Incorporating company assets into my stock picks

By: ispeculatornew
Date posted: 11.15.2010 (5:49 am) | Write a Comment  (0 Comments)

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As regular readers know, I am an avid user of the P/E ratio when selecting stock picks. There are many reasons why I trust this ratio above others and I have written about it but I’m not blind either, P/E ratio does have its flaws and limitations. One of those is its inability to help us see what a company owns. A few of the stocks that I follow such as Valueclick (VCLK) are stocks that have strong cash positions and a strong balance sheet in general which makes the P/E ratio give an incomplete picture of the reality.

Yahoo (YHOO)…

One of the best examples is Yahoo (YHOO), a company which I routinely bash on this blog but which is not as easy of a short as you would think. Why? Because when valuing Yahoo, I think it’s important to consider 3 main things:

Strong balance sheet: Yahoo has almost 7 times as much assets as it has debt.
Yahoo owns a major stake in Yahoo Japan which is a very profitable somewhat independant company
Yahoo owns a major stake in Alibaba, one of the more important ecommerce companies in the world, located in China

What does it all add up to? Honestly, I think it’s important to consider the balance sheet saituation of a company when making stock picks. It sounds obvious when saying it but the P/E ratio would not consider it. In Yahoo’s case, the book value per share, the net assets per share is worth about 9$. Imagine if that number was 12$ or 13$… The company would need to be making almost no profits for the stock to be a good buy

What I will be doing from now on

There is no perfect solution to this and I will be doing some experiments but for now what I will be doing is incorporating the book value per share in my analysis, in the tables that I present when I do new stock picks and in the charts presented in the IS Premium newsletter. I have been monitoring this number and am not convinced that it’s the best way to go but there is no doubt about one thing: Adding this ratio will add valuable information for my future stock picks. In that regard, I think it will be very interesting to see how things go.

Would love to hear from you on this, do you look at the book value per share when making stock picks and if so, how do you consider them?

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