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Both apprentice and expert investors could benefit from having a mentor. From a mentor we can learn about both profitable and unprofitable trades. For, it is much better to learn about losing money when it is someone else’s. An investor who has a successful long-term track record buying undervalued companies is an ideal mentor. Let us get in the mind of successful investor Arnold van den Berg of Century Management.
As Arnold states he did, we should, “follow every acquisition…of guys in the business.” From this, we can identify a private market value and develop a margin of safety. Jacobs Engineering Group Inc (JEC, Financial), a 1-Star Business Predictability ranked company that provides professional, technical and construction services to governmental, commercial, and industrial clients, is Arnold’s acquisition we will study today.
Before ever getting into esoteric financial algorithms, let us study sales. If we do not understand what the company sells and the levels of historical revenue in good and bad times, our calculation of future returns will probably be wrong. Use common sense when making estimates of revenue. Do not become the investor in “undervalued” buggy-whip companies when Ford started making the Model-T.
Below is a chart of JEC revenue from 1996 to today. It includes analyst projections for the next two years. Notice the general increase in sales along with the occasional downturn, as in 2008-2009. It is evident the economic conditions present allowed this company to grow.
As an investor, it is our duty to determine the value of that revenue. How important is that revenue? What is the price we should pay for that revenue? These are questions investors must ask.
A way to answer this question is by plotting Price next to Revenue per Share. The astute investor will notice, although they are both going up, occasionally the green line diverges away from the blue and other times it gets closer.
This may look like technical analysis, but it is not. Do not let the charts fool you into believing this is anything to do with technical analysis. This is pure and simple fundamental analysis. The difference is, however, instead of numbers in an Excel sheet, they are displayed on a chart. This makes fundamental analysis much easier for the visual investor.
Presented in another way, by dividing Price by Revenue, we have the Price to Sales ratio. Once again, this is a fundamental analysis concept. This chart displays the price of each $1.00 of JEC revenue. For some, seeing a chart of the price of revenue is much easier to understand than numbers on an Excel sheet. The higher the green price line, the more the market is willing to pay for revenue. The lower the green price line, the less the market is willing to pay for revenue.
Investing when the two lines are close to each other, or when the P/S ratio is high compared to historical levels, could prove dangerous. Losses are what happened to investors after they bought $1.00 of JEC revenue for $1.25 in 2008. Value investors buying JEC revenue for $0.30 in 2000 were ridiculed at the time. Despite their negative portrayal back then, their returns today should make them happy.
To become a successful investor, we must know we are not just buying a piece of paper. We are buying paper that has genuine assets and liabilities attached to it. Revenue is one of the things we buy when purchasing JEC stock. It is not the only item Jacobs Engineering has to offer; property, plant, equipment, and even cash are also included. These are things that can also be plotted; we don’t have to rely on Excel sheets any more. Take a look at Arnold's JEC holdings. 
Once we grasp the concept we are buying an actual business with tangible value, we can then assess the value of those items. This process is made simple using Gurufocus.com interactive charts. Comparing those items to the price we pay is the way we find a margin of safety.
New numbers come out every quarter, four times a year is the minimum we should assess value. Investing should not be a gamble, let us replicate the investing mentors and do our homework on each and every stock we consider.
