“redcorner” did a write-up for Northgate on TMF, the vehicle hire company. It is his entry for the Nicky Fraser Share Competition. He also has his own blog, and a level of analysis that blows my puny efforts out of the water. So it’s well worth checking out.
I have been toying with reward-to-risk ratios, which I had heard a fund manager linked via John Chew‘s blog uses. I can’t recommend John Chew’s blog highly enough. It is one of the best investing learning resources you will come across.
Anyhoo, the idea behind reward-to-risk is that you might pick a variety of metrics (e.g. EV/Sales), and look at the upside, and divide by the downside. So, if EV/Sales could go to a high of 7, or a conversely a low of 2, and it currently stands at 3, then the reward-to-risk is 4 (=(7-3)/(3-2)). For smaller companies, look for a risk-to-reward of at least 5. When you do these calculations, you, in a sense, are not worried too much about trying to predict the future, whether the next year will be good or bad, you’re more concerned with a good payoff for the risk you’re taking. This calculation is very applicable to cyclical companies, which may be on depressed operating margins, returns on equity, EV/Sales, and so on.
Using Sharelock Holmes, I calculated that the reward-to-risk for NTG on an EV/EBITDA basis is 8.2, and on an EV/Sales it is 14.6. There’s no point trying to seek special accuracy on these numbers, they’re only indicators. Seeings as they are both above 5, it certainly looks like redcorner’s pick is very interesting.
No position, as I’m a bit overwhelmed by the number of ideas that I’m reading lately. It certainly looks like a live one, though!