Tags: Hyman | value | Facebook | mining

How to Avoid the Hype and Assess 'Real Value'

By    |   Monday, 27 August 2012 07:49 AM

After my CNBC interview in the wee hours on Friday morning, I got back to my office and the guy I’m mentoring wanted to Skype for a bit and run some of his questions by me.

When we got off of that call, I thought it would be good to share some of these same things with you.

I’m teaching him how to see “real value” out there and how to avoid the hype.

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A recent example of “hype” is the Facebook initial public offering. Before the IPO occurred, it was the rage of the media. They couldn’t say enough to hype it up. Then when Facebook was found out to be a “dog with fleas,” their tone changed. However, the chatter had hyped it up and people bought off of emotion rather than hard facts.

I told the guy I’m mentoring to look at concrete fundamental and technical factors, which will help you to not get caught up in all of the hype.

I told him that Facebook was a dog when it was at $40 a share and it’s still a dog at $19 a share. To show him why, I told him that even at the present, beaten-down stock price, Facebook still trades at a price-to-earnings (P/E) ratio of 67.

I asked him, “Are you willing to pay 67 times its earnings when the average for the S&P 500 right now is at a P/E of 16?”

Then I went on to teach him by comparing Facebook’s stock fundamentals to that of a mining stock we were looking at.

I said that this mining stock, which is one of the world’s largest miners, is trading at a P/E of 6. Facebook is at 67. Which do you want?

I went on to tell him that this mining stock had a dividend yield of over 6 percent. Facebook doesn’t have a dividend.

I told him that the world HAS to have what the miner digs up out of the ground and produces. Everything from electronics to automobiles to homes and offices are dependent upon what it produces. No one HAS to use or have a Facebook account.

I get that a billion people do, but Facebook doesn’t really know quite how it can best utilize those billion eyeballs. The miner has a distinct plan. Facebook is experimenting, the miner isn’t.

I also told him how to know when Facebook might be worth the risk, as an investment. I told him what price point Facebook might need to get to in order to be reasonable for investment. He saw that it would still have to drop considerably in price to meet those levels.

So, even though Facebook had “cut in half” it still hadn’t produced “value.” In other words, it was still overpriced even though it had sunk so much.

I taught him that you can’t see value just because something went down a good bit. You have to see if it’s trading at a level that produces a great fundamental advantage.

The miner trading at a single-digit P/E is showing some real value. It’s got billions of dollars of cash on its books and is one of the largest miners in the world — a force that is hard to compete against.

So, if you were able to buy ALL of either of those businesses at their present valuations, which would you choose? I’d choose the miner.

Editor's Note: Join the 3.5% of Americans who are truly wealthy and financially secure.

I finished up with him as he reviewed some of his other positions with me. I commended him on them because he had done his homework fundamentally and picked them based off of sound valuation and not off of hype. He’s learning!

I hope this has helped you too.

By the way, this miner I spoke of might just end up in my Ultimate Wealth Report portfolio very soon. It’s been hated and the market has beaten it down unduly, which has resulted in the market mispricing it and producing “real value” that I believe will be realized in the upcoming 12 to 18 months.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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Monday, 27 August 2012 07:49 AM
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