On Feb 7, 4:10 am, "Elle" <honda.lion...[at]nospam.earthlink.net> wrote:
- quote -

That's the commonly used definition of not just the intrinsic value of
a stock but, in general, the definition of the intrinsic value of an
asset. It makes perfect sense: when you buy a stock, you buy a claim
to the property of a company which is expected to generate earnings
(if not, they would go out of business sooner or later), so you are
actually buying a stream of earnings, discounted at the appropiate
rate (riskier stocks/investments should be discounted at a higher rate
than safer investments).

- quote -

This is but one definition of "intrinsic value of a stock."
Other definitions of it may be and are employed.

Jose Bailen wrote:
- quote -

Count me in favor of earnings guidance, for cynical reasons.

The branch of value stock-picking that I find most interesting is
contrarian investing, looking for out-of-favor stocks. Not slow-growers,
not high-dividend-payers, but specifically companies that aren't geting
attention now, that are likely to be of interest in the future, for
whatever reason. The crux is deciding whether something is in-favor or
out-of-favor, which isn't easy, and which is very subjective.

It's a bit like the story attributed, IIRC, to Keynes...equating
stock-picking to a beauty contest where trying to pick not the prettiest
contestant, but rather the contestant that everyone else will think is
the prettiest. In theory everyone knows this is the game, and is doing
the same. But I believe the reality is that many investors aren't in
this second-degree form of the contest -- they're just picking what they
think is the prettiest contestant.

In that vein the forward P/E becomes interesting, not as a number you
believe, but as a measure of other investors' opinions about a stock.
You see situations where even the most pessimistic prediction regarding
earnings seems to justify a higher stock price. Or alternatively, even
the most optimistic prediction regarding earnings seems to justify a
lower stock price. Out of favor, in favor - or at least, a piece of the
puzzle.

A flaw in this approach is that the forward P/Es we see reported are
from sell-side analysts, which is to say, from glorified cheerleaders.
That's where company-reported earnings guidance can be interesting
(especially with management paranoid over securities litigation and
Sarbox). Or, when you can hear them, those from buy-side analysts.
Again, not to predict the actual future earnings (a task which I believe
is impossible) but rather to assess whether today's price can be
justified, given what "other people" assume about future earnings.

-Tad

On Feb 6, 4:12 am, "Elle" <honda.lion...[at]nospam.earthlink.net> wrote:
- quote -

I agree that is not possible to estimate future earnings to the last
dollar, but this doesn't mean that we shouldn't do the job. The
intrinsic value of a stock is, after all, equal to the net present
value of expected future earnings, and value investing consists in
buying a stock worth less -by a significant margin- than its intrinsic
value.

There is a basic fact, that is that past earnings performance -
available to everyone who looks at the financial statements of the
company- are usually a good predictor of future earnings potential. Of
course, you need to qualify this assessment by looking at factors that
may affect the future performance of a particular stock -projected
interest rates -for financial and real estate stocks-, exchange rates -
for tradable goods-, regional growth (if the bulk of the sales of a
company is in one region), etc... You always make errors when actual
earnings data are disclosed, but if you build the right model and take
into account all relevant factors, on average the sum of the errors is
zero and you build an optimal value portfolio.

For slow growing or no earnings growth companies, intrinsic value is
closer to book value, and therefore one should look very carefully at
the book value of the company, and assess if assets and debt are
correctly valued (i.e., valuation equals actual market prices). If
this is the case, it makes sense to buy the stock if book value is
close to market prices. For a company that reports negative earnings
during several years, the best value strategy is to buy the stock only
if the price is well below the book value, because in case the company
goes bankrupt the most you could get is a discount over book value
(usually estimated at around 1/3-1/2 of the book value of the
company).

This article appeared over the weekend. I think it promotes
prudence in financial planning with regard to stocks.
Excerpts:

---
Commentary: Nobody can predict the future down to the penny

For the life of me I don't know why companies give earnings
guidance. Nobody can see the future, yet every quarter it's
the same old song and dance: Will they or won't they? (Beat
the estimates, that is.)

Estimates by analysts, of course, aren't necessarily the
same as guidance provided by a company. But guidance creates
a target analysts can work from. Sometimes companies beat
the consensus estimate by low-balling guidance. Other times
they beat numbers that everybody conveniently forgets had
been revised downward. And sometimes, as if miraculously
clairvoyant, they hit the number on the nose that they had
forecast quarters or even years earlier.

Part of running a business includes making internal
forecasts. But I've never quite figured out how companies
can claim to see the future so clearly down to the penny.
Berkshire Hathaway Chairman Warren Buffett is equally
dubious. Writing in his company's 2000 annual report, he
said he and his vice chairman, Charlie Munger, "think it is
both deceptive and dangerous for CEOs to predict growth
rates for their companies. They are, of course, frequently
egged on to do so by both analysts and their own investor
relations departments. They should resist, however, because
too often these predictions lead to trouble."

Mr. Buffett added: "The problem arising from lofty
predictions is not just that they spread unwarranted
optimism. Even more troublesome is the fact that they
corrode CEO behavior. Over the years, Charlie and I have
observed many instances in which CEOs engaged in uneconomic
operating maneuvers so that they could meet earnings targets
they had announced. Worse still, after exhausting all that
operating acrobatics would do, they sometimes played a wide
variety of accounting games to 'make the numbers.'"

Mr. Buffett's comments caused a number of companies,
including Coca-Cola (KO), McDonald's (MCD) and Mattel (MAT),
to do away with guidance.

...[snip]...

"I don't deny there's a game going on with analyst forecasts
and with guidance," says one of [a recent] study's authors,
Baruch Lev of New York University's Stern School of
Business. But he adds he believes that guidance is
important. Without it, he says, analysts will continue to
forecast. "All you'll have is forecasts," he says, "some of
them completely wide. Guidance is a way for managers to
induce some reason into them." That's assuming management
has a better handle on the numbers than the analysts. Given
the amount of guidance that is often revised downward --
three for every two revised upward in the past four weeks
alone, according to Zack's Investment Research -- it's not
altogether clear they do. Case closed.
---

Article by Herb Greenberg, senior columnist for MarketWatch
and contributor to CNBC television based in San Diego. He
does not own stocks (except for shares of his employer), and
he does not sell individual stocks short or invest in hedge
funds.

Elle note: Benjamin Graham, the father of value investing,
dating to the 1930s, decades ago said investors should only
use past performance as a guide to picking stocks. Investors
should disregard, for the greater part, specific predictions
about the future of particular parameters (e.g. P/E).