Market Buzz – Good Companies…..

Posted by Ryan Irvine - Keystone Financial

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……. Not So Good Prices

After hitting a 14-month high, Toronto’s main index ended the week with a thud, followed by a sharp Friday sell-off in gold.

The new 14-month high and the fact the S&P 500 is currently up over 62 per cent from its March lows has us pausing to reflect. Most market players are feeling quite good about themselves right now and the bullish sentiment continues to make the value investor in us cringe just a bit.

For illustration purposes, we look at one of our top Focus BUY stocks over the past two years –  Alliance Grain Traders Inc. (TSE: AGT). In August of 2007, we initially recommended the company, a Saskatchewan-based processor of specialty crops (lentils, peas, chickpeas, beans, and canary seed), in the $6.65 range. Subsequently, we issued another BUY on the company earlier this year (March) in the $8.00 range. Powered by solid quarterly numbers and a recent acquisition, the stock has surged to recently close at above the $26.00 level.


Alliance Grain is what we would classify as a great, well-run company which displayed tremendous growth financially, as well as in its stock price over the past year. But, with its shares up 290 per cent since our originally recommendation and 225 per cent since March of this year, as revenues and earnings have tracked down in consecutive quarters; we do not want to get too greedy. A great company – yes, but in the near term, it is no longer as cheap as it once was, so one might be prudent to take a careful look at their current entry points on many companies at present.

Given the market’s strong move in the face of some less than impressive raw data, our universe of Small-Cap GARP stocks – in this case the “G” or growth can be substituted for “great companies” at a reasonable price – is shrinking. Yes, we can find great companies, but do they continue to trade at reasonable prices?

In many cases, no.

Looniversity – Market Cap vs. Enterprise Value

Market cap or capitalization and enterprise value (EV) are two different methods of “valuing” a company. To identify the differences between the two, we start by defining Market Cap. Essentially, it is the dollar market value of all of a company’s outstanding shares. Market cap is calculated by multiplying a company’s shares outstanding by the current market price of one share. If a company has 25 million shares outstanding, each with a market value of $100, the company’s market capitalization is $2.5 billion (35,000,000 x $100 per share). The investment community uses this figure to determining a company’s size, as opposed to sales or total asset figures.

Enterprise value is more of a measurement of a company’s value. It is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. Think of enterprise value as a theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company’s debt, but would pocket its cash. EV differs significantly from simple market capitalization in several ways and many consider it to be a more accurate representation of a firm’s value. The value of a firm’s debt, for example, would need to be paid by the buyer when taking over a company, thus EV provides a much more accurate takeover valuation because it includes debt in its value calculation.

Put it to Us?

Q. What are the top three things that a bank will look at when I apply for a loan?

– Riley Morgan; Calgary, Alberta

A. In the end, most banks are not going to advance you a cent if you do not have the means to pay it back. There are three main things about your financial situation a bank will typically consider.

1) Collateral – What major assets do you have that the bank can seize if you default on your loan? Typical collateral includes your home or your car. This will also take into consideration what you are using the borrowed funds for, such as a house, which would be collateral to the loan.

2) Credit – Your credit worthiness or rating comes into play when you apply for a loan. If you have bad credit, getting a loan is going to be difficult unless you are willing to accept less attractive loan terms (like higher interest rates and lowered limits).

3) Income – Your lender is going to want to make sure that you can afford to make payments on your loan. Higher income translates to lenders being more comfortable with letting you borrow money.


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