Value Stock-Picking, Week 4: How to Find the Next Big Value Play

Editor's note: The Value Stock-Picking Training Program is a series of four weekly assignments. (To start with Week 1, click here.) Each assignment is based on one of James Altucher's strategies in his book Trade Like Warren Buffett. To get a copy of the book, click here.

This assignment was written by Stockpickr member Ira Krakow.

In Trade Like Warren Buffett, James Altucher quotes Benjamin Graham, the founder of value investing:

Graham notes that when a company is trading below its market value, one of two things should happen (note the word "should"):

1. The market will once again value the company on the basis of its liquidating value or higher.

2. The company's management, if they can't turn the business around, will liquidate the business and return the proceeds to investors.

This raises two questions:

1. How do we calculate a company's real value?

2. When, if ever, will the market price of the company's stock rise to that value?

One way to realize value, as we saw last week, is for the company to be acquired . But at what price? In Week 2, we saw how to use the price-to-book ratio to discover value. However, this is only one valuation method. In this final week of value stock-picking, we will explore other ways to spot value.

Large-Scale Value Plays

How would a company like Google (GOOG Quote) or Microsoft (MSFT Quote) price Facebook (see "Microsoft Takes Stake in Facebook")? What's the right price for a biotech company, such as Dendreon (DNDN Quote)? What about a bank? When you read about a how a stock is priced, you will often see phrases such as "12 times EBITDA " or "2 times growth rate " or "5 times cash flows ."

However, not all deals are priced the same way.