Hweb and Stanu have made some excellent comments about finding companies and stocks poised for decent runs. I agree with most of what they have said and commend them for sharing their thoughts. I'd like to add to this discussion:
Stanu78, you hit on a very important point in your discussion of taxes:
"Crack the special situation code (NOL carry forward. One time tax benefit/credit. One time gain/sale on investment. non-recurring item and make sure it's non recurring.) this is also crucial .. [though] it's often explicitly said in 10Q a lot of people choose to ignore it. I have several experience with the NOL carryforward epiration transition and one time tax credit where the stocks tanks.. for example NTST. and I'm also might be sitting on the next one .. MDF... but the business is good I hope this one have different story than NTST when the transition happen.
Stan, there is an easy way around this. I'd recommend that you use a reasonable pro-forma tax rate (35% is the standard federal rate) and adjust net income for taxes. FD net eps will take a hit, but at least you're assured of a conservative valuation if one strictly relies on PE for valuing companies. (I know that's more Hweb's and Bobwins' philosophy, because you discuss enterprise values and using cash flows.) If one already excludes one-time events like tax refunds....why not use the same principle when evaluating tax rates? BTW - one can also look at an excessively HIGH tax rate and adjust lower if the issues that caused it to occur are one time in nature (i.e. non-deductible writeoffs).
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Here's another way to value stocks that uses a lot of Hweb's philosophy but doesn't limit one to stocks with PE < 10-15. I like to use the PEG ratio, which values stocks based upon the ratio of future PE divided by expected LT growth.
PEG: PE (looking out over the next FY) / sustainable growth rate
If you can find PEG ratios of 0.50 or lower, then you have found a stock that can potentially double in value. I like using PEGs because it doesn't limit you to only low PE stocks. Some high PE stocks, like CGIH or IIG, may be growing at sustainable rates of 30%+ and therefore deserve a higher trailing (and future) PE multiple. Conversely, some low PE stocks (based on the last 4 quarters of operations) may not deserve a long-term growth rate of more than 10%, thus, their PEG ratio may be closer to one and not a screaming value.
Of course, the devil is in the details. Investors may disagree over what is the appropriate LT growth rate for a company. 15%? 20%? more? PE expansion is one of the single biggest wildcards....that's where the "art" of investing comes into play.
Also, let's not forget that predicting future earnings is extremely difficult and depends on numerous factors such as fd share counts, seasonality, industry growth trends, company management, type of business, etc. not to mention the one-time issues that Stanu discussed earlier.
AI
