Tuesday, June 26, 2007

Invest in Value- An Interesting New Valuation Site

I have just come across a new website called investinvalue.com. Fans of classic Benjamin Graham investing will find the site quite useful.

First of all, it is free. At this point, some 1200 stocks are covered, but what makes this particularly interesting is the international breadth of coverage. Not only U.S. and Canadian stocks are featured but also stocks from the U.K., France, Germany, Japan and Hong Kong.

The valuation basis of the website is the Graham formula:

Intrinsic Value = Current E.P.S. x (8.5 + 2 x Expected Annual Growth Rate)

Consequently, intrinsic value is a function solely of the current level of earnings and an estimate of the growth rate. The website presents both a consensus view of earnings growth as well as a linear regression of earnings growth based on the last ten years of earnings.

There is a comparison of a simple discounted cash flow model valuation with Graham's formula.

The screening filters for conservative versus enterprising investors are also presented. A margin of safety is calculated based on the discount of current market price to the determined intrinsic value.

As a value investor, I have a high regard for methodologies that emphasize margin of safety. As a portfolio manager, I have always been somewhat leery of approaches that utilize regression fits for determining growth rates. The last ten years may or may not reflect the future growth rate. Competitive landscapes change, capital structures change, and hence earnings growth rates will be affected. Current e.p.s. may be bloated or understated depending on accounting choices.

Despite these inherent flaws, the Graham formula has always been an excellent starting point in considering the valuation of a business. But cyclical businesses in the late stages of an economy will have a very high earnings base that is used as the basis of the valuation. Balance sheet leverage is also not considered in the valuation. Businesses that are currently loss-making are worth zero in this analysis.

This raises another important reminder. Valuation is an incredibly imprecise art. In some ways, the development of the spreadsheet was one of the most dangerous inventions of the twentieth century. Extrapolating data into the hereafter without consideration of its reasonableness, without consideration of competitive advantage periods, and without considering something other than linear growth has often provided ridiculous results.

Though elegant spreadsheet models may create an illusion of precision, their complexities do not necessarily suggest greater accuracy than the Graham model. I do prefer free cash flow based valuation models but like every model, the valuation is entirely dependent on the input assumptions. Man have I gotten a lot of those wrong over time, but the spreadsheet sure looked impressive.

I think the website is definitely worth a look and a spin. You may or may not agree with the valuation it accords your stock, but at least it should make you think about the reasonableness of your assumptions. If it achieves that, it's a great site.


At 12:36 AM, Blogger Deborah said...

I had a look at that site and all I can say about it is exercise extreme caution using this for evaluating commodities when commodity prices are strong.

I'm also running away from banking stocks these days and that was the other choices...

At 4:17 PM, Blogger contact said...

"Merci pour votre commentaire très enthousiaste !"

... thank you so much. Thanks to you I have added a section on the page dedicated to graham's formula ; this section is called "Graham's formula limitations". it's here : http://www.investinvalue.com/0/FORMULA.php

Stéphane, webmaster de Investinvalue.com et "value investor" de Paris (France).

At 11:30 AM, Blogger Rick said...

I could not agree more with you Deborah as far as the use of this in commodity stocks.

Thank you Stephane for not only putting together such an excellent site but also including some of my comments regarding the limitations in the use of Graham's formula.

Good luck!


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