tag:blogger.com,1999:blog-2335748440449035592.post4497315427502434889..comments2008-10-29T11:07:11.734-04:00TraderMarkhttp://www.blogger.com/profile/06241756200482130281noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-2335748440449035592.post-37830684364608863032008-10-29T11:07:00.000-04:002008-10-29T11:07:00.000-04:00I don't know anything about Flowserve but taking a quick look, I don't think one can say it's cheap. But it comes down to how you look at cyclicals. <BR/><BR/>The theory I follow says to buy cyclicals when the P/E is high or infinite (losses) and sell when it is low. I know many commodity and EM bulls follow the opposite strategy so it depends on your investing style. But if you do look at it that way, then this company is more risky at a P/E of 3 than it was at a P/E of 63 in 2001! Flowserve traded at lower price-to-book, price-to-sales, and price-to-cash flow ratios <A HREF="http://quicktake.morningstar.com/StockNet/Valuation10.aspx?Country=USA&Symbol=FLS" REL="nofollow">back around 2001</A>. <BR/><BR/>The problem is that the earnings may be a cyclical peak. I mean, not just a mini-peak but could be a multi-decade peak. That's why investors are dumping all these commodity companies, industrials, shipping, and so on, with seemingly high earnins and cash flow.<BR/><BR/>If you look at <A HREF="http://finance.yahoo.com/echarts?s=FLS#chart1:symbol=fls;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined" REL="nofollow">a long-term chart</A>, FLS has clearly been cyclical with huge declines (seems like 50%+) between 1998 and 2000, and in 2002. Assuming this isn't due to some big dividend payment or something, what is happening now is not unusual. A 50%+ drop is normal for cyclicals like this--at least based on long-term history.<BR/><BR/><BR/>So if you are to stay bullish, you need to either believe that this is a growth stock (sort of like what commodity bulls believe about commodity stocks right now); or at least earnings won't decline sharply. A bullish argument would imply that the macro environment has changed or the company itself has changed. You better be sure of that if you are bullish.<BR/><BR/><BR/>Having said all this, I am neither bullish nor bearish on FLS. It could very well be a good investment. All I'm saying is that the P/E of 3 is not indicative of value--unless you think it is a growth stock or can maintain that, not just this year or next, but for the next 20+ years...<BR/><BR/><BR/>(BTW, first time poster... good blog... )Sivaram Velauthapillaihttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com