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It's All About Valuation, Stupid!

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November 16, 2009 – Comments (44) | RELATED TICKERS: V , ALU , E

There are quite a lot of investment approaches here on CAPS.  The only one that makes sense to me is buying something for less than it's worth, or less than its underlying value.  If you think a stock may be worth $15 to $20 and you can pay $12, you're paying less than it's worth.  If it were that easy, everyone would obviously do exactly this. Anyway, this post is meant to be a look into my personal investing beliefs.  

If you ask someone what a stock's worth, he might say that it's worth the net present value of future cash flows. However, it can be broken down.  Honestly, I believe it's all about earnings or assets.  Earnings are more important in my eyes, but you must also look at earnings quality: debt-fueled expansion, cost-cutting, and previous one-time charges can give false earnings numbers/growth that aren't sustainable. 

As far as assets go, there have been plenty of posts about NCAV (net current asset value) bargains, which are stocks that trade for less than net working capital (stock price < current assets - total liabilities).  I think asset plays are great, but I prefer my companies making money.  It's great if companies are trading at such a discount to assets, but it's only great if the company doesn't continue to burn through capital for a prolonged period of time.  Specific assets may include real estate, stock or bonds in other companies, and much more.

So far, I've been pretty vague on actual valuation techniques.  I can't do justice to those who are far greater than I am (it would also take too freaking long), so I suggest reading Graham's The Intelligent Investor and Security Analysis.  If you haven't read these two books, you're not a serious student of investing.  You should obviously learn how to read financial statements, how to peruse company filings to see if a company knows what it's doing or if it's full of BS, how to examine a company's capitalization structure, interest coverage, and how to stay objective in the face of much faulty analysis that's spewed by many popular news sites (it's all about valuation!!). 

What don't I look at?

1. Macroeconomic factors:  There are many highly-regarded economists on either side of many major issues.  Both sides often make great points, but I often don't see a clear winner.  Valuation is much easier: is the stock price too low for these earnings or assets? To be fair, this is the one area I'd look into if I had more time for analysis.

2. Technical analysis: I disagree with most technical analysis.  I do think it works in some instances, but I think it's more of a self-fulfilling prophecy than anything else.  Beyond price and volume information, I don't look favorably on technical analysis.

3. The whole market as a whole: I think it's ridiculous to look at a number for the S&P 500 (such as 1150) and call a "top."  The market as a whole is the supply and demand of many irrational people.  Undervalued markets can keep falling and overvalued markets can keep rising.  It's ridiculous to call a top or a bottom, because humans are irrational and so is the market.  It makes a lot more sense to value individual companies.  (Note: There's obviously a lot of research that backs these "top" and "bottom" claims, but I think they're hogwash)

4. Others' research (such as CAPS blogs): You should do your own research.  If you look only at other people's research and invest actual money based on it, you deserve to lose money if your stock tanks.  You should do your own due diligence on every pick so that YOU know why you picked the stock.  If you don't have the time or ability, you should not be picking your own individual stocks and you should go buy an index fund.

5. "Expert" opinions: experts often issue buy ratings AFTER stocks go up and sell ratings AFTER stocks go down.  That's completely ridiculous.  I don't have the links, but I've seen evidence of experts' predictions being wrong the majority of the time.  The future is simply something you can't predict, yet Wall Street is all about future earnings (forward PE, anyone?).  I also love how a large company can miss earnings by a little bit (which is elaborate guesswork at best) and the company can tank 7%.  Did this large company's value go down 7% intraday because of a small earnings miss? Absolutely not.

6. CAPS picks: Many people (myself included) carry ridiculous numbers of CAPS picks.  I guarantee you these people don't own most of these picks.  Personally, I own fewer than 10 of my CAPS picks.  I don't short in real life, so that means I only own fewer than 10 of my green thumbs.  I've mentioned very often that I'm into micro caps, and most of my watch list is unrateable in CAPS.  I'm sure many others have many reasons for not owning many of their picks, so I would tread carefully when looking at others' picks.  As I've mentioned already, further due diligence is required.

I could go on and on, but moving on...

So what would I do?

1. Learn solid valuation techniques.  Graham's books will get you there a lot more quickly than anything else I've seen.  

2. Value individual companies.  Once you train your eye, you can tell pretty quickly by looking at a company's financial statements if it's worth a further look.  With some companies, I can go to Morningstar and look at 10 years of income statements and see in 10 seconds that this company is definitely not a "buy" and is not worthy of further research.  Most important are earnings and assets, but there's obviously more to it.  Keep looking at financial statements and you will indeed become faster.

3. Once I find a company I like at first glance, I'll give it a closer look.  I look at sales and earnings growth, common stock dilution, hopefully look at debt going down, look at the health of the balance sheet, and see if it the company is the following 3 things: healthy, profitable, and undervalued.

4. If you have more time, read the annual and quarterly filings.  You can get a sense of the company's corporate governance policies and whether it keeps promises to shareholders.  A good company will buy back stock when it's low, keep its promises on growth plans and say why it failed if things didn't go as planned, keep executive pay and stock options under control, have insider buying, have a viable growth strategy, and much more.

5. If a company is clearly undervalued, I place it on my list of possible buys.  Just because a company is undervalued does not mean that I buy.  I only buy if it's the most undervalued.  If I'm looking to add 5 stocks to my portfolio, I do not indiscriminately buy the first 5 undervalued stocks I find.  I find the 5 that are most undervalued and only add those.  If you're selling holdings to buy other stocks, you should sell your least undervalued holdings in order to buy the most undervalued holdings out there (it's all about valuation!!!)

6. If there are enough undervalued companies to build an entire portfolio, do it.  If not, there's nothing wrong with holding cash, bonds, or whatever.  You should really only buy stocks when you can get a discount.  If you have to pay more than 100 cents on the dollar to buy something, I'd rather just hold the friggin' dollar.

Thoughts on the current market:

It's definitely not like it was in March.  Stocks are a lot more expensive now than before, with many stocks having gone up as much as five- or tenfold.   I'm personally still buying carefully, as I've still found bargains where I'm paying 50 cents on the dollar or less.  However, I'm buying knowing that my holdings have the possibility of going WAY down if the market were to crash again.  I seriously doubt it'll retest March lows, because stocks were just so irresistibly cheap in March.  I saw so many stocks trading 25 cents on the dollar even by pretty conservative valuation methods.  Anyway, I'm confident that the stocks I buy are worth more than the price I pay, and that the price will eventually rise to reflect what I believe is the value.

I'd recommend buying undervalued companies as you find them, and holding till they reach or exceed fair value.  This is the only approach that makes sense to me, and that's what I'll follow.  Market analysis such as what the market will do next and why, trying to make money up and down, and other techniques? I'll leave these to others.   

Small sidenote:

I find it sad that solid valuation pieces such as this and this from a solid fool such as Jakila don't get all that many recs, while so many nonsense posts are consistently getting 25-50 recs.  It's downright ridiculous, I tell you!

44 Comments – Post Your Own

#1) On November 16, 2009 at 5:19 PM, JaysRage (90.49) wrote:

Great post.   This is how it's done successfully.    There is no substitute for doing your homework on a company.  

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#2) On November 16, 2009 at 5:56 PM, anticitrade (99.66) wrote:

Bullishbabo,

If I wasn't as lazy as I am, I would have written exactly what you wrote here...  EXCEPT:

I wouldn't have recommended reading either of those books (since recommending reading them would make me a hypocrite) but I would have wanted to recommend them. 

Anyway, thanks for taking the time to write these great posts.  There is a small group of CAPS members whose blogs I try not to miss, you and Jakila are definitely among them.

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#3) On November 16, 2009 at 6:25 PM, EnigmaDude (98.06) wrote:

Good post.  Perhaps in future posts you can write about a specific company/stock that you would consider investing real $$ in.  Are there some undervalued companies out there right now that you are looking at picking up?

Thanks for the insights (although I will disregard all of it since I ignore the research of others on CAPS!)

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#4) On November 16, 2009 at 6:41 PM, walt373 (99.75) wrote:

Good summary. One thing I feel that many investors don't realize is that assets and earnings are both sides of the same coin. Earnings are basically just future assets, and assets produce future earnings, so it's a loop. Or they can both exit the loop as cash returned to shareholders. But Wall St. focuses mainly on earnings, which is only half of the equation. This is where value investors can take advantage. It's pretty amusing to me how stocks that have big earnings growth will get bid up, but after the earnings have arrived and are sitting there on the balance sheet, they mostly ignore it!

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#5) On November 16, 2009 at 6:47 PM, meganchip (87.39) wrote:

This is the best post! For the past few months I've been reading and studying and this is the only thing that continues to make sense no matter what the market situation.

Awesome. Great job.

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#6) On November 16, 2009 at 8:18 PM, Bays (30.76) wrote:

bullishbabo,

You would enjoy "The Four Pillars of Investing" by William Bernstein.

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#7) On November 16, 2009 at 8:43 PM, floridabuilder2 (99.34) wrote:

I would add focusing on a particular industry.  It is a lot easier following 20 stocks in one industry vs. 20 stocks in different businesses.  Once you focus on an industry and read their 10Qs and 8Ks you become familiar with the drivers of the industry and terminology.

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#8) On November 16, 2009 at 8:52 PM, greenwave3 (65.61) wrote:

Well done, bullishbabo. Intelligent and helpful.

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#9) On November 16, 2009 at 11:04 PM, SkinneeJ (28.32) wrote:

Awesome post, but how do you determine a value for some company?  Can you walk us through a valuation of a company using your methods and why you assign values to certain things?

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#10) On November 17, 2009 at 11:12 AM, leohaas (35.73) wrote:

Great post. We need more of this kind of blogs here on CAPS. This one is way more valuable to the investment community than all the religious, market freedom, political, and gloom-and-doom blogs combined.

One comment: when valuating companies, using a company's assets as a guideline is overrated. There are two reasons for this.

First, you'd have to trust the books. With creative accounting the reason for being of so many accountants (not marking to market is just one of the shenanigans...), it becomes difficult to figure out what's real.

Second, companies always hold on to assets in good times and only start monitizing them in bad times. That results in fire sale prices at best. Unless assets are mostly cash or can be converted into cash quickly without incurring a significant loss, take asset values with a grain of salt (make that a ton...).

Sustainable earnings (and earnings growth) are important. Rightfully so, you point out that the quality of earnings must be considered (I strongly suggest this book). Tinkering with earnings is standard practice. Often, we find out too late the hard way. Lucent Technologies taught me this lesson at a high price...

Cash flow, however, is something that cannot be tinkered with. Sure, it is difficult to figure for the future, but so are earnings!

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#11) On November 17, 2009 at 4:05 PM, TMFBabo (100.00) wrote:

@JaysRage: Agreed.

@anticitrade: I agree, the Graham stuff is the only stuff that isn't objectively laid out by the numbers.  However, I believe there is no faster way to get a complete education in investing than through Graham's two books; there is no equal.  I can't help but tell others to read Graham, broken record style.

@EnigmaDude: I do plan on doing that in the future, but you should check out JakilaTheHun's valuation posts for the time being.  He's done many very good posts already, although they've mainly been on REITs and more recently, banks (industries I don't know very well).  He does the type of analysis I'd want to do if I spent more time doing due diligence.

@walt373: I remember you from our chatting on my first blog! I like asset plays too; I was just pointing out that some of them actually burn money and continue to burn money without liquidating.

@meganchip: That's the beauty of individual stock valuation! It doesn't matter what the market does.  All you do is find stocks that are trading at discounts.

@Bays: Thanks for the book recommendation.  Sounds solid from the Amazon reviews.  I'll probably check it out sometime in the next few months.

@floridabuilder2: Great point.  When you diversify across so many industries, there's some due diligence lost and you don't know the ins and outs.

@greenwave3: Thanks! I've been wanting to do one of these posts for a while.

@SkinneeJ: Same thing I said to EnigmaDude...I plan on doing it in the future, but it takes so much time to do all the due diligence AND write it out in a blog.  Check out Jakila's posts for the time being.

@leohaas: Yeah, there are a lot of nonsense posts these days and it's irritating sometimes.  I will definitely check out Quality of Earnings in the next few months.  If I wrote everything I wanted to write, I would be writing 30 page blogs that basically regurgitate the thoughts of Ben Graham and others.  I unfortunately had to shorten and summarize my thoughts.  You do bring up great points on earnings and assets.

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#12) On November 17, 2009 at 8:05 PM, actuary99 (91.68) wrote:

"If you're selling holdings to buy other stocks, you should sell your least undervalued holdings in order to buy the most undervalued holdings out there."

This statement presupposes you have made the decision to sell your stocks. But, what if you haven't made that decision? If you are thinking of selling your least undervalued to buy your most undervalued, could it be a better idea to hold off to avoid the difference between short-term and long-term capital gains taxes? I'm sure the answer varies on a case-by-case basis, but is there a good rule of thumb?

 And another question, if you'd be so kind to answer: Why can I not seem to find any resources anywhere giving guidance on minimizing your tax obligation when investing? 

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#13) On November 17, 2009 at 8:30 PM, portefeuille (99.56) wrote:

Has someone already mentioned "portfolio theory"?

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#14) On November 18, 2009 at 4:25 PM, TMFBabo (100.00) wrote:

@actuary99: There's a big "if" at the beginning of that statement.  If you're selling holdings, then sell the least undervalued.  If you're worried about capital gains, then you should make sure that the stock you're buying should be significantly more undervalued than the one you're selling.  If it's not, I wouldn't make the switch.  That would be the rule of thumb.  You're also right that it's case-by-case.

Portfolio strategy isn't covered very much from what I've seen.  You just have to do what makes sense -- listen to logic and reason.

@portfefeuille: Not in this post, nope.  Personally, I like to treat other asset classes the same way I treat stocks: there's a price at which every asset is undervalued, fairly valued, or overvalued.  

If we talk about a specific bond, that would depend on the stock market's valuation, the coupon rate of the bond, the credit worthiness and financial strength of the company (interest coverage on earnings), interest rates, and the price of the bond (price obviously being the most important).  I've never really bought bonds individually, but I'd say that should cover a good chunk of what you'd look at, I'm sure.

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#15) On November 18, 2009 at 5:24 PM, portefeuille (99.56) wrote:

okay, then one little "portfolio argument". It is not always to switch from the "least undervalued" to the "most undervalued" stock. That might create an "unfortunate looking" portfolio.

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#16) On November 18, 2009 at 5:27 PM, portefeuille (99.56) wrote:

not always to

not always a good idea to

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#17) On November 18, 2009 at 6:05 PM, TMFBabo (100.00) wrote:

I think it's worth the switch if the "most undervalued" is significantly more undervalued than the "least undervalued" that you own.  That can, however, be personal preference.  As long as you make good buys when you buy them, a longer holding period really isn't bad; it's just not my style.

Could you elaborate on situations where you disagree? I don't know if you're talking about future explosive growth potential (biotechs and such) or something else completely different.

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#18) On November 18, 2009 at 6:10 PM, portefeuille (99.56) wrote:

No, I like the post by the way and mostly agree. It just might be the case that you are stuck with a portfolio of stocks from the "least in favour" sector after a few "switches" and that is not necessarily a good thing ...

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#19) On November 18, 2009 at 6:25 PM, portefeuille (99.56) wrote:

The biotech sector by the way is still pretty cheap from the point of view of "value investing". You can buy all "pure play" (Roche does not count for example) publicly listed biotech companies in the world for around 300 billion USD. That is just around twice the market capitalisation of Pfizer. The value obviously is "hidden" in the "drug pipelines" ...

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#20) On November 18, 2009 at 6:42 PM, TMFBabo (100.00) wrote:

I agree that the biotech sector can have some serious bargains based on the drugs that haven't hit the market yet.  If a basket of 15 biotechs has 12 of them do absolutely nothing or go to zero while 3 of them gain 1500% apiece, you did a rather fine job.  I'll be the first one to admit I don't have ANY expertise in biotechs, so I stay away.  

For the most part, I avoid banking and biotechs.  I'm a fairly new investor and I still haven't learned how to value those correctly yet.  I did realize, though, that C was too low when it was around $1.00.  Beyond situations like that, I stay away.

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#21) On November 18, 2009 at 7:10 PM, portefeuille (99.56) wrote:

If a basket of 15 biotechs has 12 of them do absolutely nothing or go to zero while 3 of them gain 1500% apiece, you did a rather fine job.

exactly!


(from here)

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#22) On November 20, 2009 at 10:47 AM, stuinkc (76.56) wrote:

not trying to hijack the thread, you mentioned klarmans book in another posting, no way i could or would ever afford it, woould be absolutely awesome if you could email it to me if you had it stuinkc@hotmail.com

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#23) On November 26, 2009 at 7:25 PM, chaimyl (94.73) wrote:

You wrote about a month ago that you ORS is one of your 5 best stocks picks do you still hold that now after their 3Q report was relased on the 25

Thanks for your blogs I learn allot from them

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#24) On November 26, 2009 at 11:57 PM, TMFBabo (100.00) wrote:

@stuinkc: I did not have a copy, sorry.

@chaimyl: I see that ORS has dropped because of a "disappointing" quarterly net income of $0.05 per share. For a stock that's now trading below $0.70 a share, that's quite impressive.  With 4 of those "disappointing" quarters, that's $0.20 annual earnings.  That kind of stock should trade at $1.50 or $2.00 at least, in my opinion. Book value is also well over $1.00 ($1.78 as of Q209), so it still seems undervalued to me.  I personally added more ORS at $0.65 to $0.71 after the recent drop.  

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#25) On December 08, 2009 at 11:35 PM, walt373 (99.75) wrote:

Hi again babo, was wondering if you wanted to chat about CHCG. I remember seeing you talk about this stock in another of your blogs. It looks ridiculously cheap and has fallen a lot in recent weeks.

The way I see it, the primary risk comes from...

1) continuing business deterioration

2) new expansion plans cut into cash reserves and do not produce profits, burning through cash

3) fraud, considering this is a Chinese micro cap otc stock.

4) management is not considering returning cash to shareholders, and no near-term catalyst that I can see

I think the risk/reward looks attractive, though. In addition to the $60M+ in current assets, there is actually a $11M statutory reserve that the company can access if it decides to liquidate - which it won't, but still, it's there.

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#26) On December 10, 2009 at 5:13 AM, TMFBabo (100.00) wrote:

@walt373: I think you summed it up nicely.  I like the risk/reward at this point, so I have added to my position since the big drop.  Because of the volatility and possible fraud factor in the OTC markets, I force myself to hold at least 15-20 stocks bare minimum. 

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#27) On December 10, 2009 at 10:57 PM, walt373 (99.75) wrote:

How prevalent is fraud in the OTC markets? Especially in these Chinese net cash stocks?

Another couple stocks I have been looking at are DFNS and CDBT. CDBT seems shady and I am trying to decide if there is some fraud going on, as some people suggest. If not, it is extremely undervalued. As for DFNS, from what I have read, it looks pretty good. I will probably put some money into that or CHCG.

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#28) On December 10, 2009 at 11:33 PM, TMFBabo (100.00) wrote:

To be honest, I have no idea how prevalent fraud is in the OTC markets.  However, I do know there are plenty of garbage pump-and-dump companies on the OTC BB.  You don't really see that on the major US exchanges.  The only way to fight that is diversification, really.  If you find a basket of stocks, each of which has a good risk/reward ratio, you would do well to buy all of them together.

I've never seen DFNS before, but I am extremely leery about CDBT.  The risk is too high for me, no matter how undervalued it seems.  Higher returns are great, but I like to protect my money somewhat when I can.  I've heard nothing good in the last few months, so I liquidated my positions and am not turning back.

Some exchange-listed Chinese micros I like at today's closing prices: CPHI, GFRE, ORS, and SUTR (especially at $2.50). 

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#29) On December 10, 2009 at 11:38 PM, Tastylunch (29.54) wrote:

To be honest, I have no idea how prevalent fraud is in the OTC markets.

Very.

and if's not fraud it's incompetence

Until Chinese microcaps started showing up there as result of Sarbanes Oxley you pretty much had a 99% chance of losing money long any .OB stock. There's been plenty of reserach that's pretty d@mning.

but as I said SOX give some foreign companies a legitimate reason to go that route now.

One thing I always do is check who their auditor is. If it's some tool in a strip mall I pass on the stock.

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#30) On December 11, 2009 at 1:50 AM, 1315623493 wrote:

This is exactly, word for word, my investment strategy. I have read The Intelligent Investor, and have developed algorithms with these principles at the heart of them. I regularly make my work available to the public at my website, www.betapeg.com. Hopefully, it is of use to somebody. 

According to Ben Graham, I advocate a 50% stock, 50% bond portfolio in the current market conditions. For details on why that is, read my report...

PDF REPORT

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#31) On December 11, 2009 at 2:16 AM, ozzfan1317 (81.83) wrote:

Good stuff I personally use Price to FCF and PE as metrics of valuation Cash per share and The shape of their balance sheet are important as well.

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#32) On December 11, 2009 at 6:31 AM, TMFBabo (100.00) wrote:

@Tasty: Thanks for the advice.  I think looking up the auditor is a great thing to do.  I'm glad to hear that at least many legit Chinese companies have decided to list on the OTC BB.  I'd be terrified if those were just as fraudulent as the other .OB stocks, because I've been buying many of those Chinese .OBs.

@ozzfan1317: Honestly, price to earnings/book/sales/cash flow/free cash flow/dividend/whatever all work pretty well.  The key is the "low price" part, right?

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#33) On December 11, 2009 at 1:42 PM, 1315623493 wrote:

Here is one valuation technique. Take the average growth rate of the PE and EPS ratio, to estimate what next year's PE and EPS are going to be. Now, multiply PE x EPS, and you have yourself a target price!!! That's just the tip of the iceberg in how I place valuations on companies.

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#34) On December 11, 2009 at 4:35 PM, Tastylunch (29.54) wrote:

bullishbabo

It's a very very recent trend even two years ago you could safely say most of them were frauds or junk. Now it's more like 80/20 (crap/decent) with chinese OTC companies.

I found RINO when it was on the .OB e.g.

 I still wouldn't dare touch almost any US .OB.

The .PKs when it comes to foriegn stocks tend to be safer even though they don't report to the SEC, for whatever reaosn the foreign megacaps like Nintendo and Vale seem to go that way.

but it still pays to be hyper skeptical.

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#35) On December 12, 2009 at 11:30 PM, value18 (< 20) wrote:

bullishbabo

 I share your interest in chinese microcaps. What do you think of CNER (.13)? Their last quarterly report was impressive as is their current book value. I own some of your picks i.e. gfre cphi. CNER looks like it could develope into another chng. The chinese govt has a monopoly on natural gas so I would expect that all these distribution companies will receive attractive fuel prices. In addition the  government is strongly promoting cleaner fuel emisssions.

 value18

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#36) On December 16, 2009 at 6:08 PM, globalsailor (39.51) wrote:

@floridabuilder2: I am not a fan of your single industry approach.  I would do at least three industries: cyclical (goes with the economy), non-cyclical (diapers etc.) and commodity.  That way, if you get surprised, only 1/3 of your portfolio will be surprised and you can shift the rest of your portfolio to reflect new valuations.

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#37) On December 17, 2009 at 2:54 AM, TMFBabo (100.00) wrote:

@value18: I usually invest because I like what the company's already done, not what it might do.  No matter how satisfactory the latest quarterly filing, I like looking for at least a year or so of profitable and growing operations (preferably several years).  I don't see that yet with CNER.  I will miss plenty of multi-baggers by limiting myself to the companies that are already profitable and have been for a while, but that's how I prefer to invest.

PB is my favorite ratio out there, but I personally think sales/earnings and sales/earnings growth are more important with these micros.  If they're growing earnings and sales at a rapid clip, you'll find that book value will grow rapidly as well (meaning low PB is not always necessary here).  If you look at my pitch for GFRE, they grew book value 99% year over year from 2007 to 2008.

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#38) On January 28, 2010 at 5:04 PM, chaimyl (94.73) wrote:

i bought ORS at 85 cents then some more at 63 I am still trying to learn how to evaluate stocks etc the thing is after getting burned more then 50 percent now it is trading at 43 cents is it maybe the time to cut your losses and move on number 2 what do you think about the fact that their account receivables is long overdue and they dont have any real money to their name 
 
Thank You very much

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#39) On February 25, 2010 at 7:04 AM, TMFBabo (100.00) wrote:

@chaimyl: I responded to you in a blog post just now, but it got swallowed up and I don't intend to type all of it again.  I'll just write it here:

I recently looked into ORS, and I agree about the liberal account receivables policy.  I also see another major risk factor: lack of diversified customer base.  Regardless, I like the risk/reward ratio here and still like ORS as part of a basket. 

With these Chinese micros, I think it's better to buy them in baskets.  I've seen other companies with liberal account receivables policies that I don't understand, and the government can also do weird things with its regulation.  I would demand better stats and ratios from Chinese micros than you would with a US company. 

I do usually stop following blog posts after several days of inactivity, so I apologize for the late response.

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#40) On February 25, 2010 at 7:34 AM, islandcleaners (< 20) wrote:

Easier said than done. Could be the greatest undervalued co. in the world and if the market's crappy..the market's crappy. Lesson: don't fight the tape.

http://yieldpig.blogspot.com/

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#41) On March 05, 2010 at 9:43 AM, TigerPackFund (< 20) wrote:

Unrelated to this topic.

Bullishbabo - please check your email account for TigerPackFund ideas sent to you yesterday.

-TigerPack

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#42) On March 09, 2010 at 12:42 AM, valuemoney (99.99) wrote:

Bullishbabo- great post. I was happy to see you wrote your own detailed post. 

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#43) On March 17, 2010 at 4:24 PM, LGM2007 (36.52) wrote:

There are a few things I think aren't really addressed here that I wanted to comment on.  Let me start off by saying that I applaud your CAPS success and I think there is a lot of good advice here.  So, here goes ...

- Saying you are buying undervalued stocks is nice, but what is the catalyst that will move the stock from being undervalued and what is the timing?  Do you make assessments in these areas?  Who's to say it won't stay undervalued - or that your valuation technique isn't proper for a particular stock?  Is there a new product coming out?  Is market cap approaching a level that will generate institutional investor interest? etc.

- If I base an investment off someone else's recommendation and lose money, I deserve it?  If I trust my car to my mechanic and it breaks down on the turnpike, do I deserve that?  If I trust my lawyer to represent me if I'm wrongfully accused of a crime, do I deserve a guilty verdict if that's what happens?  Investment professionals should have ethical, competency and disclosure requirements, but they are like any other service professional and I don't deserve it if one of their recommendations loses money.  (Note - I am not an investment professional.)  For what it's worth - my approach is to find a full fee-based advisor (no commission) and then choose how to use their advice, I don't just say blindly see what "Mega-Bank" says about "Mega-Stock" and buy or sell.

- Develop valuation techniques? In order to do this properly, I would think you need to gather competitor and industry data.  Do you do this?  If so, then you're really valuing several stocks just to get to the one you want.  How do you estimate revenue growth?  Do you really think you know what is in a company's r&d or sales pipeline?  Are you comfortable with where technology is taking a company's products - both obsolescence of current products as well as future development?  Is the company a one-trick pony?  And do they have a few large customers they may also heavily rely on?  Can you really adequately assess all this from public info?

Bottom line for me is I agree that index funds are right for many, if not most, investors, but if you choose to buy individual securities for any portion of your portfolio, trading without professional assistance is foolish.

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#44) On March 17, 2010 at 8:25 PM, TMFBabo (100.00) wrote:

@LGM2007: Holy cow, those are a lot of comments. 

How much research you do is up to you.  Everything you suggested is solid and would definitely help make better analysis.  No, you can't know everything about each company in which you invest.  Whether you do 10 minutes of research or 10 hours is up to you.  I don't research many of the things you've mentioned. 

Saying you deserve to lose your money was meant as a way of telling you to do your own homework carefully.  Maybe I should've said that differently.

I do know you can look at industries on Yahoo! finance.  You can see what industry a company's from and see a list of competitors.  You can even sort by PB, PE, RoE, and a few other parameters.

I agree that many people here possibly shouldn't invest for themselves, but I believe they have the right to succeed or fail on their own.  I trade without professional assistance and I don't think myself foolish. 

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