Phil Town
Phil Town

A good question put forward by Lee:

Hi Phil,

In some of the follow ups to the homework analysis of various companies, some additional metrics have been suggested. Specifically:

  • Total Market Capitalization and Market Cap divided by last years revenue (a sort of PE on the revenue side). The idea being that stocks with inflated market cap don't have as much upside.

  • Institutional Ownership (% of company owned). I think the idea is that the technical indicators only work well if a significant part (> 50% say) of the company is actively owned and traded by the big players.

I was wondering your opinion on these metrics, and perhaps others that are good to look at before taking a position.


- lee r.

My response:

Hi Lee,

I'm not a fan of PE type metrics simply because they don't reflect growth rates.  How do you compare a Google growth rate to some company with an 8 PE without knowing what that business's growth rate is? Growth rates and all else being equal, then sure, take the lower PE. But then, the Sticker Price analysis is going to highlight the undervalued business better than any price ratio will.

Institutional ownership is important but don't be misled.  On MSN Money they call only some big investors 'institutional'.  They also have a category for 'mutual funds'.  And there is no category for big guys like ESL and Berkshire.

So figure that if the total of mutual fund investors and 'institutional' investors on MSN is 25% or better, there is a lot more big guy money in there than that.

Now go play!


Related investing resources:

How to Invest Money: A Simple Guide to Grow Your Wealth

Small Investment Ideas for $500 to $10,000 Budgets

Stock Market Crashes Throughout History & What We Can Learn

What is Market Cap and How to Use It