****Shopping for Value: A Practical Approach

Shopping for Value: A Practical Approach


Trading off between philosophy and practicality
Shopping for Value: A Practical Approach
The Thought Process Is What Counts

Understanding different kinds of value investing situations
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors

Using a condensed appraisal approach and check list
Short Form for Value Appraisal

Managing your value investments once purchased
Keeping track of your investments
Making the "sell decision"

Recognizing Value Situations - Smoke and Mirrors

Recognizing Value Situations - Smoke and Mirrors

Some apparent asset plays can be a mirage. Find a company selling at a low price to book (P/B), look at assets, and notice that per-share assets are higher than the share price. Is it a good buy?

Depends on the quality and liquidity of the assets on the books.

Large manufacturers and other capital-intensive companies often have overvalued assets on the books. If the assets are largely based on buildings, equipment, and intangibles, watch out; but if they are cash, securities, marketable natural resourcees, land, and the like, there may be an asset-play opportunity.

If there is a large cash hoard exceeding debt, make sure the company is cash flow positive or nearly so. You don't want this cash to disappear as "cash burn."

Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors

Recognizing Value Situations - Cyclical Plays

Recognizing Value Situations - Cyclical Plays

Generally, cyclical companies shouldn't be confused with value investments. Growth, although apparent in the short term, usually isn't sustainable. Investors are getting wiser and aren't as likely to bid up prices in good times, nor bid them way down in bad times, so this form of market timing doesn't work as well.

But occasionally companies caught in the cyclical pool come up with strategies to climb out of it, and move more steadily up and to the right International expansion can reduce cyclical effects.

Manufacturing companies diversify into more recession-proof financial services (which make more money as poor business conditions beget lower interest rates). General Electric has figured this out, and Ford has tried. Other smaller companies may have more effective cycle-beating strategies, because it's hard to keep such big ships as Ford and GE from turning when the wind shifts. If a company seems cheap and has something new in its portfolio to avoid cyclical price and earnings behaviour, it may be worth a look.

Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors

Recognizing Value Situations - Turning the Ship Around

Recognizing Value Situations - Turning the Ship Around

Many companies go through restructuring, downsizing, and spinning off businesses deemed not vital to the core business. There is usually a "back-to-basics" and "focus" theme to these events, and they usually occur after extended periods of poor business results.

U.S. automakers (particularly Chrysler) went through this years ago and are obviously doing it again, exemplified by Ford's "Way Forward" campaign. Airlines have done it, albeit with mixed results, and it's likely that the banking and lending industrywill have to do the same.

Do turnarounds works? According to Buffett and many other professionals, generally not.

A few do succeed, and when they do, there's usually a big impact on shareholder value. It happened with Chrysler, and again with Hewlett-Packard (whose problems, notably, were not as severe).

Determining worthy value investments in these situations is difficult. Probably the best approach is to try to place a value on the core remaining business, as many did with HP's core printing business; then try to imagine how other units would fare either in a sale or with a successful turnaround. Again here, the work of professionals shouldn't be ignored.


Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors

Recognizing Value Situations - Growth Kickers

Recognizing Value Situations - Growth Kickers

From time to time, relatively steady companies come up with small subsidiary businesses, sometimes related and sometimes not, that can perk up business growth.

Telecom companies got into the cell phone business and 3M is sticking with the Post-It boom. Twenty years ago, the growthless Southern Pacific Railroad started using its right-of-way for telecommunications lines in a business that eventually became Sprint.

These kickers can kindle grwoth, rekindle growth, and provide good, saleable assets downstream. They may be like finding chunks of chicken in a bowl of soup - not there in every spoonful and maybe not there at all. But when a big company crows about a small new product or business development in its portfolio within its ranks, keep your eyes open.


Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors

Recognizing Value Situations - The Asset Play

Recognizing Value Situations - The Asset Play

Sometimes it isn't the growth but the value of current underlying assets that points to value.

Although in the mainstream case, assets are in place only as resources upon which to build business growth and thus aren't valued separately, there will be cases in which the assets themselves create the value. In other words:

• the company owns them, but they aren't involved - or aren't completely involved - in producing the company's revenue and profit stream.
• Or they could be used more effectively somewhere else,
• or they simply aren't valued correctly on the books.

The point is, their actual value exceeds reported value in the business as it is currently defined.

Actual value exceeds reported value usually in one of two forms:

• undervalued assets on the books or
• breakup values that exceed the assets' current value to the business.

Undervalued assets

Both physical and intangible assets can be undervalued, sometimes significantly. Frequently this occurs with nondepreciable assets that have been held for a long time, such as land. Land is often carried on the books at purchase value, which is almost always less than current market value, especially if held for a long time.

The classic example is railroads, which hold millions of acres originally granted for free when they were built. Some of this land is used in the business, but a great majority isn't, especially for western roads. Something like 1 percent of all land in California is owned by just a couple of rail firms. Similar situations occur in oil and other natural resource businesses.

Intellectual property can also be undervalued (although in many cases, especially with acquisitions, it is overvalued, watch out!). Patents and other unique, homegrown know-how can have significant value, although corporate history is littered with companies (Xerox, Bell Labs [Alcatel-Lucent], IBM) that failed to capitalize on the wealth potential.

The key to undervalued asset plays is whether the assets are really that valuable, and what the strategy is for unlocking that value. Railroads until recently have done little to try to realize the value of their land assets. (Now, we're starting to see rail yards converted to downtown plazas, but sometimes at great expense for environmental cleanups.)

Look for companies with million of acres or barrels on the books; examine current market prices; decide for yourself whether there's an opportunity. Then look for evidence that the company itself recognizes the opportunity. Union Pacific Corporation (a railroad parent company) for years not only looked to sell its rail-adjacent land but also to target potential customer companies who would build facilities along its lines and ship by rail. They had a whole real estate subsidiary set up around this idea. It was a good strategy, but so far, it's a drop in the bucket compared to potential.

When the sum of the parts exceeds the whole

Big, stagnant, set-in-their-ways companies sometimes offer hidden opportunities. If they were to break into parts, each part would be free to focus on its core opportunities. Improved focus and reduced corporate bureaucracy can work wonders toward rekindling growth, satisfying customers, and building successful new brands. The classic example is AT&T, whose breakup created billions in new business value (despite the fact that the breakup was far from voluntary).

We see it today in a lot of food companies (such as Kraft Foods) and even Procter & Gamble, which has spun off several important divisions to J.M. Smucker. And although the spinoff didn't go public, the Daimler-Chrysler breakup had a lot of value investors thinking about breakup value.

The key is to identify these companies; then try to visualize what they may look like as individual parts - as individual businesses. It isn't always a successful strategy, because new overhead must be created to run each business, and synergies are lost. A breakup of General Motors may not work because the dealer network and synergies of common parts platforms would be lost.

It makes more sense where multiple, unrelated, or poorly related businesses exist under one corporate umbrella. If the customers are different, technologies are different, or business models are different, separation sometimes leads to value. Hewlett-Packard and Agilent Technologies (one selling technology end products and the other selling ''things that make things work" to other technology companies) made a logical break, but it took a long time for both companies to hit their stride in their marketplaces.

Markets tend to undervalue huge conglomerates. It is hard to appreciate and understand the value of each component in detail, so the investing and analysis public tend to discount what they don't understand.

So put all this together, and you may look at a General Electric or Procter & Gamble and wonder whether there is more value than meets the stock pages. Listen to rumors, picture the transition, look for clues that management may be thinking along the same lines (a few small divestitures may be an experiment). This is an area where professional analysts can provide good information on which companies are "in play" and what their breakup vlaue may be.


Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors

Recognizing Value Situations - The Fire Sale

Recognizing Value Situations - The Fire Sale

Occasionally companies experience deep price declines due to actual or anticipated news or announcements. These declines can get out of hand, as more and more bad spin circulates in the market and investors (and institutions) head for seemingly safer waters.

The decline is either a one-shot affair or a longer, momentum-driven decline.

The one-shot affair is usually more attractive to the value investor, as it is often more of a short-term overreaction to news than a fundamental shift in the business.

Getting creamed

The one-shot hit was recently exhibited by company XYZ. Even though XYZ has no debt, pays a dividend (rare for a small cap growth stock), and has over $5 in net cash, the stock lost 40 percent of its value, from $28 to $16 over three trading days with concerns about the economy and an ambiguous earnings outlook (the quarterly report actually beat expectations).

The shrewd value investor doesn't just go out and buy; he or she researches a situation to determine whether the business model really is broken. Running the numbers, visiting the stores, and researching the industry are all appropriate steps in this situation.

Anytime a stock loses a quarter, a third, or half of its value in one day, it may be worth a glance. Just keep in mind that the reasons for these slaughters are sometimes justified, and the road to recovery may be difficult. There may be more touble than meets the eye. At the same time, a value investor may find bargains among such distressed inventory.

Misreading the tea leaves

Longer declines are illustrated by nearly the entire telecom and fiber optics sector in the 1998 - 2003 era: Long, slow persistent declines driven by ever increasing negative sentiment. The reasons are fairly obvious considering the history of telecom deregualtion, the Internet boom, over-ordering, excess capacity, excess expectations, and subsequent bust. But still, most market players were focused on the short-term write-offs, layoffs, and lack of visibility; few looked at the long-term prospects for these businesses. These bust cycles happen all the time. Some are company-specific; others are inherent in their industry. Widespread negative sentiment can produce attractive buying opportunities.


Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors

Recognizing Value Situations - Growth at a Reasonable Price (GARP)

Recognizing Value Situations - Growth at a Reasonable Price (GARP)


GARP is the mainstream scenario of reasonable market valuation - or undervaluation - of growth potential. Solid and improving fundamentals and supporting intangibles are key. As part of the assessment the value investor must ask how realistic are the growth projections, particularly over time, and whether the company takes a balanced approach to the business and fundamentals. In short, is the business a good business, capable of sustained growth, and selling at a reasonable price? Key words not to lose sight of are good, sustained, and reasonable.


Or is the business a bet on an extreme but temporary success in short-term margins, market share, revenue, or profit? The G in GARP must be sustainable, not based on a short-term blip, fad, acquisition, or worse, a wild hope. The business model and its perception in the marketplace must be solid and on the rise.


Stocks with a PEG ratio of 2 or less with other solid fudamentals are good candidates, but "GARP" is not a matter of ratios alone.


Select companies with solid fundamentals and strong growth prospects based on various factors to analyse, but beware the growth maybe far from a sure thing.

Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors

Recognizing Value Situations

Recognizing Value Situations

Value comes wrapped in many different packages. The common is the growth case through normal business results, where solid and improving business fundamentals and intangibles point to solid business growh down the road, and where the market has undervalued that growth. That's arguably the most clear-cut, least risky, and easiest-to-understand scenario.

But other situations do present themselves, and although they may take weeks of professional-level analysis to fully grasp, they can be quite interesting. And in a few cases, they may be as easily justified by your own observations, common sense, and gut feeling as by the numbers.

In general, you're encouraged to be a do-it-yourselfer. But in many of the special situations, do-it-yourself may not be practical. Some of these value drivers can be well hidden and subjective - like a company's breakup value. They often turn into value not through normal business results but by being unlocked through acquisitions and restructurings. For these situations it makes sense to rely a bit more on industry professionals and analysts, who have access to key, paid-for data and a lot of historical precident. They can also pick up the phone and call the company itself or others who may have interest in the assets.

Smart value investors know when to - and when not to- rely on the work of others.


Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors

Shopping for Value: A Practical Approach

Shopping for Value: A Practical Approach

"Value investing boils down to finding a good business, analyzing it to find the simple truths about it, and deciding whether the truths are on track and the price is right."

The thought process is what counts.

1. Recognizing value situations:

• Growth at a reasonable price (GARP)
• The fire sale
• The asset play
• Growth kickers
• Turning the ship around
• Cyclical plays

2. Making a value judgement in practice

3. It ain't over until it's over

• Keeping track
• Making the "sell decision"