Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
GROWING RICH WITH GROWTH STOCKS<br />
or industry. It’s very hard to be right twice on both the buy and the<br />
sell decision. I believe if you stick with growth stocks, you can buy<br />
and hold them for a very long time. That way, you’re not constantly<br />
subjected to making the tough calls of when to get out.”<br />
CALCULATE PRIVATE MARKET VALUE<br />
Yacktman has a slightly more <strong>com</strong>plicated formula for evaluating<br />
whether a stock is selling for the right price. He tries to buy <strong>com</strong>panies<br />
trading below their so-called private market value, defined as what<br />
an intelligent businessperson would pay for the entire <strong>com</strong>pany. The<br />
number is <strong>com</strong>puted by applying the following formula:<br />
operating cash flow (after depreciation)<br />
× capitalization rate<br />
= total private value<br />
- net debt<br />
= private market value<br />
Operating cash flow is the amount of cash generated from operations<br />
after taking care of capital spending. You can think of the capitalization<br />
rate as the inverse of a <strong>com</strong>pany’s discount rate. (Yacktman<br />
generally plugs in a number between 10 and 15 here. If you use a<br />
lower capitalization rate, you’ll get a more conservative private market<br />
value.) Net debt is a <strong>com</strong>pany’s long-term debt minus available cash.<br />
By subtracting this number from the total private value, you’ll find<br />
out what the firm owes its debtors. You then divide the result by the<br />
number of outstanding shares to get the per-share private market<br />
value. One thing to keep in mind is that this formula assumes the<br />
<strong>com</strong>pany will generate the same cash flow every year. Therefore, it<br />
works best for consistent, steady growers, as opposed to more cyclical<br />
operations.<br />
“I try to be as objective as I can when calculating this,” Yacktman<br />
says. “It’s really a blended number. In other words, you take each<br />
segment of the <strong>com</strong>pany, break it apart, and decide how much it’s<br />
worth based on cash flow. Then you bring all of those parts back together,<br />
add them up, and get a net result. I’m trying to get as close<br />
to the private market value as I can. Nobody knows exactly what that<br />
is. I’m not attempting to cut it to the exact decimal. I can only hope<br />
to be close. What I really want to do is make sure I don’t overpay for<br />
the stock.”<br />
55
Change language