Firehoses, Drinking Fountains, and Intrinsic Value

CFA Magazine’sChristopher Wright recently spoke with four analysts about the challenges of identifying key share price drivers among the torrent of minutiae.

The analysts cover a number of topics, and come from a variety of firms and industries.  Here’s J.B. Groh, CFA, senior research analyst at D.A. Davidson in Lake Oswego, Oregon:

[It is largely] about the importance of fundamentals over the longer term. Ultimately, the value of anything, whether it’s an investment property or a share of stock, comes down to cash flow, timing of the ash flow, growth, and risk.  Of course, as analysts we need to determine the drivers of those factors for industries and companies we value and recommend.

In our aerospace coverage area, we try to boil it down to a few simple industry drivers. Then we try to determine which companies have disproportionate leverage to those factors that we think are moving in the right direction and avoid or short those on the opposite end of the spectrum. For example, one of the major drivers in our view for the aerospace suppliers group is new aircraft orders. We have seen a surge in aircraft orders this year for varying aircraft types. We believe that one driver of success will be focusing on companies that have exposure to this order trend and the particular programs that are in high demand. Understanding the business mix, supply chain, and relative operating margins for different lines of business is critical in determining future growth rates and cash flow.

Read the whole article here.