Saturday, July 26, 2003
by D. Nancy Tengler
John Wiley & Sons
Value investing seeks companies whose ratio of price to earnings per share is too low for the market or whose price does not reflect the rate of growth of earnings. Ms. Tengler, CEO of Fremont Investment Advisors, enhances the traditional value fundamentals made famous by Ben Graham seventy years ago by adding measures of the worth of stocks that do not pay dividends and, as well, examines special situations that can make low value stocks leap in market price.
Ms. Tengler focuses on price to sales as an indication of value. This is not a new metric and, indeed, many market experts have found price to sales a better predictor of price trends than price to earnings per share. Earnings, after all, are subject to manipulation, and probably more than raw sales.
She also compares stocks that do not pay dividends with those that do. Often called earnings yield, this is a metric that edges into the fuzzy space of the new metrics that came crashing down with the end of the tech boom. There is, however, nothing edgy or fuzzy in Ms. Tengler's valuation process; if anything, it is diverse rather than focused on what drives profits and stock prices.
New Era Value Investing is a sophisticated attempt to bring Ben Graham's Security Analysis from the early 20th century into the 21st. The valuation process that worked in the 1930s won't work today and price measures have changed, probably forever. The new metrics that Ms. Tengler suggests may not identify the sickest puppies in the market that can surprise everyone and bounce back to life. It can, however, help select sleeping dogs and avoid the mutts.