, it is critical to be reminded that there is no "right" valuation -- if there were, there would be no trades and no market.
I'm certainly no expert on valuation. I have a rudimentary understanding of the relevant ratios and balance sheet items. But I've gotten pretty comfortable "crowdsourcing" my buy decisions. And sharing ideas and opinions here should only enhance that.
For me, I apply different standards to different companies. There are a core group of companies that fall into the "dead simple" bucket. These are companies that make simple products that are in high demand and purchased frequently. They make the things in centralized factories, and ship it out -- they do not have hundreds or thousands of locations and unlimited overhead. They generate tons of cash quarter after quarter, pay dividends like clockwork, and raise them every year. These are companies like KO, PEP, MO, PM, PG, CL, and the such. I like having these are the core of my portfolio, and I am comfortable buying these great companies at reasonable valuations. I don't need a huge margin of safety on these because I am confident that over the long holding term I have, they will perform well. For these I keep an eye on historical yield and historical P/E, and I get interested when they drift to the sweet end of their historical ranges. This happens when the market as a whole swoons, or when they turn in a bad quarter or two and the talking heads go crazy, or some other one-off event. And when the next financial crisis hits, these are the ones that I will load up on.
The next ring out from the center for me includes stocks like MCD, WMT, TGT, WAG, COP, PSX, T. I treat these pretty much the same way as the "dead simple" stocks above, but I am a little more hesitant to pull the trigger and I need a little more of a sweet spot to buy. These are still very strong businesses, but they are less idiot-proof than the core companies above.
Then there are more rings out beyond those, where companies like tech (IBM, AAPL, INTC, CSCO, QCOM), financials (WFC, AFL), and cyclicals live (F, DE). The farther out from the core I get, the more I need to be convinced that I am buying a bargain, as opposed to just a fair price. I’d likely not buy F at today’s prices, but when it was trading at just two or three times earnings, I was comfortable picking up some shares. For these companies, being priced at the good end of the historical range is not enough. I need to be confident that the market is really mis-pricing the company and that its future is not nearly as bad as the price would suggest.
Then really out on the fringes are things like the mREITs (NLY) and longer-shot turnaround plays (FTR). For me, these are really just calculated risks to juice my returns some.
For all of these categories, though, I am comfortable doing a small to medium amount of my own diligence, and then read all I can about the company from as many trusted sources as I can. I form an opinion as to valuation, watch the stock for a while, and make a decision.
There are times when the process is easy and there are bargains aplenty (summers of 2011 and 2012 come to mind), and there are times like now where it is much less straightforward. I am buying less these days, but there are still plenty of opportunities. Nobody can know the future. I expect, and hope, for periods of volatility where there are general price declines. For long term investors, that is when you set up your future.
Ok, I think I have meandered off topic here, but I enjoyed writing it. I’ll quit now and maybe chime in again with something more relevant as the thread progresses.
Valuation is such a tricky topic. For me, it is critical to be reminded that there is no "right" valuation -- if there were, there would be no trades and no market.
I'm certainly no expert on valuation. I have a rudimentary understanding of the relevant ratios and balance sheet items. But I've gotten pretty comfortable "crowdsourcing" my buy decisions. And sharing ideas and opinions here should only enhance that.
For me, I apply different standards to different companies. There are a core group of companies that fall into the "dead simple" bucket. These are companies that make simple products that are in high demand and purchased frequently. They make the things in centralized factories, and ship it out -- they do not have hundreds or thousands of locations and unlimited overhead. They generate tons of cash quarter after quarter, pay dividends like clockwork, and raise them every year. These are companies like KO, PEP, MO, PM, PG, CL, and the such. I like having these are the core of my portfolio, and I am comfortable buying these great companies at reasonable valuations. I don't need a huge margin of safety on these because I am confident that over the long holding term I have, they will perform well. For these I keep an eye on historical yield and historical P/E, and I get interested when they drift to the sweet end of their historical ranges. This happens when the market as a whole swoons, or when they turn in a bad quarter or two and the talking heads go crazy, or some other one-off event. And when the next financial crisis hits, these are the ones that I will load up on.
The next ring out from the center for me includes stocks like MCD, WMT, TGT, WAG, COP, PSX, T. I treat these pretty much the same way as the "dead simple" stocks above, but I am a little more hesitant to pull the trigger and I need a little more of a sweet spot to buy. These are still very strong businesses, but they are less idiot-proof than the core companies above.
Then there are more rings out beyond those, where companies like tech (IBM, AAPL, INTC, CSCO, QCOM), financials (WFC, AFL), and cyclicals live (F, DE). The farther out from the core I get, the more I need to be convinced that I am buying a bargain, as opposed to just a fair price. I’d likely not buy F at today’s prices, but when it was trading at just two or three times earnings, I was comfortable picking up some shares. For these companies, being priced at the good end of the historical range is not enough. I need to be confident that the market is really mis-pricing the company and that its future is not nearly as bad as the price would suggest.
Then really out on the fringes are things like the mREITs (NLY) and longer-shot turnaround plays (FTR). For me, these are really just calculated risks to juice my returns some.
For all of these categories, though, I am comfortable doing a small to medium amount of my own diligence, and then read all I can about the company from as many trusted sources as I can. I form an opinion as to valuation, watch the stock for a while, and make a decision.
There are times when the process is easy and there are bargains aplenty (summers of 2011 and 2012 come to mind), and there are times like now where it is much less straightforward. I am buying less these days, but there are still plenty of opportunities. Nobody can know the future. I expect, and hope, for periods of volatility where there are general price declines. For long term investors, that is when you set up your future.
Ok, I think I have meandered off topic here, but I enjoyed writing it. I’ll quit now and maybe chime in again with something more relevant as the thread progresses.