There was a request in the under or fairly valued stocks thread that without providing P/E ratio and “NAV”, the thread is not complete. The scope of that thread was to do a real time experiment with a basket of stocks with good balance sheet and good valuation. The criteria for valuation were covered extensively in another thread with guidance from smarter folks such as Ali and Player (where are you guys?). To accommodate the request, while avoiding clutter of the other thread, this thread will address why each stock was chosen at the time. Since choice made 13 months ago, fresh analysis attempted using historic data. Folks can chime in with independent analysis or critique the provided analysis.
Re: Explanation for criteria of picking under or fairly valued stocks
The 5 stocks were
amat
si
Teva
Nvs
Abb
Si and abb industrial. ( sort of cyclical)
Teva and nvs pharma
Amat technology (cyclical)
In my opinion, P/E is but just one metric. As for NAV, in and of itself it says little about the financial strength of the company or its valuation. The ratio of price to nav can be used as valuation metric. Debt to equity used as indicator of balance sheet strength. Where NAV is equity or book value. From what I have seen NAV used in context of mutual fund closing share price. I will be using book value or equity instead.
Re: Explanation for criteria of picking under or fairly valued stocks
Let us start with simplest case. Novartis (NVS)
Selected May 24 2012. So 2011 numbers will be used for eps, revenue etc - that is last 12 months. Ideally I should use average of 2011 and 2012 numbers. But good enough for gov work.
Why I chose it. NVS dipped from 64 to 51.5 from June ~ 2 2011 to may 24 2012. Caught my attention. That was 1st screening step, albeit unscientific.
market cap on may 24 2012 $124 billion
2011 numbers
EPS 4.48. No big spike in eps. So use it.
p/e 11.5. Good. 2nd screen passed.
Revenues $60 billion.
P/S 2.07. Great. 3rd screen passed
Balance sheet analysis.
Total debt $19.8 billion.
Cash + short term securities 8.2b
Net debt 11.6 billion.
Operating cash flow $14.1b
Capex $3.1B
Free cash flow $11B
Net debt - Free Cash Flow close to 0.
1 st screen for balance sheet passed.
Equity $69 B
Debt/ equity 0.29. Not a problem. 2nd screen passed.
While I didn't consider price to book value as valuation metric st that time, for those interested it is 124/69 = 1.8. Good enough. Sorry Benjamin (Graham) tough to find p to book value < 1.
Toss in dividend yield of 4.84% as mentioned in the thread. What is not to like?
Keep it simple. This is 8-10th grade Arithmetic. With some common sense thrown in.
Re: Explanation for criteria of picking under or fairly valued stocks
Cap gains from NVS 39.9%. With div yield on top of it.
About 4 months ago sold it at 72. Now at 72.6. Or a 0.9% return. While the market has gone up abt 20-25% in last 4 months. Why did I sell? Because I felt it was fully valued. Should I have sold? Maybe not. Unnecessary trading cost. But no one gets broke taking a profit.
All inputs welcome.