Sunday, May 16, 2010

New Era Value Investing: Chapter 7

As the chief investment officer at Fremont Investment Advisors, Nancy Tengler employed the value approach she describes in her book, New Era Value Investing.

In a similar vein to the previous chapter, Tengler now describes specific stocks that she has bought as a result of using RSPR, the method described in Chapter 4. She notes that the types of stocks this method picks up, as opposed to RDY, tend to be more growth oriented, but are still fallen angels of sorts, since they would not qualify as bargains unless they had a relatively low price to sales ratios.

Throughout the technology boom, Tengler notes that RSPR underperformed the market, as the expensive, high-flying stocks were the securities that rose the most. But during the bust, RSPR stocks outperformed their peers, as stocks with high price to sales ratios came crashing down.

Intel (INTC) is a company that appeared cheap on an RSPR basis in 1988, 1991, and between 1995 and 1996. Despite a strong market position, Intel's earnings would be pressured near the end of a product cycle, as competition would compress the company's margins. This has allowed value investors to take advantage and get in at attractive prices. From 1999 to 2000, however, RSPR suggested Intel was a major "sell", and so the investor was afforded an opportunity to take profits prior to the crash.

Other stocks this method has resulted in identifying are Estee Lauder (EL) in 2002, Microsoft (MSFT) in 1995, Oracle (ORCL) in 1997, Disney (DIS) from 1999 to 2001, The Home Depot (HD) in the mid 1990s, Nike (NKE) in 1998, and Cisco (CSCO) in 1994, 1997 and 2002.

Occasionally, stocks will become undervalued according to both RDY and RSPR at the same time. These stocks are usually former high-flyers that have reached a stage of maturity. Tengler suggests investors switch to using the RDY method only for evaluating such stocks, as the RSPR method may not longer apply. RDY is also described as the more rigorous method.

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