Some stuff I bought last week

[KaneKungFu123]

IF
TLK
MXF
AA
XTO
ARF

most of these have come from recommendations from people on www.valueforum.com (http://www.valueforum.com)

Particularly bullish on TLK (which is up 4% already) and MXF.

[DesertCat]

Invalid Ticker Symbol
'arf' is not a valid ticker symbol.

[KaneKungFu123]

AFR

[DesertCat]

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most of these have come from recommendations from people on www.valueforum.com (http://www.valueforum.com)

Particularly bullish on TLK (which is up 4% already) and MXF.

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"bullish" is not a valuation metric. Can you summarize why you think they are quality holdings, and why you believe they are undervalued?

Also do you pay for membership on valueforum.com? If so, could you tell me if you'd recommend it?

thanks,
Randy

nice move on TLK probably see some profit taking on it soon (pending any good news) should hold 21-22 on the back end and think about reaccumulating on big vol.

[KaneKungFu123]

Yes, i pay for membership on valueforum.com

by bullish i just mean that ive invested more in TLK and MXF then i have in the other stuff.

I think valueforum is really great. its like 2+2 only alot more organized, and more serious. i think you can get a free trail at first.

XTO:
XTO recently presented at an FBR conference. In not so many words, they said to expect natural gas companies to have blow-out earnings in Q4 2005.

They also pointed out that XTO's production costs are one-half of the industry average, and that their decline rate is one-half of industry average. This powerful combination generates tremendous free cash flow.
Management expects production to grow by at least 10% organically next year, while the company generates 1 to 1.5 billion in cash for accretive acquisitions or failing that, share buybacks.

I am very impressed by this disciplined, focused, and enthusiastic team.

Earlier I wrote:
This is a well-managed, growth oriented natural gas play. XTO's management usually low-balls per share production growth figures. While they are predicting 10% growth for next year, they will likely come in at their more typical 15 to 20%.

XTO’s superior finding and development cost performance and low rate of decline lead to a relatively low level of capital necessary to hold production flat (maintenance capital). As a result, the company generates a high level of free cash flow relative to its stock price.

Given the low decline of older vintage wells in XTO’s producing portfolio, the rate of production replacement required by new wells is relatively low. This gives XTO the opportunity to generate competitive organic growth versus its peers, who typically have greater decline rates. XTO's crack geology team manages to double the expected production from their reserves.

Long term debt to capital of 38% is somewhat higher than peers, but manageable.

Strictly land-based production, significant insider ownership, only 1% hedged for 2006, good reserve growth, extensive drilling inventory, exceptionally high NatGas prices, and a forward PE of 11 make XTO an excellent choice for one's portfolio. I've got it in mine!

AFR: insider buying with divy coming up

IF, TLK:
Yesterday, Indonesia's President Bangbang Yudhoyano reshuffled his cabinet and appointed a new economic team:

http://sg.news.yahoo.com/051206/16/3x258.html

Today's market reaction in Jakarta was distinctly positive:

http://finance.yahoo.com/q/bc?s=%5EJKSE&t=5d

I have been watching Indonesia lately, because I think it could be the Brazil of 2006 and maybe 2007. They had a tough year over in Indonesia, starting with the tsunami last Christmas, but the pain this year points to longer term gain in this economy. The tsunami was a catalyst to make peace with the Ache province, so energy production and export from North Sumatra should pick up. The government put through a new pricing policy for consumer energy products. Previous prices were below the cost of refining, which lead to the screwy result that an energy exporting country had to import refined products, it also caused government fiscal problems.

Not everything is fixed, by a long shot, but it appears fixed enough that the market can move again. There are not many choices for US stock buyers. Primarily:

IF : The Indonesian Fund is selling at a small discount to NAV and can really move when it gets going.

tlk : Telekomunikasi Indonesia makes up a full 20% of IF and it is the best of the two Indonesian ADRs available on the NYSE. On a daily graph, the TA is stretched, but it's close to breaking out to new highs on the weekly.

Just curious, desert, how much value do you put into standard and poor and other such reports. they have a chart showing how the correlation between how many stars they rate a stock and how well it does, and they seem to do a damn good job.

i wrote none of this, and i barely understand it. i guess i am gambling sort of by investing here, but these guys are pretty well documents as winners.

[KaneKungFu123]

adding UPL on monday

[Sniper]

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i wrote none of this, and i barely understand it.

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Just to be clear... the message you posted, was written by someone else?

... and you are making your investment decisions based on it, without even fully understanding it?

[KaneKungFu123]

doesnt seem much different then following a football handicapper.

i also do this with the poster acehigh, see: JCOM, CUTR, CWTR.

[KaneKungFu123]

CHK

Entrepreneurial Management . Our management team formed the company in 1989 with an initial capitalization of $50,000 and fewer than ten employees. Since then, our management team has guided the company through various operational and industry challenges and extremes of oil and gas prices to create the second largest independent producer of natural gas in the U.S. with approximately 2,800 employees and an enterprise value of approximately $18.8 billion (based on a common stock price of $31.00 per share and pro forma for this offering). Our co-founders, Aubrey K. McClendon and Tom L. Ward, have been business partners in the oil and gas industry for 22 years and beneficially owned, as of
November 30, 2005, approximately 21.0 million and 21.3 million shares of our common stock, respectively. Messrs. (((((McClendon and Ward each intend to purchase 500,000 shares of common stock in this offering at the price offered to the public.)))))

[KaneKungFu123]

i understand it enough. barely was bad wording. i understand why the stock will go up, and why it will go down. but still, i think this is +EV. these guys are professionals, and i am only investing a portion of my money.

[Sniper]

Just to clarify, following advice is fine; but there is no excuse for not understanding it!

[DesertCat]

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Just curious, desert, how much value do you put into standard and poor and other such reports. they have a chart showing how the correlation between how many stars they rate a stock and how well it does, and they seem to do a damn good job.

i wrote none of this, and i barely understand it. i guess i am gambling sort of by investing here, but these guys are pretty well documents as winners.

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Valueline does the same type of ratings, and claim that highly rated companies outperform lower rated ones over time. I'm skeptical about the utility of their "outperformance", esp. since the fund that uses their rankings has been getting pwnd over the last ten years. (http://quicktake.morningstar.com/Fund/TotalReturns.asp?Country=USA&Symbol=VLIFX&fdtab=re turns) And in your case, you aren't buying all of the "highly rated" companies, just ones you find interesting. So you might get the dogs of the bunch, or the stars, or a representative sample, I think it's just luck that will determine that.

I prefer to take another route. If someone rates a stock very highly, I use that as a starting point for research. I only buy it if it meets my value criteria. You are probably making so much money from high stakes NL that spending significant time on stock research might be -EV for you today. But you should definitely consider having a goal of minimizing your portfolio risk. Since your day job has so much volatility associated with it, why double up with your porfolio?

[DesertCat]

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XTO:
XTO recently presented at an FBR conference. In not so many words, they said to expect natural gas companies to have blow-out earnings in Q4 2005.

They also pointed out that XTO's production costs are one-half of the industry average, and that their decline rate is one-half of industry average. This powerful combination generates tremendous free cash flow.
Management expects production to grow by at least 10% organically next year, while the company generates 1 to 1.5 billion in cash for accretive acquisitions or failing that, share buybacks.

I am very impressed by this disciplined, focused, and enthusiastic team.

Earlier I wrote:
This is a well-managed, growth oriented natural gas play. XTO's management usually low-balls per share production growth figures. While they are predicting 10% growth for next year, they will likely come in at their more typical 15 to 20%.

XTO’s superior finding and development cost performance and low rate of decline lead to a relatively low level of capital necessary to hold production flat (maintenance capital). As a result, the company generates a high level of free cash flow relative to its stock price.


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Acccording to MSN, XTO's free cash flow from 2002-2004 was a negative $1.3B (B as in Billion)! In Q3, it had cash from operating activities of $1.4B, but invested $1.3B in property acquisitions and $909M in development/exploration. That doesn't seem like free cash flow to me. But I can't figure out how much of that $2.2B in investment is required, and how much is discretionary. I'm not sure the company wants me to figure it out, either.


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Long term debt to capital of 38% is somewhat higher than peers, but manageable.


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It has $3.2B in long term debt! And it's entire shareholder equity is only $3.5B. I don't understand how the analyst got 38% from the Sept. 30 balance sheet. And while they have $9B in assets, but only $12M is cash. Their current assets are mostly accounts recievable.

Strictly land-based production, significant insider ownership, only 1% hedged for 2006, good reserve growth, extensive drilling inventory, exceptionally high NatGas prices, and a forward PE of 11 make XTO an excellent choice for one's portfolio. I've got it in mine!


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Two big red flags here. First is "exceptionally high NatGas prices". What happens if prices decline? I think it's going to hurt real bad.

Secondly, when an analyst starts talking about "forward PE", I immediately regard them as a retarted moran. They are putting a ratio on something that hasn't happened yet. It's because the analyst doesn't want to tell you that it's real PE is 22.

This is my thirty second evaluation. It looks like a leveraged, fast growing company that should do pretty good if natural gas prices continue to stay strong. If prices drop, it may be faced with a big cash crunch, and the stock could get killed.

[Uglyowl]

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how much value do you put into standard and poor and other such reports. they have a chart showing how the correlation between how many stars they rate a stock and how well it does, and they seem to do a damn good job.


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I have used these guys as my primary starting point for the past 6-7 years and these guys do a great job.

EDIT: Or take an idea I heard elsewhere and see what S&P writes about it. There is a significant amount of info in each report.

I shorted AA based on the chart.

[xtravistx]

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Secondly, when an analyst starts talking about "forward PE", I immediately regard them as a retarted moran. They are putting a ratio on something that hasn't happened yet.

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This isn't always applicable with stocks that are so heavily dependent on commodity prices, especially ones with a defined forward curve such as natural gas. It doesn't make sense to value XTO (or CHK for that matter) on what they did last year (when gas prices were 1/2 to 1/3rd of what they are now). You buy/value stocks based on their future earnings potential, not their past earnings. In this case, the forward curve it the BEST indicator of their future earnings potential. If you don't agree with how natural gas prices are priced in currently in the future, then play the natural gas futures speculative game and don't invest in this stock, but if you believe the market has priced in the future expectations of natural gas prices, then the forward P/E makes sense (even though P/06E CF and EV/06E Cash flow are the main metrics used valuing E&P companies right now other than Firm value/reserves).

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But I can't figure out how much of that $2.2B in investment is required, and how much is discretionary. I'm not sure the company wants me to figure it out, either.


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You aren't even trying to value an E&P company which are different from other companies you might be looking at. Asset intensity is a measure of the % of capex used to maintain FLAT production, and is mentioned by some analysts, and XTO ranks well there. A quick and dirty way to figure out how much they spend on maintenance capex is to take the 3-year avg (or the last year, but less sampling data) all-in F&D costs (how much it costs to find and develop reserves) and multiply this by their production last year to get a mainentance capex cost.

[KaneKungFu123]

what chart?

[adios]

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Secondly, when an analyst starts talking about "forward PE", I immediately regard them as a retarted moran.

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Since the value of a share of stock is at the very least highly dependent on future earnings why is an analyst that discusses "forward PE" (i.e. future earnings) a moron?



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This is my thirty second evaluation. It looks like a leveraged, fast growing company that should do pretty good if natural gas prices continue to stay strong.

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One question is what future price of natural gas is currently priced into the stock i.e. what is the estimate of future earnings thus forward looking PE of the stock.


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If prices drop, it may be faced with a big cash crunch, and the stock could get killed.

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This could be said about alot of companies and their products.

[KaneKungFu123]

Thanks for your analyzation. One thing, these arent analyst picks that are being punched out to meet a weekly quota of selections. these are actual stocks they are invested in. you pay only for the message board. no one owes anything to anyone, so you dont have to worry about someone pimping a stock and just trying to make it sound good.

[Sniper]

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so you dont have to worry about someone pimping a stock and just trying to make it sound good.

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What makes you think this is true??

[DesertCat]

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Since the value of a share of stock is at the very least highly dependent on future earnings why is an analyst that discusses "forward PE" (i.e. future earnings) a moron?


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Typically the analyst is doing it to avoid discussion how expensive the stock is today. You are right, it's that stream of future earnings that determine the stocks value. Typically, you can look at the last five years of earnings and come up with a reasonable idea of what normalized earnings and growth are. But in this case I was being unfair to the analyst, as it's growing so fast that it's history is much less pertinant to the evaluation.

But remember, it was my "thirty second evaluation.". I was only trying to find red flags for Kane, not spending hours on whether I wanted to invest in it.

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If prices drop, it may be faced with a big cash crunch, and the stock could get killed.

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This could be said about alot of companies and their products.

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It can be said about a lot of companies you should avoid. It can't be said about Coke or Pepsi for example, or Walmart, etc. There are companies that have pricing power, and built in competitive advantages. When a company's future earnings are dependant upon commodity prices, that's pretty much a "no buy" for me. I have no ability to predict price futures. In energy, I'm much more interested in owning pipeline companies at the right price, as my perception is whether gas prices go up or down, they still get paid.

This company looks like it's dancing on the razor's edge and has no competitive advantage. Great natural gas prices mean great performance. Bad natural gas prices probably hurt it bad.

But if I was to own it, I would sure spend the time to model a worst case scenario and as you pointed out, understand what prices are built into the todays price.

[DesertCat]

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You aren't even trying to value an E&P company which are different from other companies you might be looking at. Asset intensity is a measure of the % of capex used to maintain FLAT production, and is mentioned by some analysts, and XTO ranks well there. A quick and dirty way to figure out how much they spend on maintenance capex is to take the 3-year avg (or the last year, but less sampling data) all-in F&D costs (how much it costs to find and develop reserves) and multiply this by their production last year to get a mainentance capex cost.

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This was very interesting, and makes perfect sense. I guess my problem analysing this stock was that the thirty second "mental models" I use for evaluations don't extend well to most energy companies. It's probably because I've pretty much excluded them from research the last few years due to the volatility of energy prices. Thanks for giving me some new perspective.

[AceHigh]

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see: JCOM, CUTR, CWTR.

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What about LUFK, USAK, SWN and EPEX?

LUFK and USAK are up almost 20% since I bought/recommended them.

[DesertCat]

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IF
TLK
MXF
AA
XTO
ARF

most of these have come from recommendations from people on www.valueforum.com (http://www.valueforum.com)

Particularly bullish on TLK (which is up 4% already) and MXF.

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Let's see if I can redeem myself for Kane after doing a crappy job on XTO and offer some useful thoughts.

First, why MXF? It's a closed end fund that's not rated very high by Morningstar. Like many closed end funds it trades at a discount which could be good/bad depending upon when you get in. It's expense ratio isn't cheap, but isn't horrible. If you want exposure to the mexican market isn't there an index fund available? That way you don't have to deal with discounts, mgmt fees and potentially bad mgmt decisions.

Moving on to AA. Before starting, all I know about Alcoa is that aluminum production is energy price dependant. So I would expect their earnings to be down. Looking at their recent results doesn't really support or deny that theory. (http://moneycentral.msn.com/investor/invsub/results/hilite.asp?Symbol=aa) Current PE is 19.6, but earnings this year are flat. Revenues have been roughly flat for five years, thought they actually declined for two years and have rebounded about 15% the last two. What's their real trend line? Return on equity is blahh (9.4%).

According to MSN, free cash flow the last five years is negative, but that's with two super heavy investment years three and five years ago. The last two years total $1.2B, while reported earnings were $2.2B. This is suspicious, either MSN's database has it wrong or poorly interpreted, or their earnings aren't very high quality. So let's look at their 2004 10k to get a feel for the business.

Interestly enough, the 10k mentions they own 8 dams and supply 25% of their own power, buying the rest under long term contracts. That seems to help keep their costs in line. They report their sales numbers have been impacted by regular acquisitions and restructurings. If they have spun off or sold some subsidaries that would explain why sales have been treading water.

Looking at the cash flow statement, it appears to match up well with profits. I.e. operating cash flow minus capital expenditures is slightly higher than profits in 2002, way higher in 2003, and slightly lower in 2004. So I'd regard their earnings as pretty 'clean'.

The balance sheet is okay. Lots of goodwill from acqusitions, lots of AR and inventory, but $457M in cash too. Most of their debt is long term. They have some prefered stock as well.

Overall I don't see any big problems with Alcoa, but I also don't see any reason to buy it. It just seems like a big, decent company at a price that's not super cheap or super expensive. I have to go to breakfast, so that's my "two minute" analysis, which is hopefully at least four times better than my thirty second analysis.

The next step would normally be to model the growth of their core businesses and review all their acquisitions/restructuring to try to understand what's really happening. It would take some time to do this, it's a big complicated business so you have to invest a good amount of time to understand it. This is one reason as a individual investor I like to stick to small cap companies. It's also a place where a good analyst (as much as I hate to admit it) has value. I would never invest on their recommendation, but I would read their report carefully and use it as a jumping off place.

I.e I'd read the annual reports myself to ensure I don't find something that contradicts the analyst's opinion, and then estimate it's value myself so I don't fall victim to any bias the analyst has. I.e. an analyst might find AA a good buy at a 19 PE because he's required to only compare it against other metals companies, but in your broader universe of stocks you might find much better opportunities. The guys at valueforum probably don't have any limitations, but that still doesn't mean their valuation perspectives are necessarily the same as yours.

[KaneKungFu123]

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see: JCOM, CUTR, CWTR.

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What about LUFK, USAK, SWN and EPEX?

LUFK and USAK are up almost 20% since I bought/recommended them.

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Man, I wish I bought these. At the time I didnt have enough money. How much do you usually beat the market for anually. Even your DRIV selection, they killed their earnings quarter - but ended up downgrading for 2006. So you were on the right track there also.

[Evan]

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Secondly, when an analyst starts talking about "forward PE", I immediately regard them as a retarted moran.

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Since the value of a share of stock is at the very least highly dependent on future earnings why is an analyst that discusses "forward PE" (i.e. future earnings) a moron?


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While this is not that far from the truth, it is still wrong. Stock prices are based on future free cash flows, not future earnings. This may sound trival to some, but it's not.

By the way, the analyst is sort of a moron anyway if he valued the firm based on any type of P/E (I haven't read this report and I don't even know what analyst we're talking about, just so we're clear, this is just a general statement). Why a completely flawed metric has become the gold standard for people that know just enough about finance to hurt themselves, I don't know, but I sure get a kick out of it.

If anyone's wondering why I call P/E a "completely flawed metric", you should go compare a bunch of companies in similar businesses with varying debt levels. You will almost always "determine" that the higher levered companies are the most undervalued. P/E uses a firm value and compares it to an equity cash flow; that makes companies with excess debt appear deceptively "cheap".

[AceHigh]

Last few years 30%+. But it's a little like poker, if the market does well I do a lot better.

[DesertCat]

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If anyone's wondering why I call P/E a "completely flawed metric", you should go compare a bunch of companies in similar businesses with varying debt levels. You will almost always "determine" that the higher levered companies are the most undervalued. P/E uses a firm value and compares it to an equity cash flow; that makes companies with excess debt appear deceptively "cheap".

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Well, the best way to value a company is EV/FCF, wouldn't you agree? But if I use those terms here, half the audience won't understand. So I often use PE and market cap when writing about a stock just to be more easily understood.

When I'm doing my own analysis, I don't have a screener that understands FCF or EV, so I use PE and market cap to screen with. Then I have to do the dirty work of calculating EV and FCF by hand for anything that looks interesting. But before I get there I'm using PE as a shortcut until I figure out whether FCF is wildly different than E.

[adios]

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Secondly, when an analyst starts talking about "forward PE", I immediately regard them as a retarted moran.

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Since the value of a share of stock is at the very least highly dependent on future earnings why is an analyst that discusses "forward PE" (i.e. future earnings) a moron?


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While this is not that far from the truth, it is still wrong. Stock prices are based on future free cash flows, not future earnings. This may sound trival to some, but it's not.

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We can quibble about what "at the very least highly dependent on" vs. "based on" but to me they do mean something different thus I used "at the very least highly dependent on" vs. "based on." You more or less imply that they're synonomous but they're not in my mind.


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By the way, the analyst is sort of a moron anyway if he valued the firm based on any type of P/E (I haven't read this report and I don't even know what analyst we're talking about, just so we're clear, this is just a general statement).

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I don't agree with this at all. Future earning imply something about future free cash flow if that's how you prefer to value equity.

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Why a completely flawed metric has become the gold standard for people that know just enough about finance to hurt themselves, I don't know, but I sure get a kick out of it.

If anyone's wondering why I call P/E a "completely flawed metric", you should go compare a bunch of companies in similar businesses with varying debt levels. You will almost always "determine" that the higher levered companies are the most undervalued. P/E uses a firm value and compares it to an equity cash flow; that makes companies with excess debt appear deceptively "cheap".

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What studies back this up out of curiosity? It should be easy to identify such companies and compile data on investment returns.

[Evan]

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If anyone's wondering why I call P/E a "completely flawed metric", you should go compare a bunch of companies in similar businesses with varying debt levels. You will almost always "determine" that the higher levered companies are the most undervalued. P/E uses a firm value and compares it to an equity cash flow; that makes companies with excess debt appear deceptively "cheap".

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Well, the best way to value a company is EV/FCF, wouldn't you agree? But if I use those terms here, half the audience won't understand. So I often use PE and market cap when writing about a stock just to be more easily understood.

When I'm doing my own analysis, I don't have a screener that understands FCF or EV, so I use PE and market cap to screen with. Then I have to do the dirty work of calculating EV and FCF by hand for anything that looks interesting. But before I get there I'm using PE as a shortcut until I figure out whether FCF is wildly different than E.

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You can screen for EV/FCF on Yahoo. I don't really know if I trust the way Yahoo calculates FCF (mostly because I don't know how they do it). I thougt you could also screen for EV/EDBIDA on Yahoo, but it looks like you can't. I'm sure you can somewhere though. Either way, comparing firm values to equity cash flows is just misleading. If you make sure you're comparing two like metrics you'll get much more meaningful results.

[Evan]

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Secondly, when an analyst starts talking about "forward PE", I immediately regard them as a retarted moran.

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Since the value of a share of stock is at the very least highly dependent on future earnings why is an analyst that discusses "forward PE" (i.e. future earnings) a moron?


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While this is not that far from the truth, it is still wrong. Stock prices are based on future free cash flows, not future earnings. This may sound trival to some, but it's not.

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We can quibble about what "at the very least highly dependent on" vs. "based on" but to me they do mean something different thus I used "at the very least highly dependent on" vs. "based on." You more or less imply that they're synonomous but they're not in my mind.

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Okay, I'll agree that they're usually corrlated. I would guess that price and earnings have a high beta but significantly different alphas (at least in some cases). If that's all you're saying than I misunderstood your post.

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By the way, the analyst is sort of a moron anyway if he valued the firm based on any type of P/E (I haven't read this report and I don't even know what analyst we're talking about, just so we're clear, this is just a general statement).

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I don't agree with this at all. Future earning imply something about future free cash flow if that's how you prefer to value equity.

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Yes, they do imply something.

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Why a completely flawed metric has become the gold standard for people that know just enough about finance to hurt themselves, I don't know, but I sure get a kick out of it.

If anyone's wondering why I call P/E a "completely flawed metric", you should go compare a bunch of companies in similar businesses with varying debt levels. You will almost always "determine" that the higher levered companies are the most undervalued. P/E uses a firm value and compares it to an equity cash flow; that makes companies with excess debt appear deceptively "cheap".

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What studies back this up out of curiosity? It should be easy to identify such companies and compile data on investment returns.

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Studies? For what? Companies A and B have PE's of 20 and the same market cap. Company A has twice as much debt as company B. Do you think these these firms are fairly valued (assuming all else is equal)? I don't know of any study that proves this, or even where I'd look to find one, but it's basically just common sense.

The long term weekly chart.

[adios]

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Studies? For what?

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To indicate that picking company A referred to below has inferior returns for investors compared to company B below.

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Companies A and B have PE's of 20 and the same market cap. Company A has twice as much debt as company B. Do you think these these firms are fairly valued (assuming all else is equal)? I don't know of any study that proves this, or even where I'd look to find one, but it's basically just common sense.

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Just because you say it's common sense doesn't mean that buying stock in company A will provide inferior investment returns than buying company B stock. Again this is a fairly easy set of criteria to enumerate and track investment returns for. What I'm chiding you about is that IMO you're more or less arguing that there's a market ineffeciency of some sort.

Here's what you wrote in the post I responded to:

If anyone's wondering why I call P/E a "completely flawed metric", you should go compare a bunch of companies in similar businesses with varying debt levels. You will almost always "determine" that the higher levered companies are the most undervalued. P/E uses a firm value and compares it to an equity cash flow; that makes companies with excess debt appear deceptively "cheap".

If a company is deceptively "cheap" then this implies to me that it's a worse investment i.e. will have inferior returns for the investor buying the stock than another compnay with a similar business but less debt. I'm a little confused with your point here because in the post I responeded to I think you implied that the companies in similar businesses have different PE's as the higher leveraged company has a lower PE and thus is "deceptively cheap." But in your next response they have the same PE's so why would the higher levered company be "deceptively cheap" if they have the same PE's? Put another way when you wrote:

You will almost always "determine" that the higher levered companies are the most undervalued.

I assumed you meant the higher levered companies would have lower PEs. Is that wrong and if so could you elaborate on the criteria that you were referring to that one would use to "determine" that the higher levered company is undervalued?