I was rereading Albert Einstein's Relativity last week (yeah, I'm a geek), and was struck with this thought: Like physical objects, stocks also have four dimensions (in a manner of speaking).
If you think back to college Physics 101, you'll remember that an object can be placed at a particular space along the X, Y, and Z axes, and also at a particular point in time along the T axis (the fourth dimension). Like an object, a stock can be placed at a particular "space," defined by axes such as its:
- Market cap
- Enterprise value-to-free cash flow
- Historical and projected earnings growth
- EV/FCF/G
- Return on equity
- Insider ownership
- Share dilution
Actually, as for physical objects, you can hypothesize as many stock dimensions as you like, depending on which metrics you use to analyze a stock. (In my column last week, 7 Steps to Finding Gems, I named the seven different metrics I use, yet I freely admitted that there are other dimensions I don't consider.) The point is this: At any given time, it is possible to call a stock "cheap," "fairly valued," or "expensive" based on the seven items listed above. But time moves on, therefore, a stock's valuation "location" is constantly changing.
Take Motley Fool Hidden Gems recommendation Hooker Furniture
So if Hooker shares were cheap in August, are they now expensive? Not at all, because we are now looking at Hooker at a different point on its time line, a point at which it has an enterprise value-to-free cash flow ratio of just 8.6, an EV/FCF/G ratio of just 0.6, continued strong insider ownership, and negative share dilution.
That is to say, Hooker's shareholders are seeing their slices of the corporate pie growing, as opposed to the ceaseless shrinking that occurs at companies such as Cisco Systems
The moral of the story: A cheap stock can rise in price and yet remain a bargain. So rather than fret over having missed the boat after a stock has risen in price, focus on the business, and check back on it from time to time. Yesterday's bargain might be tomorrow's as well.
Interested in learning more about Motley Fool Hidden Gems ? Sign up for a free, no-obligation trial today.
Fool contributor Rich Smith owns no shares in any company mentioned in this article. Years ago, on his personal time line, he earned a pair of A minuses in astronomy and macroeconomics from the College of William & Mary.
