A Good Story Isn't Enough -- Check the Numbers

One of the most important tools in the investor's kit is a set of quantitative standards for measuring the health of a particular corporation's balance sheet and income statement. Too much emphasis is paid to the story of a particular company or the outlook for its business prospects. All too often, stories tend to have fictional elements to them, and the future is not predictable.

I realize that this flies in the face of typical Wall Street analysis with its carefully calculated forecasts. I find it hard at times not to laugh at all the well-educated men and women who believe their elaborate spreadsheets that predict earnings six or seven years out. They mean well, but the investing landscape is littered with these spreadsheets, and they are all pretty much worthless.

Opinions and forecasts are nice, but it is far more important to know how the health of a company is right now, and how well it is managing its business to produce profits right now.

One of the best measurements for this was developed by Joseph Piotroski, an accounting professor at the University of Chicago. I have talked before about using the Piotroski score to evaluate the condition of a company, and it remains one of my favorite scoring methods. It is a nine-point scoring system that measures the balance sheet as well as the quality of earnings and quality of management. The higher the score, the better the condition and prospects of the company.

Three Real Estate Picks

I recently used the method to look at several real-estate-related companies, primarily REITS, and found several that should be of interest to long-term investors.

The first two I found are in the hotel business. In spite of the weak economy, the hotel business has pockets of strength. There are several reasons for this, some related to the weak dollar and foreigners' traveling to the U.S., as well as the fact that business travel continues even as domestic foreign trade declines.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider Hersha Hospitality Trust to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Melvin had no positions in stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.