Wednesday, February 22, 2006

Martin Whitman's rule of thumb for valuation of stocks

Here are Martin Whitman's ( a legendary value investor) rule of thumb for evaluation of stocks:

1. Financial-services companies and depositories: Stated book value.
2. Small banks: 80% of book value.
3. Mortgage portfolio: Calculate yield to maturity and perform credit analysis.
4. Financial-guaranty insurers: Adjusted book value - a publicly disclosed number that is book value plus the equity in the present value of certain future premiums.
5. Insurance companies: Adjusted book value.
6. Real estate companies: Private appraisal value or market value.
7. Real Estate (REITs): Appraisal value or discounted present value of cash flow from operations.
6. Broker/dealer and asset managers: Tangible book value plus 2% of AUM.
7. Operating companies: 10 times peak earnings or below "net asset value."
8. Tech companies: 2 times book value, less than 10 times peak earnings, 2 times revenue and cash larger than the book value of all liabilities.

Read the whole article by Brian Zen here.

What will be of interest to us are the rules for valuation of banks and tech companies. I have been searching for a reliable method for valuation of banks based on Shankar's comments on valuation of banking stocks though have not come across anything reliable so far.

4 comments:

Shankar Nath said...

Prasanth, have you looked at REITs? The last time I sold one, the client wanted to offer me an i-pod ... he made 48% in a single year. That was the 3-yr Japanese REIT (bundle of 4 property funds).

Very interesting investment avenue and rather profitable !!!

Warm Regards
Shankar

Prasanth said...

REIT's are an interesting concept and am waiting for them to be introduced in India. HDFC had come out with a real-estate fund but that is only for HNI's and minimum investment was something like 1 million USD

Harsha said...

I eagarly waited to hear about REITs in budget for retail investors. there are scores of un-registered REITs in India, esp. they are quite known in Gujarat cities like rajkot, surat etc. I can't comment on profits margin since i happen to see real estate prices in bangalore where my prime interest lies crashed twice in last 10 years by 30-50% from their highs. yes, they provide liquidity, the only advantage i see than going single, after all my funds may hardly fetch few sq.feet in the heart of bangalore.

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