LOFTB 60 Second Test

The 60 Second Test

June 7, 2012 By Bill Bullington

 

Performing an evaluation of a stock’s investment potential quickly can save you time and energy. Our goal is to guesstimate the fair market value of a stock in order to avoid those that are overvalued, while also identifying those that may be undervalued and deserve more attention.

Let’s begin by going to money.msn.com and typing in the stock symbol in the search field next to Get Quote. Looking to the lower left hand corner, under the Financial Highlights header, you’ll see Net Profit Margin. Divide that number by 5 and multiply Sales by the result. Let’s call this the LOFTB fair market cap.

Finally, divide the LOFTB fair market cap (the number you just calculated) by the number of Shares Outstanding to arrive at the LOFTB guestimated fair market value.  I feel an example coming on.

I’m looking at Procter and Gamble as I write this. Their sales are $84 billion and they have a Net Profit Margin of 11.4%. If I divide 11.4% by 5, I get 2.28. If I multiply PG’s sales by 2.28, I get an LOFTB fair market cap of $192 billion. In other words, if I paid $192 billion for Procter and Gamble I’d be earning a 5% return on my money*.

Dividing the LOFTB fair market cap by the 2.74 billion shares outstanding gives us an LOFTB estimated fair market value of $70 per share. Since PG is currently selling for $63, it looks like a sound investment at this point.

Incidentally, I’ll typically look up a company’s last ten years of financial statements (also at money.msn.com) to get an idea if what I’m looking at is out of the ordinary. For example, if a company has a ten-year average net profit margin of 10% and the last twelve months

it’s been 15%, I’ll look into why. Was there a one-time event that occurred, like selling a division of their business that won’t be repeated again next year, or is it the result of a hot new product that may increase sales in profits for years to come?

If I’m satisfied that the profit margins are normal and this stock is selling below my estimated fair market value, I may add it to my portfolio. If not, I’ll keep looking.


* In case you were wondering, the reason I divide the net profit margin by 5 is because I’d like to make at least as much money as I could have by investing in ten year treasuries over the last 100 years or so. That average has been close to 5%. If a company, like PG, is 2.28 times more profitable than 5% and I feel they have a good chance of growing, I’d be willing to pay up to 2.28 times their current sales for the entire company. Since I’m probably not going to be in a position to buy the entire company, I have to divide the company’s value by the shares outstanding to know how much to pay for each share. Make sense? If not, just re-read the post and watch the video again. If you’re still having trouble, send me an email and I’ll see what I can do to help. 


http://www.youtube.com/watch?v=WdgaaWx-BSI&feature=player_embedded#!