Enterprising Investor Forum

Trying to get your head around all the different ETFs can be quite tricky, especially due to the fact that there are so many new offerings.

We recently came across Bespoke Investment Group’s ETF Family Tree which we found extremely useful.

Hope it helps!

Can anyone call the top or bottom of the market? Well, for a true value investor, the answer is quite clear: No. Naturally, some people do make the right call but can they do it consistently? Probably not.

You’ll always come across someone who tells you that the market is going to crash or about to hit new highs but how do they know? What do they base their assumption on? Anyway, if you keep on saying “up” or “down” for long enough, you’re bound to be right sooner or later. Furthermore, be wary of people who tell you that their methodology would have worked in the past… anyone can be a master stock-picker with the benefit of hindsight or that they have back-tested their module (as George Stigler wrote: “Theories that are right only 50% of the time are less economical than coin-flipping”).

An academic study conducted at the University of Calgary shows that - as a longterm strategy - staying invested in the market instead of trying to move in and out produces better returns. Your gains during the bull markets would far outweigh the losses in bear markets. They conclude that if a market timer wanted to outperform an investor with a buy and hold strategy, he/she would have to make correct calls 70% of the time. Moreover, we are sure than you have all seen the statistics showing that, the most active accounts held at internet brokerage firms tend to underperform the ones with the least activity.

As usual, we favor an approach consisting in research, due diligence and a buy and hold strategy. Of course, you are free to trade as activly as you like … we wish you the best of luck … we are sure your brokers thank you for all the commissions!

This book is the story of the largest corporate take-over in America history at that time; the battle for the control of RJR Nabisco.  If you interested, intrigued and fascinated by Wall Street, Corporate American and LBOs, then this is a book you must read.

Not only is this one of the best business books you will ever read but you could easily mistake it for John Grisham’s best novel. As the book states: “The rules were simple: never pay in cash - never tell the truth - never play by the rules.”

Just to give you an idea of “The Players” involved:

• Henry Kravis & George Roberts, KKR
• Bruce Wasserstein, Wasserstein Parella & Co.
• Theodore J. Frostmann, Frostmann Little & Co.
• John Gutfreund, Salomon Brothers
• James D. Robinson III, American Express
• And last but not least, F. Ross Johnson, RJR Nabisco

Basically, the story portrays the “greed is good” era and shows how money and power shaped the business arena and general corporate environment. Whereas the founder of Nabisco felt that he was responsible not only for increasing shareholder value but also for contributing to the general prosperity of the United States, Ross Johnson simply noted that “Some genius invented the Oreo. We’re just living off the inheritance.”

Enjoy!

The Quick Ratio is calculated by dividing Current Assets minus Inventories by Current Liabilities.

Like the Current Ratio, the Quick Ratio (or Acid-Test) is a measure of how well the comapny can pay off its liabilities. However, due to the fact that we subtract the inventory, the ratio becomes a more rigorous test of liquidity. The reason we take away the inventory is becasue it is generally considered as the least liquid of the current assets.

Ideally, the ratio will be equal to “1″ or lower. However, if the result in lower than 0,8, then the business could end up suffering financial difficulties. Furthermore, if the Quick Ratio is significantly lower that the Current Ratio, then this is an indication that the company is heavily dependent upon inventory.

The Current Ratio is calculated by dividing Current Assets by Current Liabilities.

This ratio show us how well a company is able to pay off its short-term debt using its most liquid assets over the next 12 months (short-term solvency).

A ratio of “1″ would mean that the company can pay off its short-term debt. Higher than “1″ would mean that it still has cash left over to operate and under “1″ would mean that it cannot pay off its short-term debt.

As a Value Investor, you will be looking for a ratio higher than 1 and ideally around 1.5. Please note that if the current ratio is too high, then the company may not be efficiently using its current assets.

Johnson & Johnson (JNJ) is engaged in the research and development, manufacturing and sale of a range of products in the health-care field. Johnson & Johnson has more than 250 operating companies and operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics.

With increasing speculation on the fact that we are reaching the top of the present bull market, we thought that we would take a look at some more conservative stocks. Assuming that we are looking to remain invested in the stock market, where could we put our money?

JNJ is not trading at 30% under fair value and is not set to sky rocket in the near future. However, it presents a chance to own one of the best blue chip companies in the market and a company that has been shaping the health-care system for over 120 years. Furthermore, we are confident that it will continue to do so, profiting from the expected growth and importance of this sector in years to come.

In summary, this is an ideal long-term play for any portfolio. JNJ is a blue chip company that:

• Operates in one of the fastest growing sectors in the global economy.
• Has great balance sheet with a track record of strong performance and healthy dividends.
• Is trading at a very reasonable multiple.
• Presents reduced risk in case of an upcoming market correction.

Furthermore, for followers of Warren Buffett, Johnson & Johnson represents over 5% of Berkshire Hathaway portfolio.

Please read our disclaimer.

Jim Cramer is a very controversial character and we were not sure what to expect from this book. The only exposure we had to Cramer was from his CNBC show and he can come across as a bit crazy, loud and very arrogant.

We say, “he can come across as” because we are convinced that after reading this book, you will start to see him in a different light. Don’t get us wrong, what you see is what you get but the book allows you to get a better understanding of where he comes from, what he has accomplished and why there is a lot more behind him than people think. For example, most don’t know that he graduated from Harvard College where he was President and Editor-in-Chief of The Harvard Crimson, that he is the co-founder of TheStreet.com and that he compounded 24% after all fees for 15 years at the hedge fund he started.

This book takes you through his life from his youth and early interest in the market to how he quickly started to manage some more serious money at Harvard. Then the adventure continues to his first experiences on Wall Street at Goldman Sachs, him meeting his wife “the Trading Goddess” and setting up his own hedge fund and eventually TheStreet.com.

Cramer is characteristically outspoken, the pace is frantic and it really feels as if you are there within him (getting to the office at 04.30 a.m., celebrating the victories, not being able to sleep through the bad times, etc…). We would almost go as far as saying that he is contagious.

Honestly, this is probably on of the best glimpses your going to get into Wall Street and makes for an exciting read even for people how are not particularly interested in the financial world. In case you are not familiar with Cramer, here is a quick interview where he candidly talks about market manipulation – truly priceless - click here.

Enjoy!

Since our recent post, the stock price has actually gone down almost 4%.

Has anything fundamental changed with SCSS? Not really, we still feel that the main issue is the President and CEO, Mr. Bill McLaughlin.

Just a small recap of some of the key figures:

• Price is very close to a all time low valuation (P/E of 19 and Forward P/E of 16.2).
• Company has no long-term debt to speak of.
• 5 year ROA 21.33% vs. 4.24% industry average.
• 5 year Net Margin 7% vs. 3.99% industry average.
• 3 year Revenue Growth 20.7% vs. 9.71% industry average.
• 10% Pre Tax Earnings Yield.
• Large percentage of shares are owned by insiders.

As per our first post, we understand that SCSS is facing some issues (management focus, marketing, etc..) but at recent levels, a true value investor should definitely take a very close at this company.

With the current spread between the two classes of stock at approximately 1,40 USD, the MWA.B shares are currently trading at quite a substantial discount.

There is no logical reason for this difference. If anything, the B shares should be worth more due to the added voting rights.

Once again, Mr. Market is offering a good opportunity for the Enterprising Investor to profit from irrational pricing.

The PEG ratio is a variation of the P/E ratio. It compares a company’s P/E to its earnings growth and is increasingly used due to the fact that it factors in growth.

The PEG ratio is calculated by dividing the current share price by the Earnings per Share (EPS), divided by the Annual Earnings per Share Growth.

Like the P/E ratio, a lower PEG indicates that the stock may be undervalued. If the PEG is equal to 1, it means that the stock is priced at a level exactly matching the Earnings Growth. Therefore, if it is under 1, it may be an indication that it is undervalued and overvalued if over 1.

The main thing to keep in mind when examining a PEG ratio is what periods were used for the calculation. Growth rates, for example, could be calculated based on historical or projected growth and could be for different durations (i.e. 1 year vs. 5 years). The same is true of earnings, which could be historical or projected.