Many thanks Sauced for the time you have given to responding to...

Many thanks Sauced for the time you have given to responding to me.

I fully understand your approach and cannot fault it in appraising the quality of different companies. I have no problem in recognising the points you make, but, important as they are, to me as an investor, it is only half the story:

The point I was trying to make is that in my view no matter how successful a company, no matter how great are its prospects, no matter what its growth path may be, from an investment perspective the cost of buying into such a company at a particular point in time, perhaps not at other times, can be just too high, relative to other available investments, and so not worth buying at that time.

To me its not only the strength of the company, but has to include the relationship between forward earnings (as a measure of the performance of the company) and the share price, being the cost of buying into that performance.

Question is how do we make that judgement.

As I see it, it is the forward earnings estimate which is an objective measure of the likely outcome of a companys performance ie the earnings per share. I accept that if this estimate is incorrect then the consequent conclusions will be wrong, but we have to use some measure to form a view on the appropriate share price or cost of buying into a company with those earnings.

I am not questioning the quality of a companys operations or its growth; I am questioning the relationship between those factors and the price being asked to buy into those factors, which can often be too high, relative to alternatives.

So with ANG FGE and RCR, if the comparative forward earnings estimates are broadly correct then we have the option of buying into ANG with forward earnings 2010 2011 of 5.7% pa and 6.9% pa (the share price has already anticipated much of the projected growth) or RCR at 12.4 % pa and 13.3 % pa. (share price oversold and also reflects uncertainty re quality of those earnings).

In examining the companies, you are no doubt correct, that ANG is more secure, is a stronger company and destined for growth etc, and that RCR is an inferior company, but my point is that IF the forward estimates are broadly correct (and we are satisfied with gearing, interest cover and roll-over of borrowing, if any) then for me RCR is a better short term investment at these prices at this time.

If by some chance the earnings ratios were reversed then I would sell RCR and buy ANG, and when RCR moves to lower earnings % return on investment, it would mean either that the earnings genuinely are forecast to fall or the share price has moved too high, then I would also sell RCR and look for higher earnings on my investment.

A corollary of the above is that if the relative forward earnings estimates are broadly correct then there is very little margin for an increase in the ANG sp but considerable space for RCRs sp to increase.