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.