Invest now – but only in quality businesses

Linked in just raised US$76m from some strategic investors, while over in Western Australia Tanami Gold grabbed AU$12m from almost all exisiting shareholders.

In Canada vBrick systems got $11.9m – they make enterprise video systems, and managed to get Menlo Ventures and Morgan Stanley on board, amongst others.

China is also showing life, with Intel Capital investing in 3 different companies. Meanwhile in Vancouver the Yaletown fund is succesfully raising money.

Why mention these? Because now is a great time to make considered investments in quality companies. If you are going to time the market then the rule is simple: invest when everyone else is selling, sell when everyone else is buying.

Considered means making your own analysi, and buying with a margin of safety.

Quality means companies with solid earnings, growth and management teams

I use really basic rules of thumb to determine value in a hurry.

1: Examine the earnings before interest and tax (EBIT). Ask what will it be next year, and the years after, given current events. Estimate the answer.

Apple’s earnings were $6.75 billion for the last 12 months, and despite the market and recent Microsoft efforts, everything points to them geting stronger again.

2: Multiply that number by 10. Make it 15 if it is growing in leaps and bounds. That’s the rough value of the company. (for companies with no revenue yet or wild growth a la Trade Me it is a bit harder – make a model and discount back)

Apple is growing a bit, so I’ll multiply that $6.75 billion by say 12 to get $81 billion.

3: Compare that to the total debt + equity value

Apple’s market rate enterprise value is $57 billion (today), which is 8.45 times EBITDA.

4: Invest only if there is a healthy difference between your valuation and the company’s valuation. These things have risk associated with them and you can lose if the market overshoots, which it does.

$81 billon is 42% greater than $57 billion, so Apple is a good investment.

You can also use Valuecruncher to get this data automatically for you, and to lay with the assumptions of revenue and so forth. Here is Apple’s page – go for it.

Published by Lance Wiggs


One reply on “Invest now – but only in quality businesses”

  1. Well said, Lance, and timely. This approach is right in good times and bad. It’s tougher to find the bargains in good times, but conversely easier to sell something that’s ridiculously over-valued to people who don’t abide by these principles, or think they can win the momentum game.


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