Value Investing: Hidden Stock Price = Deliberate Practice

A little over a year ago, Geoff Gannon wrote a post where he gave readers the salient financial information of company, but didn't give the ticker/name of the company. He then had readers guess the stock price. It was an amazing little experiment derived from a quote of Warren Buffett where WEB goes on to say he likes to guess the stock price before looking at the actual price when he analyzes investments.

As always, WEB was well ahead of his time. Much work and study from behavioral finance/economics, like that of Daniel Kahneman, had discusses the effects anchoring has on each of us. If we see a stock price before valuing the company, we will unconsciously fix our valuation near the actual price.

Ever since Geoff's original post I have been fascinated by the experiment. I even went as far as making an Excel program that would randomly generate ticker from the Russell 3000, display the financial information with ticker and price hidden. I could then go about valuing the company and check my work to see how I was doing. Here are three takeaways from probably doing this a couple thousand times in the past year:

  1. There are many companies out there that I did not know existed. While very few were "cheap" per se, it felt like a healthy change from names you hear about every day on the press or in the value investing community
  2. I have improved my valuation skills
  3. I can feel the bias in stocks that are easily dismissed. For instance, the for profit education sector screens amazing well (i.e. I guess the stock price substantially higher than the actual trading level). This is similar to some of the stocks spit out by Joel Greenblatt's Magic Formula.
I equate the exercise to deliberate practice, a concept that is somewhat difficult to point to a true exercise for investing.

Here is an example:

(You will note I have added a number of line items from Geoff's original exercise)

I have not looked at the ticker or stock price. The first few things I would notice:
  • Sales and earnings are growing very quickly
  • Dividends have come down
  • Lots of free cash flow. Scalable business with essentially flat capex in the last few years along with growth
  • Industry: Hard to tell. Not a utility or a REIT. Definitely asset light, working capital heavy (people)
I am going to guess a pretty high multiple here. 25x FCF maybe which equates to a sales multiple of around 3x and a stock price ~$48. (In my spreadsheet I have a place where I can pound numbers in to get the various sales, cash flow, book, and earnings multiples):

The actual price: $57.61. Ticker: SYNT. Another company I've never heard of before: From their website "Syntel is a leading global provider of integrated information technology and Knowledge Process Outsourcing (KPO) solutions spanning the entire lifecycle of business and information systems and processes. The Company leverages dedicated Centers of Excellence, a flexible Global Delivery Model, and a strong track record of building collaborative client partnerships to create sustainable business advantage for Global 2000 organizations." 

I do not think I have ever paid, or will ever pay 25x FCF for a company but I know lots of people that do. So SYNT might not be one for me to allocate capital to. 

With that I am going to throw three examples up. And I'll make it interesting: The reader that is closest (on average) to the various stock prices (as of close today), I'll invite out for drinks as well as the next Distressed Debt Investors Club Meet Up. Email me your guesses by the end of the month (and, to keep it less mundane, your favorite non investing book)

Stock #1

Stock #2

Stock #3

Good luck! If you think you need more information, drop it in the comments and I'll respond accordingly.


Whopper 6/18/2012  

Hunter- very fun project. I think it would be worthwhile to include Gross Profit and operating income in the information given.

Anonymous,  6/19/2012  

How did you come up with the excel program to find choose the random stocks in general? I just finished my first year out of undergrad and was wondering how you created the excel program, so I might be able to try something like this on my own.



Anonymous,  6/19/2012  

so are we putting a price on where we think it is trading, or a price on what we would pay for it?

Hunter 6/19/2012  

Where it is trading is how I think about it. I think what you would pay for it changes based on your hurdle. A better way to think about it: What is it worth? We want to buy meaningfully below 'what it is worth'...

417628,  6/19/2012  

Here are my educated guesses for the market prices on 6/18 of each of these companies:
1) $5.63
2) $100.66
3) $69.13

Anonymous,  6/19/2012  

i would also love to know if your excel program is able to be replicated. I do remember reading JG's post on this back then and it's a great idea. It is a solid way to improve valuation skills.

Anonymous,  6/19/2012  

Great idea, Hunter. To others, the model is easy to replicate assuming you have access to Bloomberg - took me about 20 minutes this morning. If not, it will require some work, but I'm sure it can still be done. I'm happy to help if needed.

Anonymous,  6/19/2012  

I think you also need i) cash, ii) non-operating assets, iii) non-operating liabilities, iv) preferred stock, v) non-controlling interest.

Anonymous,  6/19/2012  

Also, tangible equity would be helpful.

mdc,  6/19/2012  


Tsachy Mishal 6/19/2012  

With the information given the only stock that meets my criteria is #2. I would pay $18 but I'm a cheapskate.

Amit,  6/19/2012  

I like this exercise, but its very easy to find the companies using Bloomberg Equity Screen

Anonymous,  6/19/2012  

shares outstanding each year would be helpful - you can kinda figure out whether they raised equity or not but not how much dilution there was, etc.

red.,  6/19/2012  

What are they worth?
$4.60, $55 and $55

Where are they likely trading today?
$5, $40 and $90

#2 is interesting. The sort of stock that will double then halve then double again.

Anonymous,  6/20/2012  

Rob Southey

#1 = $3 looks like a entertainment store/book store/Re business.. heading to extinction

#2 = $35 strong growth, Equity doubling in 4 years , asset growth , storng cash flow from shares

#3 = $50, sales growth, huge equity growth but FCF is a disaster, don't like high capex!

stumanji,  6/20/2012  

#1 - $7
#2 - $24
#3 - $40

anahin 6/21/2012  

The Benjamin Graham stock screener (http://www.anahin.net/screener) gives a complete Graham analysis, for all 4000 stocks listed on the NYSE and NASDAQ.
Including all the above stocks.

Benjamin Graham was Warren Buffett's professor and mentor, and the original proponent of Value Investing.

ShortBus 6/21/2012  

#1) I would not touch the stock above $3.50-$3.90 due to Declining sales and cash flow, horrible earnings contraction, and one off dividend. I would not be surprised if it was trading above book value, but without the earnings or revneue growth hardly worth touching it. I would not be surprised if the stock was trading above $5.60 due to the 5 year average yield of about 2.5-3% and the one off dividend last year.

#2) Due to consist growth in most metrics, I would be interested in this stock below $24, but it probably is trading above $45

#3) Due to excessive build up of debt and capex from acquisitions, I would not be prepared to pay more then $50, however it probably is trading at over $70 due to the earnings, dividend and cash flow growth.

Jeff 6/21/2012  

My guess:

1. $6.00 (no debt, cyclical, recent eye-popping dividend, trades for about revenues)
2. $62.00 (trades for 30X earnings in this crazy market)
3. $28.00 (5.0X dividend yield)


Anonymous,  6/21/2012  


Louis,  6/22/2012  

1. 5.50
2. 25
3. 45

hazyhorizons 6/22/2012  

1) 1% ROE, shrinking asset base, high capex, Not any better than liquiation play: hedging risky exposure not worth than maybe 2.80 (pricing for 50% decline in asset writedown). Earning power largely redundant

2)Obvious case of optimism: no explanation required: what value: 3X Book, 15 X earnings and 2X Sales Approx $30

3)Consistent and profitable, maintained gearing and payout ratios, well behaved book value and cash flows: Taking wild market beast's projections : trades somewhere between 38 and 45. My guess $40

Nick Gogerty 6/25/2012  

Hunter, do you have the excel program available? or at least the symbol list you used. I was thinking about developing one using the SMF_ADD in. that would pull historical fundamentals from some period X years back using a random symbol. then for practice come up with a valuation and see how the walk forward came out. I will probably use the OSV (old school value worksheet) and pair it down.

Mat 6/27/2012  


Here is my guess

1- 3.8
2- 35.3
3- 28.6


pedaltodaflo 6/27/2012  

1. $2
2. $40
3. $60

Kid Ing 6/28/2012  

Hi Hunter,

What's the answer??


sdm,  6/28/2012  

Fantastic post - I'm going to start incorporating this exercise with another one of gannon's posts (http://www.gannonandhoangoninvesting.com/blog/how-to-become-a-better-analyst-one-hour-at-a-time.html). My guesses for the stocks are:

1) $5
2) $38
3) $33

analyst 6/28/2012  

1. 3
2. 28
3. 35

DM,  7/02/2012  

I know this is a day after the end of the month, but:





hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.