anoop <ghanw...[at]gmail.com> wrote:
- quote -

The only parts to which I object are the statements that it makes no
sense to compare stocks to treasuries and that government's creation
of jobs so clearly is not going to be palliative. Otherwise, I agree
the author is persuasive in explaining how companies' earnings spiral
downward following a buildup (housing bubble) based on excessive
leverage.

A good argument for why stocks are not undervalued at present.
http://globaleconomicanalysis.blogsp...ket-cheap.html
Of course, this amounts to trying to time the market.

Anoop

Stocks are cheap now compared to last year, but you shouldn't judge
stocks based on recent prices. You should look at fundamental values.
PE ratio can be used to guess this, but company earnings can fall.

On Jan 2, 2:32*pm, Ron Peterson <r...[at]shell.core.com> wrote:
- quote -

Ron -

Yes ... the valuable product or service underlies the sales, then
profit margin determines the earnings. In pretty much all companies,
there are fixed costs and variable costs (micro-economics). The idea
is to keep total costs below the total sales, thus generating a
profit. (I just skipped directly to earnings, on the assumption that
these demonstrate that the company is well-managed and has a good
diversified product line.) In securities analysis, you want a company
with demonstrated capacity to generate earnings on a sustainable
basis.

Thorough analysis will look at the accounting and micro-econ of the
company, and of course some estimation of the market for the products,
and some estimation of management competence in adjusting to new
conditions. There's nothing wrong with horses and carriages, nor with
many companies that manufactured them. But the automobile ate their
lunch. Walmart is considered a fairly safe investment because they are
the best at providing products people want to buy at the lowest
prices. In a sense, it's a service company.

Usually, a history of steadily increasing earnings is a good enough
guess that earnings will continue in the future. MacDonald's is a good
recent case-in-point. Although a huge and mature company, in response
to changing consumer preferences, they changed their product line
rather dramatically, and apparently, very successfully. Their
methodology or researching new line-ups is very interesting, and
relevant.

Benjamin Graham and Peter Lynch are good reading for analysis and
investing. It isn't necessary to delve into graduate level micro-econ
- I know, I've done that, and I do not use the analysis (it's too
fine, too much for company use in fine-tuning). I just look at
consistent earnings and a solid market for the products and services,
coupled with at least decent management. One indication of good
management is a gradually increasing return on equity, or similar
measures such as return on invested capital, etc., and conversely,
declining measures may be an early indication that something is not
going well.

But yes, you are right. Earnings are the bottom line reflection. More
fundamental are the product or service, the determination of those,
and then the marketing, financial, and other management functions.

- George.

On Jan 2, 12:10*pm, dapperdobbs <George...[at]hotmail.com> wrote:

- quote -

Can you explain why earnings are fundamental? I try to buy low P/E
stocks, but then, sometimes, the earnings disappear and the stock
drops.

Why aren't sales fundamental since earnings are usually less than
sales?

--
Ron

Elizabeth Richardson wrote:
- quote -

I think you meant "earnings" when you typed "dividends" - they're quite
different - but regardless, understanding what P/E is reported makes
this all a bit clearer.

Most quote services, and most "index P/Es" that you see reported, are
based on the trailing twelve months of reported earnings ("TTM"). The
P/E is looking in the rear view mirror. In say early-mid 2008 the
trailing P/E for a broad-market stock index might still have included in
its earnings the past income of soon-to-be-defunct-or-acquired companies
like Lehman, AIG, Fannie Mae, WaMu, Countrywide, Merrill Lynch and on
and on. Earnings were clearly contracting but the "E" that was the basis
for the market P/E hadn't yet adjusted, because it hadn't hit the next
reporting quarter yet.

So it makes perfect sense that P/Es will rise and fall over time. Price
is responding to the expectations for what earnings are going to be in
the future. I'd add the nuance that inflation is a factor here too,
because that affects the price you'd pay for earnings ($1 a share next
year is worth less to you if inflation is 100% per year - so would
demand a lower P/E).

But anyway - if the market is doing a good job of predicting the future,
P/Es should be below-average when earnings are about to drop (or "not
grow much"), and should be above-average when earnings are about to
rise, simply because of the P/E that's reported (TTM). Only if earnings
were always stable should P/E be stable, or perhaps stable when you
adjust everything for inflation. And earnings are never stable!

You can find examples where the market is right about individual stocks
- P/Es of 2, 3, 5 right before bankruptcies or big declines in earnings.
Of course you can also find examples going very strongly the other way,
which gets at the argument that "value" - whether expressed as a low
P/E, a low price relative to book value, or a high dividend yield - is
just signaling some type of risk, and risk and reward should be related.

-Tad

On Jan 1, 9:46 pm, "Elizabeth Richardson" <erich...[at]worldnet.att.netwrote:
- quote -

I have to think you put up a great post. You reflect sanity that made
America great, and sanity that will make the future.

People now buy "growth" companies with the expectation of capital
appreciation in the price of the stock. Apparently this shift in
expectations away from dividends, and towards capital appreciation,
prevails near the beginnings of bull markets. And probably shifts back
to dividends during and after bear markets. A lot of stocks rose very
quickly in the 2000 electronics / internet bubble, but their prices
got way ahead of any earnings. Thus, the high PE ratios.

The fundamental is earnings. One would think that this is very
obvious. It is after all a tautology: the profits of a company make
money. One would think that everyone certainly understands that.
Surprisingly, it is difficult to get the point across. You've made
about as succinct a statement for it as I have seen. Reminds me of Ayn
Rand.

Sanity is the fundamental underlying earnings (product). We might have
easily avoided the current mess.

- George

"Gil Faver" <rowdy'sboss[at]xxyz.com> wrote in message
news:gYc7l.249343$Mh5.26759[at]bgtnsc04-news.ops.worldnet.att.net...
- quote -

I meant by "dividends/earnings" dividends and/or earnings. No, Gil, I am not
changing my story. I did skip a step in my explanation, but you'll note I
said I am an observer and others may be able to present a better
explanation. As others have noted, dividends are paid out of earnings. My
understanding is what I said it is: price is determined by what buyers are
willing to pay for $1 worth of dividends. This is what I learned many years
ago (like back in the late 50s/early 60s - again / is not "divided by"). Now
there are "growth" companies who do not pay dividends, I know, and my
explanation was, perhaps, a simplification of the process. Now people buy
these "growth" companies for dividends that may be paid in the distant
future, but still planning on dividends at some time.

Elizabeth Richardson

On Jan 1, 6:01 pm, "catalpa" <cata...[at]entertab.org> wrote:
- quote -

Are these definitions off the top of your head? Or have you a citation
for them?

- quote -

I lean towards investopedia's definition, among others, which is
different enough from yours that it bears noting:
http://investopedia.com/terms/v/valuestock.asp

A growth stock might underperform the S&P 500 for years as well. I am
not seeing the "classic problem" you claim for value investors. Indeed
it flies in the face of much historical evidence supporting value
investing as a excellent strategy.

"Elizabeth Richardson" <erichktn[at]worldnet.att.net> wrote in message
news:jm97l.106093$_Y1.5397[at]bgtnsc05-news.ops.worldnet.att.net...
- quote -

I would say an anticipated higher stock price, which may or may not reflect
anticipated dividends/earnings.

If selling in a stock drys up then the price will tend to go up without
anticipating anything. During bull markets some stocks go up on nothing more
than hot air.

<honda.lioness[at]gmail.com> wrote in message
news:c1def831-6160-4635-b706-9e0c7924023a[at]p2g2000prf.googlegroups.com...
- quote -

Classic definition of a value stock is when the price of the stock is below
tangible book value per share. The ideal value stock is when the price of
the stock is below the net cash per share.

Modern definition of a value stock is when the price of the stock is low
relative to tangible book value when compared with the average stock.

A value stock might not pay dividends and might underperform the S&P 500 for
years.

"Elizabeth Richardson" <erichktn[at]worldnet.att.net> wrote in message
news:jm97l.106093$_Y1.5397[at]bgtnsc05-news.ops.worldnet.att.net...
- quote -

now you are changing your story. dividends/earnings (I assume the / does
not mean divide here) is not the same thing as dividends.

The "gotcha" is an accurate description of earnings.
You have to read annual reports closely to evaluate
the company. There was a time not too long ago
when accountants shirked there duty and puffed
up earnings. This lead to greater accounting
regulation. Now its perhaps the other way
around - companies will take special charges at a drop
of a hat. You have to add these back in for a truer
picture.

On Jan 1, 7:47*am, Ron Peterson <r...[at]shell.core.com> wrote:
- quote -

Thanks for the explanation,. So the retained earnings only increase
the book value which has wierd stuff like goodwill. So it seems the
expected price increase due to retained earnings would have to be
worked out on a case by case basis. Bummer.


======================================= MODERATOR'S COMMENT:
Please trim the post to which you respond. "Trim" means that except for a line or two of the previous post to add context, the previous post is deleted. Thank you.

"catalpa" <catalpa[at]entertab.org> wrote in message
news:IT77l.2474$BC4.2135[at]nwrddc02.gnilink.net...
- quote -

But what creates demand? Is it not anticipated dividends/earnings?

Elizabeth Richardson

"catalpa" <cata...[at]entertab.org> wrote:
- quote -

Can you please give your definition of a value stock? I always
thought that a value stock staying a value stock could be a perfectly
good thing. Their share prices tend to keep up with the S&P 500 and
with the re-invested higher than average dividends, the compounding
effect inter alia justifies this investing approach.

"Gil Faver" <rowdy'sboss[at]xxyz.com> wrote in message
news:u3U6l.247105$Mh5.143424[at]bgtnsc04-news.ops.worldnet.att.net...
- quote -

I agree with you. The current price of a stock is set by supply and demand.
More supply means a lower price and more demand means a higher price.

The vast majority of stocks have a price that has nothing to do with
discounted cash flows based on future earnings or dividends.

If someone needs cash now they sell their stock now without caring about
future earnings or dividends.

One of the classic problems for value investors is that a value stock can
stay a value stock for years or decades. Just because you see or calculate
value in a stock does not mean that the market will ever see value in that
stock.

On Jan 1, 6:29*am, camg...[at]att.net wrote:

- quote -

You're assuming that the P/B ratio is 1. If the P/B ratio is 2, than
the stock will increase 15% in value annually and if the stock didn't
pay dividends, the stock would increase 20% annually.

Investors should be warned that book value may contain accounting
entries such as goodwill and intangible assets which may not
contribute to the the financial health of the company. A more
conservative investor will look at tangible book value instead.

Companies may try to buy back their stock, but if the stock price is
at a considerable premium to book value, book value will be diluted
just as options granted to employees may dilute the book value if
issued below book value.

--
Ron

On Dec 31, 2:38*pm, dapperdobbs <George...[at]hotmail.com> wrote:
- quote -

Since stock dividends are paid
- quote -

It seems to me that this provides a simple test of whether or not
retained earnings are increasing share value by a corresponding
amount. The stock price should increase at a rate of (1-PayoutRatio)/
(P/E). You could think of 1-PayoutRatio as the RetainedRatio. So if
a stock has a PayoutRatio of 25% and a RetainedRatio of 75% and a P/E
of 10, the stock should increase in value annually by 7.5% simply due
to retained earnings. Change the P/E to 20 and the increase in value
should be 3.75%. If this stock doesn’t increase in annual value at
this rate then retained earnings are being burnt up in friction.

"JoeTaxpayer" <JoeTaxpayer[at]comcast.net> wrote in message
news:gjh6uf$9ec$1[at]news.motzarella.org...
- quote -

Hmm . . . P/E has nothing to do with dividends, either.