While analyzing stocks for buy/sell recommendations for the USC Student Investment Fund, I discovered one key factor that often flipped my valuation opinion from buy to sell. This factor is share-based compensation (accounting treatment, here). When it’s added back in a discounted cash flow analysis, cash flow goes up and a stock looks like a buy, yet when it’s subtracted out (like a cash expense), cash flow goes down, making a stock look like a sell.
Share-based compensation is the largest valuation issue that I see discussed the least. (more…)