Snapchat’s parent company soon will sell stock to the public, giving more investors a chance to put their money into another social media company like Facebook and Twitter. But be careful of the Wall Street hype that spews from investment bankers seeking a big payday.
“This scenario underscores a ubiquitous investing conundrum: Is an exciting, media-hyped stock necessarily a good investment opportunity?” asks John P. Reese, portfolio manager at Validea Capital Management, in a Seeking Alpha blog.
He cites research that suggests companies seeking capital in the public markets have a history of "negative return-on-assets, high valuation multiples, previous capital raises and 'positive price momentum'."
Reese recommends investors take advice from Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. who famously seeks value in strong products, brands, management and competitive edge. Using a methodology inspired by Buffett’s methods, he identified 5 winning stocks (which also are owned by his fund):
- Herman Miller Inc. (MLHR): “Our Peter Lynch-based investment methodology likes the company ratio of price-earnings to earnings-per-share growth (the PEG ratio, a Lynch hallmark) of 0.64. A company passes with anything under 1.0.”
- Principal Financial Group Inc. (PFG): “The company earns a perfect score under our James O'Shaughnessy-based stock screening model based on its size (market capitalization of $18.06 billion) and persistent earnings-per-share growth over the last five years.”
- Cooper Tire & Rubber Co (CTB): “A manufacturer and marketer of replacement tires that earns high marks from our Lynch-inspired investment model due to its PEG ratio of 0.57 coupled with its favorable debt-equity ratio of 30.28 percent.”
- Michael Kors Holdings Ltd. (KORS): “The company earns high marks from our Kenneth Fisher-inspired screen due to its price-sales ratio of 1.33 (based on trailing 12-month sales), which falls comfortably within the preferred range of between 0.75 and 1.5.
- Maximus Inc. (MMS): “Our Lynch-based stock screen likes to see companies with sales exceeding $1.0 billion to maintain price-earnings ratios of below 40. With a revenue base of $2.4 billion and price-earnings ratio of 20.07, MMS passes this test.”