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Peter Lynch Fair Valuing Arnold Van Den Berg’s Portfolio
Posted by: guruhl (IP Logged)
Date: July 11, 2012 05:01PM
The Peter Lynch Fair Value was developed based on one of Lynch’s personal rules of avoiding companies that traded for a P/E multiple higher than the expected growth rate of the company. A focus on simplicity underscored much of the investing wisdom that the prolific Lynch offered the investing world, reaped over his long management career and which garnered him a 29.2% average return. GuruFocus’ new Valuations tab includes a Peter Lynch Value that indicates one way Lynch would view the stocks in each gurus’ portfolio.
The formula for Peter Lynch Fair Value is: Earnings Growth Rate * Earnings.
So, a company growing EBITDA at 20% per year would have a fair value of 20 times earnings. The formula’s primary weakness is underestimating slower-growing companies and overestimating fast-growing companies, as well as assuming the atypical scenario that a past growth rate will continue forever.
The Peter Lynch Value can be applied to the stocks in the portfolio of Arnold Van Den Berg, a long-term-oriented investor and founder of Century Management, who released his second-quarter holdings recently.
Van Den Berg bought shares of three new companies: Astec Industries Inc. (ASTE), Layne Christensen Company (LAYN) and Comstock Mining Inc. (LODE). None of the new holdings, however, have a Peter Lynch Value. This is because something about each of the stocks does not fit the formula. Astec has a negative EBITDA growth rate of 3.8%, and the formula only applies to companies with between 8% and 25% growth rates. Layne Christensen also has a negative growth rate. Comstock Mining does not fit because it has reported only one year of financial results.
Some of Van Den Berg’s holdings do have a Peter Lynch Value though. Comcast Corp. (CMCSK), with a growth rate of 15.2% and earnings per share of $1.62, has a fair value of $26.05, lower than its latest quote of $31.15 per share. Actually, Van Den Berg has been selling shares of Comcast since the second quarter of 2010. The last time he purchased was in the first quarter of 2010, when the stock had an approximate fair value of $19.15 (2009 earnings of $1.26 multiplied by current growth rate of 15.2%), and he purchased it for about $16 per share.
Another holding, Intel (INTC), has a fair value of $25.03 and trades at latest quote for $25.39. Van Den Berg has owned shares of Intel since the second quarter of 2007, and has been mainly selling shares, except for three small buys.
Similarly, Microsoft (MSFT) has a fair value of $26.38, and trades for $29.30. Van Den Berg bought it in the second quarter of 2007 for $29.89 per share and has been reducing the holding since.
Other valuations are quite disparate. For instance, Van Den Berg’s Kroger Holding trades for $22.81 per share and has a Peter Lynch value of $9.56 per share. Newmont Mining Corp. (NEM) trades for $45.98 per share and has a Peter Lynch value of $9.20. In these cases Van Den Berg likely sees something else in the company or it has abnormal growth.
Few of Van Den Berg’s companies have a Peter Lynch Fair Value. This indicates that he does not invest in many growth companies, or companies with positive earnings.
For more valuations of Arnold Van Den Berg’s stocks, see his portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Warren Buffett.
Guru Discussed: Arnold Van Den Berg: Current Portfolio, Stock Picks
Stocks Discussed: ASTE, LODE, LAYN, CMCSK, INTC, MSFT, NEM,