Brian F. Spengemann, C.F.A.
Chief Executive Officer
Coventry Capital Inc.
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How can you get high return when the companies you are
buying are closely followed by everyone else?
Mr. Spengemann:
I prefer to use issues that
are followed by several analysts. I use a range of earnings estimates to construct a price range associated with those
earnings expectations and develop a target price. There are several other factors which contribute to the price
range, but earnings trend is the starting point.
The target price can move
with the upward or downward direction of earnings expectations. The return is a function of the projected
earnings expectations.
The direction and magnitude
of interest rates and growth of common stock earnings in the aggregate are the
key areas of my focus. Stock prices move
with the change in earnings growth and that growth is affected by a change in
the interest rates, which are the discounting factor in equity prices.
In recent years, inflation has been low. As a result, we have had a stable discount
factor during a period of very strong corporate earnings growth. Recent volatility has come from external factors
such as the concern for the stability of foreign economies and their impact on
the U.S. economy. Of course, if U.S.
economic growth is stronger than that with which Federal Reserve is
comfortable, there is always the likelihood of intervention by the Federal
Reserve to slow economic growth.
What individual factors do you look for in accessing
the potential of a company as an investment?
Mr. Spengemann:
Other individual factors
include price to sales, price to earnings, price to cash flow, relative market
multiples and earnings growth. These factors all converge to develop a trading range for individual issues relative
to the S&P 500. I watch these
factors on a forward rolling basis. Typically, they are elements that I look for in the research that I use
to build a working list of stocks.
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