NetNews Usenet Archive 1992 #31/NN_1992_31.iso/spool/misc/invest/15278

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From: [e-mail] (Paul S. Kedrosky)
Subject: Re: Buy Recommendation For Shares Priced Greater Than Book Value
Organization: University of Western Ontario
Date: Tue, 22 Dec 1992 20:57:51 GMT
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[e-mail] (Steve Meyers) writes:

> In article <[e-mail]>
> [e-mail] (Paul S. Kedrosky) writes:
> > [e-mail] (George B. Clark) writes:
> >
> > >
> > > The current issue of Money Magazine ranks Syntex as their highest
> > > buy recommendation for 1993. However, the current issue of Business
> > > Week ranks Syntex as selling at twice its book value, even though its
> > > share price is half its 52-week high.
> > >
> > > Is this a contradiction?
> >
> > Not at all. Stocks trade on a heck of a lot more than breakup value
> > (which is what you're at least party talking about with book).
>
> But how high is reasonable? 2x book is pretty good, but 20x book
> is too expensive. I guess my question is, how important is price/book
> value when selecting a stock?

I don't think you can give a general answer to that question. Price to
book ratios and that sort of thing are like market fashions - they
tend to vary with the times. What seemed high in the past has become
acceptable today in some industries, if not the norm. One way of
looking at the problem is to compare the stock in question with others
that are in a similar business or have approximately similar outlooks
and see whether are significant differences in price-book ratio. That
may be a clue that something interesting or troublesome is going on.

The real trick (and here's a non sequitur if there ever was one) is to find
out what a stock or an industry trades on and think of that as your
guide in looking for stock ideas and valuing those stocks you find
interesting. For a long time people looked at  P-E ration as at least
one important measure of a stock's attractivenenss, but now you see
all sorts of things like sales per employee, % revenue generated from
products introduced in the last x years, etc etc.


Finally, and maybe answering your question at least in part,
price-book varies as an indicator of significance depending on the
company's situation. For example, a bio-tech may have a negative book
value (at least for while), no earnings and none forecast for two to
three years, but it still trades (and at a value appreciably more than
0). People are at least partly (maybe mostly) trading on hopes,
wishes, and dreams; they are also, if the industry happens to be in
vogue, probably getting caught up in a bandwagon effect like what happened in
the bio-tech industry almost a year ago.

Paul


 __________________________________________________________________________
     Paul S. Kedrosky              __/ "In a certain village in La Mancha,
    [e-mail]      __/ which I do not wish to name, there
   University of Western Ontario __/ lived not long ago a gentleman..."
  [phone] x5174          __/