Security Analysis anyone?

[nodols3]

---

Have been reading a lot lately about stocks, bonds and the stock market, and been reading a lot of Benjamin Graham's books and Warren Buffetts....and found out that most of the guys who are into investing have commonalities which is they are security analysts.

So I just want to know if you anybody here knows anything about analyzing securities, there is only one book that others call the bible of investing and it is Security Analysis by Benjamin Graham.

Anyone?

[nodols3]

OK here's how it goes...

MARKET RIDER
Margin of safety
By Den Somera
Philippine Daily Inquirer
First Posted 22:23:00 11/08/2010
Filed Under: Markets & Exchanges, Financing an Stock Offerings


THE INITIAL public offering (IPO) and consequent listing of the shares of Cebu Air Inc. (CEB), better known as Cebu Pacific, resurrected a concept that seems to have been put to oblivion due to the long absence of IPOs in the market. This is the so-called concept of “margin of safety.”

It is a concept applied in considering the price of a stock and first advocated by Benjamin Graham.

Benjamin Graham wrote the book “The Intelligent Investor,” which is said to be “probably the most widely recognized book in the world” on stock investment.

Along with the book “Security Analysis,” which was co-authored by David Dodd, Graham propounded the academic and practical soundness of the “margin of safety” as a tool for stock valuations and/or pricing.

Consistent with the tenets of sound investment judgment and practical trading practice, it is said to be Graham’s “greatest gift to investors.”

How it works

A stock has a so-called “business valuation” and at the same time a “market valuation.” Both serve as bases to a stock’s value or valuation.

Business valuation consists of the book value of the company. In other words, it is “the monetary amount by which an asset is valued in business records, a figure not necessarily identical to the amount the asset could bring on the open market.”

Simply, book value is computed as the cost of the company’s total assets minus accumulated depreciation. And for that, it is also known as “the total value of the company’s assets that shareholders would theoretically receive if a company were liquidated.”

In the United Kingdom, business valuation also refers to what is known as the “net asset value,” or NAV. Specifically, NAV is total assets minus intangible assets—like patents and goodwill—and liabilities.

In any case, both definitions lead to the same expression—that of providing a quantifiable basis of the underlying value of a company.

On the other hand, the value dictated by the supply and demand on the stock of the company is what is called “market valuation.”

The difference between the two is called the “margin of safety.”

One obvious significance of the concept of margin of safety, therefore, is that it provides an alternative perspective to appreciate a stock’s value. It can give a comparative sense of valuation—for instance, the book value of a company can be said to be under- or overpriced over its market value and vice versa.

In addition, a stock could have a big or small margin of safety. But again, a stock with a big margin of safety can go way down in price and still be a good investment and a stock with a small margin of safety can only drop a little in price, yet still be considered a good investment.

Because of these, Graham was said to be deliberately vague on just how much a margin of safety should be. Like investment analysis, it is not an exact science.

What matters is that the margin of safety of a stock is reflective of the “subjective factors” in a company’s stock price such as quality of management and the risk nature of a company’s business—factors that also have direct impact on the company’s business or market valuation.

Some applications

In this connection, I have a feeling that CEB’s market price may not totally break down.

CEB’s offer price was equivalent to about 12 times the estimated earnings for the year at P125 a share. On the basis of its estimated book value of P18 a share, it is priced to about 6.94 times book value.

So far, CEB has traded at a high of P133.50 and a low of P116 a share from lisitng. As of last Friday, it held on to the closing price of P121.80 a share.

Based on Graham’s concept, the margin of safety of CEB is small. It has negligibly fallen down to 6.4 times and has gone up to only 7.42 times estimated book value. This is only about 7 percent lower and 6.3 percent higher than its offer price of P125 a share.

Based on these observations, CEB’s offer price could just be right. Yet, many local investors are selling. But, guess what? These selloffs on CEB shares are being absorbed--yes, you are right--by foreign buying.

So, as it is said, the margin of safety of a stock may not always be big but it can be small to be considered a good investment.

Bottom line spin

The Philippine Stock Exchange index, or PSEi, hit another new record high of 4,413 last Friday, but at the same time succumbed to profit-taking.

From the stochastic of the market, it is at the overbought territory. It is also seemingly headed for a downward crossover. This is supported by a similar signal from the relative strength index of the market. A bearish divergence is seemingly developing despite its record feat.

It may be prudent, therefore, to take profits on technically overbought stocks. It seems that the market may need to consolidate to eventually breakout higher.