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Get Four
|  | OCTOBER 21, 2003
Picking the Market's Value Leaders Author Peter Cohan explains his "value quotient" system for finding winners. Among his favorites: Southwest Airlines and J&J Want a way to spot the best values in the stock market? Peter S. Cohan, president of Peter S. Cohan Associates and author of Value Leadership, among other books, boasts that he has devised such a formula, which he calls a company's "value quotient." Cohan uses a set of criteria to evaluate how well a company relates to its customers, its employees, and its communities. By the employee standard, for example, Southwest Airlines (LUV ) ranks high, and he gives Johnson & Johnson (JNJ ) top marks both for its 10-year financial performance and for the way it reacted swiftly to the Tylenol scare back in 1982. After sifting through 1,500 companies, Cohan came up with a number of leaders, including eight examples he uses in his book (see accompanying excerpt). Among these are Goldman Sachs (GS ) and Synopsys (SNPS ). These were some of the points Cohan made in an investing chat presented Oct. 16 by BusinessWeek Online on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff and Karyn McCormack. He also named top performers this year among his stock picks, including Boston Scientific (BSX ), Career Education (CECO ), and Lexar Media (LEXR ). Edited excerpts follow. A complete transcript is available from BusinessWeek Online on AOL at keyword: BW Talk. Q: Peter, after hitting 18-month highs, the market is resting for a moment -- or so it seems. Do you expect stocks to resume climbing? A: I think stocks are reflecting some fairly optimistic assumptions about results, and it makes it harder and harder for companies to have their stock prices go up, because they have to exceed already high expectations. What I see, though, is that some companies are actually doing it. Intel (INTC ) is showing some powerful results and guidance, and is benefitting. IBM (IBM ) put out lower numbers, though, and is being punished. Q: Your new book, Value Leadership, is very timely. Tell us what it's about and why you wrote it. A: It's about restoring confidence in our system of equity capitalism and how executives can do that. The central theme of the book is that relationships matter -- relationships not only matter, but they pay. The idea is that companies that do a better job than competitors of creating value for employees, customers, and communities earn higher returns for shareholders. The reason I wrote the book was because I believe in our system, and I believe that the CEOs of our companies are in the best position to restore confidence in our system. If they do the right things, that is. I wanted to create a roadmap for doing that. Q: You write of a seven-point "value quotient" for evaluating a company. Is the value quotient a formula? A: Well, actually it is. It's a formula -- it's made up of 24 variables that are equally weighted, and it's based on assessing how well companies perform 24 activities that underlie the seven principles talked about in the book. If investors take the time to calculate this number, they get an advantage over investors who don't, because they'll get insight into the long-term value-creation potential of the company. Q: How do you define value? Specific criteria that you utilize would be what? A: Well, that's a key question. Value I define differently for different stakeholders. Value for an employee is different from value for a customer, which is different from value for a community. The way to think about it is, for example, with an employee in any given industry, there is a finite number of top employees, and one of the ways that a company can win in its industry is creating an environment that satisfies an employee's value criteria better than competitors. What I found in examples that I used in the book, such as Southwest Airlines, is that they understand what the best people want in a work environment, and they create an environment where the best people will thrive and want to stay. Employees are looking for a chance to make a difference, they are looking for people who are compatible with them in their work environment, they're looking for the chance to do innovative things and create value for their customers.... A company wins in its industry by doing a better job than its competitors of satisfying those value criteria, and one of the challenges of management is to discover what those criteria are and create an environment that satisfies them better than competitors. Q: Since all equities have risen enormously in the past 52 weeks, how hard is it to find value? A: It's much harder than it was before. I think, in terms of looking from an investment standpoint, the investor has to take a very hard look at the price-earnings ratio of a company relative to its earnings growth rate. The place to look for stocks that are going to continue to go up are companies that are announcing guidance more than the market expected. This represents an opportunity until the stock market starts to anticipate that the company will continue to do this, which gets baked into the price. These days, there's a lot of money on the sidelines, so when a stock goes up, money pours in. This makes it hard to find an inexpensive stock that is doing well. Q: Can you name some examples of companies that you've found have strong "value leadership"? And ones that don't? A: Absolutely. As a matter of fact, in the book I have eight value leaders and eight peer companies that are...O.K. [in their industry] but not as good. For example, I found that Goldman Sachs (GS ) was a leader, Merrill Lynch (MER ) was a peer. Synopsys (SNPS ) was a value leader, Cadence (CDN ) was a peer company. Southwest was a value leader, and American Airlines (AMR ) was a peer company. I selected the value leaders from 1,500 companies, based on a mix of 11 criteria. Six were quantitative criteria, like 10-year stock-price appreciation and 10-year return on equity. Five were qualitative, like surveys of customer satisfaction or employee surveys. Out of all the companies, there were only these eight that came close to my ideal of value leadership. These companies are not perfect -- they have flaws, mind you -- but they are examples of companies that come the closest in their daily doings.
BW MALL
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