Robert Olstein: BETTER VALUES OR VALUE TRAPS; THE CURRENT ENVIRONMENT

How do we determine when a stock is falling whether we believe it is temporarily out of favor or has turned into a value trap? There are two main risks that we assess when valuing a company. Financial risk relates to how a company is capitalized (debt ratios, excess cash, etc.), the realism of its reporting practices, and most importantly its ability to withstand bad times without having to resort to short-term solutions that are not in the long-term interests of the company. Operating risk relates to the accuracy of future estimates of a company’s ability to produce free cash flow from its basic business. Thus, the accuracy of our valuations is based on our ability to accurately predict future excess cash flow.