Is WACC any good (or just a crappy model)?

Discussion in 'Ask any question!' started by Alexander Gray, Jun 4, 2016.

  1. Alexander Gray

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  2. Gray Wolf

    Gray Wolf Well-Known Member

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    I've looked at that model and abandoned it pretty quickly as it was too tedious to dig out information needed for the formula calculations. I sometimes use CAPM but don't like that either since it uses 5 year projected earnings growth in it's calculations and I simply don't trust those far out estimates. What I've found when looking at a value stock is checking a few things easily available at most stock summary pages. If a stock has a P/B ratio of 3 or less, P/S ratio of 2 or less and a PEG of less then 2 it most likely is in the value territory. Debt./ Liquidity can be looked at quickly by looking at Current Ratio >1.5 and Quick Ratio. >1 then the stock is most likely pretty healthy. Doing value stocks though usually requires more patience and long term thinking when getting into these positions because the very metrics that make them a value means the market is not pricing it in yet and the stock price is usually in a pullback mode for some reason. A lot of times it is simply because the sector/industry it is in is not in favor at the time. The question becomes how long will it take to move the price back up to it's value.
     
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  3. Alexander Gray

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    It is interesting that you recommend looking at recent data, surely going back through balance sheets to find anomalies are good? I think that OCF (operating cash flow) is important and consistent growth (from dividend yield to revenue) means a company is healthy. Also comparing these statistics of a company to competitors in the same industry is good. For example, AT&T has much healthier statistics in comparison to Verizon but both on average, have goodish statistics that you talk about. I agree with what your saying very much, like Warren Buffett says “There is so much that’s false and nutty in modern investing practice and modern investment banking, that if you just reduced the nonsense, that’s a goal you should reasonably hope for.”
     
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  4. Gray Wolf

    Gray Wolf Well-Known Member

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    Yes, those metrics I mentioned above make up a very good value screen. It allows you to take the thousands of stocks that are out there and reduce them down to a handful of stocks that could fit the value category. At that point I do look at balance sheets, income statements and cash flow for about the past 3 years for trending information and because these stocks could end up longer term the dividend history and payout ratio are also important but not a requirement for my value stocks. I personally have 50 percent of my portfolio for dividend stocks which I use an entirely different set of metrics to select them. Value stocks have a 20 percent space in my portfolio with growth 20 percent which have a 3rd set of metrics I use to select growth. By the way, AT&T has a prominent place in my income portfolio.
     
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  5. Alexander Gray

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    Great minds think alike :) Very interesting indeed about your portfolio allocation.
     
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