Forum Archive Index - November 1999

["Brian Brakenridge" <brianbrak@xtra.co.nz>]

Hi there:

 

Have been reading recent posting re: company valuations and question if, especially for relatively new investors, the basics for company selection are being overlooked. I use the analogy that if your car doesn't start in the morning do you go straight to the computerized electronic fuel injection system before you check to see if there's any fuel in the tank?

 

Please don't get me wrong. The analyses you guys are working through are critical in the overall appraisal of a prospective company but do they come before or after you have appraised the companies fundamentals ie. do you look at the quality of the company before it's present and future (largely speculative) value.

 

I have spoken of the Motley Fools (www.fool.com) before and about how they stress the fundamentals. For those of you who may be a little bamboozled by the calculations of the last few postings and even for those of you who are deeply engrossed in these calculations can I suggest or ask you to go to the above site, click on the "Strategies" section then "Rule Maker". On the right hand column you will find a section headed "11 Steps". In particular I recommend Steps 6 & 7 as being hugely interesting and though are written through an American perspective I think outline the basics very well.

 

"Our quite contrary take is that any intense process designed around arriving at a present-day fair price for a given stock greatly underrates the long-term merits of the business that underlies it."

 

"If we grant you that finding companies like Coca-Cola is a challenge, will you grant us that if you can find them, worrying about their P/E ratio today, or their projected cash flows over the next five years, or the images on their stock graph, is worrying about something that will end up being totally inconsequential? Given the performance of just Coca-Cola (and there are other examples), at what point over the last eight decades would it have been smart to stress out about the stock's immediate fair price? We submit to you then, Fool, that valuation isn't half so important as quality and the durability of the business model."

 

"In fact, we'll go so far as to say that the quality of the company is fully 100 times more important than the immediate value of its stock price."

 

I'm interested in any comments you may have. I have applied the citeria to a number of NZ companies and one which stands out is Baycorp (BCH). Anyone been following them recently?

 

Cheers, Brian