One Up on Wall Street, Peter Lynch Wednesday, June 20, 2007
Posted by ei-forum in Book Reviews.1 comment so far
It is refreshing to see a Wharton graduate, great fund manager and Wall Street legend demystifying the investment world. Like Warren Buffett, Lynch is a quintessential value investor and has a very clear and simple way of expressing his views and strategies.
His mantra is “… average investors can become experts in their own field and can pick winning stocks as effectively as Wall Street professional by doing just a little research.”
In fact, he maintains that the average investor is in a better position than the professional as he is free to invest in whatever company presents the best opportunity and does not have to justify the decision to anyone. A professional will never be questioned for investing in a Blue Chip company that does poorly (he could always blame the economy, the management or unexpected events) but funnily enough, he would have a difficult task explaining why he invested in a Small Cap with excellent fundamentals that did poorly. Taken to an extreme, as Keynes put it: “Worldly wisdom teaches that it is better to fail conventionally that to succeed unconventionally.”
Lynch also talks about how people always forget to focus on what they know (i.e. a doctor would recommend an IT stock to a friend who is and IT specialist and in turn, the friend would recommend a drug stock to the doctor); do not forget to leverage your knowledge and competence! The book is full of check lists, rules and advice – some of them are:
- Don’t overestimate the skill and wisdom of professionals.
- The average person is exposed to interesting local companies and product years before the professionals.
- Invest in a house before you invest in a stock.
- Invest in companies that sound dull and operate in boring industries.
- Large profits can be made in common stocks.
- Large losses can be made in common stocks.
In essence, the book is a no nonsense look at value investing focusing on fundamentals, taking a long-term approach to portfolio management and avoiding hype through solid research. It really is a must read for any investor.
Enjoy!
Price-to-Earnings Ratio (P/E) Wednesday, June 20, 2007
Posted by ei-forum in Understanding Ratios.add a comment
The P/E ratio tells us how much an investor is willing to pay for every dollar of earnings that a company generates. Generally, a high P/E ratio suggests that there is an expectation for higher earnings growth and therefore an expectation for the company to appreciate in value. This ratio is also known as “price multiple” or “earnings multiple”.
As with most ratios, the number alone can be misleading. It is important to compare the P/E ratio of companies within the same industry, to the market in general or against the company’s own historical P/E.
You will probably come across general benchmarks ranging from 12 to 20 but we strongly encourage you to do your own research because as you can imagine, industries vary considerably (i.e. P/E ratios in the technology sector are usually around 40 vs. 8 for the textile sector).
Just because a company’s P/E ratio is going down, does not mean that the company’s prospects are decreasing. It could simple mean that earnings are growing at a faster pace than the stock price and that this could be an interesting trigger to open a position. Furthermore, please note that companies with negative earnings (meaning that they are actually losing money) do not have a P/E ratio.
The P/E ratio is calculated by dividing the current share price by Earnings per Share (EPS).
Safety Insurance Group Tuesday, June 19, 2007
Posted by ei-forum in US Traded Stocks.1 comment so far
Safety Insurance Group Inc. (SAFT) is a provider of private passenger automobile insurance in Massachusetts and offers a portfolio of property and casualty insurance products, including commercial automobile, homeowners, dwelling fire, and umbrella and business owner policies.
SAFT recently suffered from a big drop due to a small earnings miss, an out of favor sector and uncertainty surrounding Massachusetts auto insurance regulation. We feel that the correction was far too server and that this is an undervalued company with good management, a clear strategy and solid fundamentals.
Here is a quick snapshot of some of the numbers:
|
|
SAFT |
Industry Average |
|
Price-To-Earnings |
6.3 |
12.8 |
|
Price-To-Book |
1.3 |
1.7 |
|
Price-To-Sales |
1.0 |
1.4 |
|
Dividend Yield |
2.4 |
1.4 |
|
Forward Price-To-Earrings |
7.7 |
10.8 |
|
PEG Ratio |
0.5 |
1.3 |
Ideally we should have reacted quicker when the share price dipped to 38 USD but even at current levels the company offers a very good value proposition.
Please read our disclaimer.
Price-To-Book Ratio (P/B Ratio) Tuesday, June 19, 2007
Posted by ei-forum in Understanding Ratios.add a comment
Book Value shows us the account value of a company. In other words, if the company were liquidated, this is what the shareholders would theoretically receive.
In most cases, the market value of a company (current stock price) will be higher than the accounting book value. When analyzing this specific variable, investors look for a company where the book value is:
- Lower than the industry average book value.
- Close or equal to the book value for that specific company.
- In extreme cases, lower than the book value for that specific company (please note that if the result is substantially lower, it could mean that there is something seriously wrong with the company).
Why is the book value generally higher in the open market? Because the market price takes into account expectations of future growth and profitability which are not accounted for in the balance sheet.
The Price-To-Book Ratio (P/B Ratio) is calculated by dividing the last closing price of the stock by total assets minus intangible asset and liabilities.
iShares MSCI Japan Index (EWJ) Monday, June 18, 2007
Posted by ei-forum in ETFs.add a comment
Some readers might be surprised to see us writing about an ETF but we feel that iShares MSCI Japan Index (EWJ) allows investors to try to exploit two different value plays at once:
1. Strengthening of the Yen and therefore rally against the USD and the Euro.
2. Shift of investor sentiment vs. Japan and therefore influx of funds in to the Nikkeï.
Despite the Bank of Japan refusing to raise interest rates; afraid that they could send the economy into recession, the overall picture seems quite positive. Economic growth is good, reaching 3,3% in the last quarter and latest consolidated figures for company profits increased 12% vs. last year.
These figures suggest that, if the recent pattern is confirmed, the Bank of Japan will have to raise interest rate and in turn, the market should react at an accelerated pace (please note that, as opposed to other indexes around the globe, the Nikkeï is still far from all time highs).
We believe in the long-term potential of Japan.
Earnings per Share (EPS) Monday, June 18, 2007
Posted by ei-forum in Understanding Ratios.2 comments
This is one of the most widely used ratios when trying to asses a company’s performance. Most analysts use this as the primary variable to determine the share price.
In order to calculate EPS you have to divide the profit attributable to ordinary shareholders by the weighted average of shares outstanding during the financial period. The result is the net income that is being generated per share of the company.
As already mentioned, since this ratio is so important, you will see that analysts are constantly issuing revised earnings estimates. Why? Because, earnings are the most important factor that affects the value of a company. Earnings are the profit a company makes, and a company cannot survive without earnings.
You should not compare the EPS of different companies due to different strategies in terms of numbers of shares outstanding. The most useful way to use this ratio is to look at the growth in EPS over time, which will help us understand the company’s progress.
Understanding Ratios Friday, June 15, 2007
Posted by ei-forum in Understanding Ratios.add a comment
You have probably heard people saying that the common language of business is finance and therefore, when dealing with ratios, the most important are those that are financially based.
We plan to use this category to explain not only, how some of the key ratios are calculated but more importantly what they mean and how to interpret them. In our search for truly exceptional businesses that are currently trading at discounted prices, we have to be able to asses the business fundamentals: basically we are looking for value.
Assets, profits, growth and cash flow will be the inputs that will allow us to generate the ratios and enable us to determine this corporate value. However, please remember that this is only part of the equation, when trying to understand a business and future growth potential, we also have to consider key issues like management, competitive advantage and moats.
Stay tuned for our first post on Earnings per Share (EPS).
The Little Book that Beats the Market, Joel Greenblatt (with foreword by Andrew Tobias). Friday, June 15, 2007
Posted by ei-forum in Book Reviews.add a comment
This is a very interesting book offering an extremely quick and easy read. As Greenblatt writes in the first page of his book, he wanted to give his children a great gift and what better gift that teaching them how to make money for themselves. Indeed, the book is written in a way that even a sixth grader could grasp it.
In essence, Greenblatt claims that you can beat the market with value investing and that he will show you how, with his magic formula that he has literally named “The Magic Formula”. This formula is his way of tackling the value investing theory that Graham started to apply and that others like Buffett and Lynch used to achieve incredible returns.
The founding principle is to find stocks that are trading under their real/fair/intrinsic value and wait until the market recognized their true value. Greenblatt shows that by focusing on cheap stocks with high earning yields and high return on capital his magic formula has managed to beat the S&P500 96% of the time and has averaged a 17 year annual return of 30.8%.
This is probably a very good place to start if you have never read a book on investing. It covers a lot of the basics and does so, using normal terminology and everyday examples that even a child could understand. Furthermore, the book gives you a detailed step by step approach on how to screen for these stocks but you can even just directly go to www.magicformulainvesting.com which practically completely automates the whole procedure for you.
Enjoy!
Precision Drilling Trust Thursday, June 14, 2007
Posted by ei-forum in US Traded Stocks.2 comments
Precision Drilling Trust (PDS) through its subsidiaries, provides contract drilling, service rig, and ancillary services to oil and natural gas exploration and production companies in the United States and Canada.
The share price is down over 45% from a year ago, pushed down by a taxation change implemented by the Canadian government on trusts, the current economic climate and the fact that the second quarter is seasonally the weakest for all drillers in Western Canada.
The company has demonstrated that it has a strong business model and management has repeatedly shown that they are capable of creating value and returning it to shareholders. Most recent dividend paid was of 1.95 USD which amounts to an annual yield of 7.6% and consensus is that it is very likely to grow to 9% over the next 3 to 5 years.
They have recently been trading just under 25.50 USD. Considering the above comments, the divided yield, future outlook and the fact that we have seen “fair value” estimates at over 60 USD – we feel that PDS could be an interesting company to invest in at this moment in time.
Please read our disclaimer.
Select Comfort Wednesday, June 13, 2007
Posted by ei-forum in US Traded Stocks.2 comments
Select Comfort (SCSS) is a developer, manufacturer and marketer of premium quality, adjustable-firmness beds. The air-chamber technology of its Sleep Number bed allows adjustable firmness on each side of the mattress and provides a sleep surface that is clinically proven. They are one of the leading brands of premium mattresses; one of the big three and have been a good growth story but the stock has been suffering lately.
Until now, the main drivers have been their focused management, superior products and a very good distribution system. Unfortunately, sales have started to slow and the current economic climate is not favorable to this industry, especially a producer of high-end premium products. Adding to all this, Select Comfort has been struggling with their marketing which seems to be one of their biggest weakness: compounded by their complicated product line-up.
We have started to question management effectiveness due to recent events like conference calls comments, failure to address the marketing issue and a recent interview with the CEO where he seems be focusing on international expansion and acquisitions, instead of fixing the difficult situation in the US (which he seems to be downplaying).
As the FT article suggested, we agree that the company could be a takeover target. A quick look at SCSS shows a great product, no debt, lots of cash, excellent distribution system, good returns and decreasing insider ownership. The main problem seems to be that management has lost overall focus and has repeatedly failed to solve the greater marketing issue.
Again, the fundamentals remain strong and we feel it is just a question of time before the stock price recovers. Trading under 17 USD and having hit 16.68 USD (52 week low) this company is definitely worth a look.
Please read our disclaimer.
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