Tom Cole says you should toss out the old fundamentals, like book value, and look at a different one more attuned to the 21st century. Works for him.
Tom Cole says you should toss out the old fundamentals, like book value, and look at a different one more attuned to the 21hat is the measure of a company’s worth? If you are like most investors, you look first to book value, earnings and dividends. Take those three metrics with a grain of salt, says Chicago money manager Thomas Cole. He says you’re better off appraising, instead, how much loose cash a business generates from its operations.
Necessity is the mother of entrepreneurship. Cole, now 61, Jacob Beidler, 41, and Matthew Swanson, 46, created Distillate after New York Life pulled the plug on a research boutique where they were working. “We knew going into it that the world didn’t need another money manager,” Cole says, but they didn’t want to abandon the work they had already put into their alternative way of evaluating stocks.
Distillate’s obsession with free cash flow emerges from a skepticism about corporate accounting. Net income can all too easily be doctored or artificially smoothed out, Cole says, citing acerbic comments from Buffett in this year’s letter to Berkshire Hathaway shareholders. Take a look at the cash flows, says Cole. The utility has a habit of consuming all its net income and then some in building new power plants and transmission lines. It covers its hefty dividend by borrowing money.
Alongside net income and book value, dividend payments make up a classic triad of Graham and Dodd valuation. What about them? Surely they are real things, not easily manipulated like earnings or irrelevant like book value?
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