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Investing's Big Secret: Know Your Relati Post Reply Rate topic
teeth53 Supreme	27-Jun-2006 18:02        teeth53 About Contact  Quote this Post! Style: Flexible   Mood: Yells: "don't learn through life, learn to grow with life "
x 0   x 0  Alert Admin	TA or not, fa or not, they r many eg out there, today stock can go down 20/30cts, tomorro same stock can go up 20/30cts or stock can suddenly push up by 10-20% todat and tomorro same stock can down by10-20%, so how to look at TA or FA ??, can any one share or care to explain how such px is factor in in such volatile mkt.
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dotted Member	27-Jun-2006 10:10        dotted About Contact  Quote this Post!
x 0   x 0  Alert Admin	and why not... u mean to say TA people are not flexible?
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singaporegal Supreme	21-Jun-2006 12:31        singaporegal About Contact  Quote this Post! Style: Technical   Mood: Yells: "Female TA nut"
x 0   x 0  Alert Admin	thanks for the interesting article. I guess you're an FA person. I don't this comparison like this ever exists for TA practitioners.
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dotted Member	21-Jun-2006 12:04        dotted About Contact  Quote this Post!
x 1   x 1  Alert Admin	a difference from how most analysts are comparing today's stocks... in your own opinion... do u think this will work or is it just plan rubbish to u? By Tim Beyers (TMF Mile High) November 22, 2005 I'll admit it: It's not always easy to meet a regular schedule of deadlines. That's not a complaint; it's just a fact. The truth is that I love what I do: I get paid to cover investing topics that I consider to be important. Usually, that has me hunting and pecking my way through a flood of company press releases, headlines du jour at Google News, and the delightful feature stories at News.com. Not tonight. Tonight, I'm on an airplane, flying home from a brief trip to Canada, joyfully disconnected from the Web. And that's given me some time to contemplate some of the great things I've read and heard from superior investors over the past year. Here's one of my favorites: All valuation is relative. Know your relatives Specific credit for this thesis comes from Professor Aswath Damodaran, whom I had the pleasure of hearing speak earlier this year at Fool HQ. He covered the topic with considerable skill, but I won't go into all of the details of this wonderfully rich realm here. (You can find more on your own by visiting the professor's highly instructive website.) I'll focus instead on a question he asked that day, because it resonates above everything else I heard: Why, Professor Damodaran asked, should we blindly compare companies by industry when or if a comparable doesn't exist? Talk about the lights going on. What a simple statement, and how often ignored. In essence, Damodaran is saying that it's impossible to perform an accurate valuation without first knowing the proper benchmarks. Or, put differently, how do you know a P/E ratio of 12 is good, or of 35 is bad? Neither may be. It's all relative. iPods and peas Allow me to explain with an example. Yahoo! Finance makes it possible to quickly compare any public company with three or four competitors and its industry. Though it appears so, this tool isn't very useful, for it often compares companies of vastly different sizes and growth rates. Let's take an extreme case, such as Apple Computer (Nasdaq: AAPL). Have a look at whom Yahoo! lists as competitors and some of the more important metrics for each: Metric Apple Dell (Nasdaq: DELL) Hewlett-Packard (NYSE: HPQ) Microsoft (Nasdaq: MSFT) Market cap $54.61 billion $72.14 billion $84.69 billion $298.26 billion TTM sales $13.93 billion $54.18 billion $86.7 billion $40.34 billion TTM net income $1.34 billion $3.3 billion* $3.2 billion* $12.87 billion Gross margin 29.02% 17.97% 23.4% 85.0% Operating margin 11.84% 8.11% 5.7% 42.2% TTM earnings growth 383.69% 6.59%* 15.3%* 59.2% Trailing P/E ratio 42.24 21.64* 26.13* 23.67 Forward P/E ratio 31.34 16.9 14.14 18.43 * Excludes restructuring charges and other one-time items. Do you see how ludicrous this is? I mean, really, comparing Apple and Microsoft on any basis -- even though both vie for dominance in the personal computing and digital music markets -- is like comparing pineapples to peas. It's silly. If you really wanted to know whether you're paying a premium for Apple's growth and earnings power, wouldn't it be better to find stocks with similar market caps, growth rates, financial characteristics, or cash flow as a reference point? Absolutely, so long as you recognize it as one of many needed reference points for developing a valuation thesis. Does that make sense? Good. Let's get started. My search for the more important characteristics of growth and earnings power at Fidelity revealed four companies. Here's what stood out: Metric Apple Yahoo! (Nasdaq: YHOO) Market cap $54.61 billion $59.73 billion TTM sales $13.93 billion $4.83 billion TTM net income $1.34 billion $890.61 million* Gross margin 29.02% 61.8% Operating margin 11.84% 20.97% TTM earnings growth 383.69% 46.78%* Trailing P/E ratio 42.24 67.31* Forward P/E ratio 31.34 56.13 * Yahoo!'s net income excludes earnings from investment gains; growth in net income came in at 193% before those gains. Don't just buy: Compare! Clearly, there's more art than science on display in this exercise, but the point remains: Valuation is relative. Yeah, I know it's commonplace to juxtapose companies of similar size and industry. That's still a good approach. It just may not always be accurate. (And in fairness, make sure to look for telling signs on industry dynamics and associated growth, capital structure, and stability of growth when comparing outside an industry, since this sometimes may account for differences in P/Es. After all, not everything is static across industries, and the market recognizes this.) Take Dell and Apple, for example. They have very similar businesses, but not exactly. Yet one is the heavyweight in digitized personal entertainment, which, in turn, has led to astounding growth. Which, in turn, has led to a premium-priced stock. Put differently: Apple's organic growth far outstrips Dell's. And since a P/E ratio is nothing more than a market price for future growth -- and since all of the available evidence suggests that Apple is going to sustain heady growth for a while -- one might say it deserves a gilded price tag. But is the premium fair, or outrageous? How would you know? The only way to find out is to compare Apple with similarly sized companies. Yahoo! qualifies on the surface, but not after a little digging. Excluding gains from the sale of its Google (Nasdaq: GOOG) shares reduced Yahoo!'s earnings growth from a world-beating 193% year over year to a more modest but still impressive 47%. Interestingly, the other three candidates found by Fidelity -- British American Tobacco, Brazilian mining company Companhia Vale do Rio Doce, and telephony laggard LM Ericsson (Nasdaq: ERICY) -- experienced too many one-time events to be effective in a comparison. Thank you, Professor Damodaran So, maybe Apple really is that good. And maybe it deserves the premium at which it trades. It certainly looks cheap compared with Yahoo! But even that assumes that Apple's iPod franchise will continue to deliver triple-digit income growth. And that's by no means assured. No doubt, most of you didn't need me to tell you that. It was probably just obvious. What couldn't have been is what the market considers to be a fair price for the kind of growth and earnings power Apple is offering at the moment. Doing this exercise -- inspired by Damodaran's guiding hand and completed in about an hour -- has given us some clues. And that's really what is most important. After all, you'd never buy a car without understanding its value relative to other, similar models, would you? Why, then, treat stocks differently? You shouldn't.
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