Outstanding Investor Digest



Home




Subscriber Areas


Audio Archives
Client Letters
OID Features Online
OID.com Exclusive
Features

Indexes:
Investors
Funds et al.
Companies &
Investments



Contact Us

About Your
User Name
& Password


Guest Areas


Free Reprint

Online Excerpts

Investors in
Our Latest Edition

Companies &
Investments in
Our Latest Edition



About OID
Subscribe
Online Advertising
Online Classifieds

Employment
Opportunities



Portfolio Reports
Home Page


TWEEDY, BROWNE COMPANY L.P.
What Has Worked in Investing
 (continued from preceding page)


In Tweedy, Browne's experience, stocks selling at low prices in relation to cash flow are also often priced low in relation to book value and earnings, and often have high dividend yields. Business people in certain fields such as the newspaper, cable television, broadcasting, and book and magazine publishing fields, frequently describe valuations of debt-free businesses in these fields in terms of multiples of pre-tax operating cash flow (pretax income from the business itself before the deduction of depreciation). Stocks selling at low prices in relation to cash flow, especially in comparison to other companies in the same industry, are frequently undervalued relative to the price which shareholders would receive if the entire company were sold.

For companies domiciled outside the United States, Tweedy, Browne has frequently observed depreciation policies that result in larger depreciation expenses, and lower earnings, than would be the case if the same company prepared its financial statements in accordance with U.S. generally accepted accounting principles. The Swiss company, Nestle, for example, reports as an asset on its balance sheet the estimated current cost to replace its property, plant and equipment. This is a significantly larger figure than the historical cost figure which would be required under U.S. generally accepted accounting principles ("GAAP"), and results in higher depreciation charges versus U.S. GAAP.

Cash flow analysis and comparison to companies in the same industry will frequently suggest "hidden value" in the form of understated earnings and/or assets which have been written off to amounts which are significantly less than true realizable values.

Five-Year Holding Period Year-By-Year Investment Returns for Low Price to Cash Flow Companies as Compared to High Price to Cash Flow Companies
Josef Lakonishok, Robert W. Vishny and Andrei Shleifer examined the effect of price/cash flow ratios on investment returns in Contrarian Investment, Extrapolation and Risk, Working Paper No. 4360, National Bureau of Economic Research, May 1993. The professors ranked all companies listed on the New York Stock Exchange and the American Stock Exchange according to price/cash flow of ratios and sorted the companies into deciles. Portfolios were initially formed on April 30, 1968, and new portfolios were formed on each subsequent April 30. The study period ended on April 30, 1990. The decile portfolios were held for five years, and the average annual year-by-year investment returns, the average annual five-year returns and the average cumulative total five-year returns were calculated. The investment returns were equal- weighted. Table 23 shows the results of the study.

Page 25 of 42

Page: 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13
14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24 | 25 | 26 | 27
28 | 29 | 30 | 31 | 32 | 33 | 34 | 35 | 36 | 37 | 38 | 39 | 40 | 41 | 42

(Return to Table of Contents)

(continue to the next page)



©Copyright 1996-2008 Outstanding Investor Digest, Inc. All rights reserved.
295 Greenwich St., Box 282, New York, NY 10007 (212) 925-3885