On the Bloomberg News last week it was reported Billionaire hedge fund manager Dan Loeb said he is building bets against stocks that have surged because companies are relying on dubious financial metrics. Mr. Loeb felt there is sloppiness in accounting and the use of adjusted EBITDA and adjusted earnings has produced companies trading at valuations which are not supported by real numbers. What he is suggesting is companies are saying if you factor out this exception then we are really doing well. The question is the exception really an exception? Every year, people knowing that the standard Price Earnings Ratio (PE) is something investors want to hear, there is a twist on accounting procedures. If the company has not produced what it thinks is enough it needs a good reason, and it order to get the stock trading at a higher PE studies come out to suggest the company should be trading at a higher multiple or its stock price should be higher. Mr. Loeb believes many of the stories are unbelievable and thus is shorting companies.

In another news article by Scott Barlow, he says the good news is that a focus on low stock valuation is a profitable way to invest over the long term. The bad news is any time period less than 10 years they are not much use at all.  Mr. Barlow quotes value investor Charles Brandes saying what growth investors pay in valuations, we pay in time. This means growth investors usually pay high PE Ratios to capture immediate earnings, while value investors who can buy stocks cheaper often have to wait a long time before the stocks appreciated.

Warren Buffet describes this style as simple, but not easy. It is simple to see, but it hard to hold a stock through 5 years of volatility and potential poor performance and trust it will generate high returns in the long term.

Linking to dividend paying stocks, if you pay attention to these stocks then while you wait you can be rewarded with a dividend along the way. Profitable companies will trade at higher multiples than non profitable ones because there will be in business for longer periods of time. If bad news happens to a profitable company, it should be able to continue operating; if bad news happens to a non profitable company – many things spiral downwards including loss of credit. In investing try to keep it as simple as possible and you will be rewarded.

There are more questions than answers, till the next time – to raising questions.