LET’S TALK STOKSrmchapter.org/doc/Let'sTalkStocks2012_1up.pdf · Value Line Growth Stocks with...
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9/28/2012 1 Sacramento Area Chapter – August, 2012 Ken Kavula President, Mid-Michigan Chapter LET’S TALK STOCKS How We Do What We Do
Transcript of LET’S TALK STOKSrmchapter.org/doc/Let'sTalkStocks2012_1up.pdf · Value Line Growth Stocks with...
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Sacramento Area Chapter – August, 2012
Ken Kavula President, Mid-Michigan Chapter
LET’S TALK STOCKS How We Do What We Do
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Disclaimer • The information in this presentation is for educational purposes only and is not
intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced. The securities of companies referenced or featured in the seminar materials are for illustrative purposes only and are not to be considered endorsed or recommended for purchase or sale by BetterInvesting™ National Association of Investors Corporation (“BI”) or the BetterInvesting Volunteer Advisory Board, its volunteer advisory board (“BIVAB”). The views expressed are those of the instructors, commentators, guests and participants, as the case may be, and do not necessarily represent those of BetterInvesting™ or BIVAB. Investors should conduct their own review and analysis of any company of interest before making an investment decision.
• Securities discussed may be held by the instructor in his own personal portfolio or in those of his clubs. BI presenters and volunteers are held to a strict code of conduct that precludes benefiting financially from educational presentations or public activities via any BetterInvesting programs, events and/or educational sessions in which they participate. Any violation is strictly prohibited and should be reported to the President of BetterInvesting or the Manager of Volunteer Relations.
• This presentation may contain images of websites and products or services not endorsed by BetterInvesting. The presenter is not endorsing or promoting the use of these websites, products or services.
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Today’s Plan
1. Finding Stocks to Study
2. Doing the Research and Making
Judgments
3. Studying an Industry
4. Setting Some Goals
a. Diversification
b. Growth
5. Maintaining Your Portfolio
6. Some Portfolio Reviews
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FINDING STOCKS TO
STUDY
Focusing on Small and Medium Sized
Companies to Add to our Holdings
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MANY OF YOU CONFIDE THAT IT’S JUST TOO DIFFICULT TO FIND SMALLER STOCKS THAT LOOK GOOD FOR FUTURE STUDY.
Let me share a
few of my tricks!
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Consider screeners:
1. NAIC Stock Prospector 2. VL Screener, Morningstar
Screener, Yahoo Screener and other free or low-cost internet products
3. Manifest Investing
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Using Stock Prospector, I created this
simple query that gave me twenty-one
candidates for future study.
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Based on MIPAR
Highest Quality
No MAX set
Small companies grow faster than 12%
Manifest Investing
Screener
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Here are TWELVE more ideas to get you started…
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SOMETHING NEW!
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12 …and SIXTEEN more!
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Value Line
Growth Stocks
with High
Annual Returns
(18-25%)
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MORNINGSTAR
DEEP VALUE SCREEN
Price/Fair Value < .53
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I use many published lists to get ideas.
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More ideas . . .
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I can access Morningstar from my library anywhere I have an internet connection.
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Develop a list of mutual funds that invest the way you
invest.
CAUTION: Small-cap does not always
mean a small company!
LOMMX, ACRNX, BUFSX, WAAEX
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Have any of you noticed my articles in
BetterInvesting magazine?
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Keep a list . . . and use it as you read!
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I ended up buying two of these and using one of them to launch a study that lead me to Strayer Education . . . in 2003! I still own one of these stocks today.
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GREAT SMALL STOCKS ARE ALL AROUND YOU
What I do to find them isn’t rocket science. It does take a little time. It does take some effort. It does require that you be organized and thoughtful. But it is something everyone can do!
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DOING THE RESEARCH
AND MAKING
JUDGMENTS
Providing Solid Rationale for the Choices
You Make on a Stock Selection Guide
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Once you have a name, it’s time to do the
research. I suggest you find a way to
organize the materials you will read.
Recognize the STANDARD SOURCES:
1. Value Line Investment Survey
2. Morningstar Investment Research
3. S&P Stock Reports
4. Yahoo.finance
5. Company specific websites
6. Additional websites or printed materials
where appropriate
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YOU HAVE A
COPY IN YOUR
MATERIALS!
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The form matches the six
judgments on the Stock
Selection Guide and points
you to numbers you will
want to consider as you
make your judgments.
Don’t skip the concluding dialogue on the
final page. It will help you clarify why you
made a particular judgment. Make sure you
provide some brief rationale for each
judgment made. Have a reason to choose
a value!
IT’S BRAND
NEW!
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CONSIDER USING THE
PREFERRED PROCEDURE
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It really was PREFERRED!
“Usually it is better to estimate EPS five years in the future by applying profit and tax margins to the projected sales five years in the future rather than by drawing an EPS trend line.” “Why? Because it centers your study acutely on profitability instead of [%EPS] growth.” page 53.
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An SSG circa
1946
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SALES
- EXPENSES
PRE-TAX PROFIT
- TAXES
EARNINGS
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DIVIDE EARNINGS BY
SHARES OUTSTANDING
TO GET EPS
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This simple arithmetic
is fundamental to our
investing philosophy.
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It’s the foundation for the entire Stock
Selection Guide!
Everything in
Sections 3, 4
and 5 of the
SSG is based
on your
projection of
EPS!
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The
PREFERRED
PROCEDURE
is available in
Toolkit 6.
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Click in one of the Judgment boxes and you can access the Preferred Procedure!
One CLICK Away!
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NOTE: Small changes in PP
input can have dramatic
effects on the EPS growth
value!
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Here’s a trick!
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No Pre-Tax
Profit figure!
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UP,
STRAIGHT
AND
PARALLEL!
2134.6
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Instead of Pre-Tax Profit, I will
use NET MARGIN from Value
Line and a zero tax rate.
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NET MARGIN history is readily available without
having to convert to PRE-TAX PROFIT MARGIN.
You might feel Value Line’s call of 18.5% is a bit
aggressive. If so, change it! I think I might use 17
or 17.5.
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Using NET MARGIN (profit after
taxes) accounts for pre-tax profit and
taxes in a single subtraction from
sales.
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BUY THE BEST!
Presenting a procedure for studying an
industry and identifying the best stocks
within that industry
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. . . FROM PRESENTATION
THE MID-MICHIGAN MODEL CLUB HELPS ITS MEMBERS MOVE…
. . . TO PURCHASE
. . . AND BEYOND!
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THE MMMC STOCK PRESENTATION
CHECK LIST
IT STARTS WITH A STOCK OF INTEREST . . .
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KEEP IT SHORT!
• Remember, this is only the first go-round
• Focus on the fundamentals
• Keep the “story” to a minimum
• Your club is only deciding whether or not they wish to study the stock and its industry
• Can be done in less than four minutes
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Most of the information comes directly from …
… a well-prepared SSG.
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Get Industry Numbers from:
Don’t grab your pencils! You have this slide!
http://betterinvesting.org/Members/chapter/Michigan/mid-michigan/default.htm
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INDUSTRY NUMBERS
(Computer Systems)
Avg P/E 74.7x
5-Yr Rev Growth 11.3%
5-Yr EPS Growth 10.4%
5-Yr PTP (2A) 8.5%
5-Yr ROE (2B) 17.0%
Debt/Capital 36.0%
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So, we liked the stock and
placed it on our Watch List!
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AAPL SAT ON THE WATCH LIST, ALONG WITH OTHER IDEAS FOR ONE MONTH UNTIL WE NEEDED A NEW IDEA FOR AN INDUSTRY STUDY.
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… compares your choice against its peers.
An INDUSTRY STUDY …
NOTE: PEERS AND
COMPETITORS ARE NOT
NECESSARILY THE SAME!
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This process takes some time and some skill. Don’t RUSH it! A good industry study might take two or more months to complete. The more you do, the better you’ll get! Your goal is to identify the best company in the industry.
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IN AUGUST, 2011, THE VP FOR EDUCATION CHOSE A FOUR PERSON COMMITTEE, APPOINTED A CHAIRPERSON AND ASKED THEM TO BEGIN AN INDUSTRY STUDY BASED ON AAPL (COMPUTER SYSTEMS).
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PROSPECTOR CAN BE USED TO OBTAIN A COMPLETE LIST OF THE COMPANIES IN THIS INDUSTRY. THE LIST WAS REDUCED TO COMPANIES THAT MET THESE CRITERIA: AT LEAST FIVE YEARS OF PUBLIC HISTORY STOCK PRICE ABOVE $3 UPWARD BIAS IN SALES AND EPS
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THAT REDUCED THE LIST TO 15 COMPANIES
THE CHAIRPERSON EMAILED THE NAMES OF THE 15 COMPANIES TO THE OTHER FOLKS ON THE COMMITTEE. HE ASKED THEM TO CHOOSE THE THREE OR FOUR BEST BASED ON THE SSG AND DO SOME VERY PRELIMINARY RESEARCH.
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THE LIST WAS REDUCED TO FIVE CONTENDERS
• APPLE (AAPL)
• DELL (DELL)
• HEWLETT-PACKARD (HPQ)
• IBM (IBM)
• SYNAPTICS (SYNA)
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EACH COMMITTEE MEMBER WAS ASKED TO PREPARE A THOUGHTFUL SSG ON THE FIVE CONTENDERS
THE CHAIRMAN AVERAGED THE JUDGMENT VALUES FOR EACH OF THE FIVE CONTENDERS. HE THEN PREPARED THE NEW SSGs AND DISTRIBUTED THEM TO THE COMMITTEE.
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EACH PERSON WAS ASSIGNED ONE STOCK FOR IN-DEPTH RESEARCH.
THIS IS WHEN THE REAL WORK BEGAN!
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WE USE A SIX-STEP RESEARCH MODEL
1. IDENTIFY THE COMPANY
2. DO A “QUICK” RECENT NEWS SEARCH
3. READ THE VALUE LINE, STANDARD & POOR’S AND/OR MORNINGSTAR REPORT
4. COMPLETE A DETAILED INTERNET SEARCH
5. VISIT THE COMPANY WEBSITE
6. READ ANNUAL REPORT, ESPECIALLY THE MD&A
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1. IDENTIFY THE COMPANY
THIS STEP WAS ACCOMPLISHED BY THE ENTIRE COMMITTEE WHEN TENTATIVE SSGs WERE CREATED.
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2. DO A “QUICK” RECENT NEWS SEARCH
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USE AT LEAST TWO NEWS SITES TO ENSURE WIDE COVERAGE.
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THE COMMITTEE MEMBERS ACCOMPLISHED THIS STEP WHEN THE PRELIMINARY SSGs WERE SUBMITTED.
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3. READ THE VALUE LINE, STANDARD & POOR’S AND/OR MORNINGSTAR REPORT
USE WHAT YOU CAN FIND. REMEMBER THAT YOUR BROKER CAN USUALLY PROVIDE AN S&P REPORT AND YOUR PUBLIC LIBRARY IS A GREAT RESOURCE.
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STEP 3 WAS ALSO ACCOMPLISHED DURING THE PRELIMINARY PHASE OF THE INDUSTRY STUDY!
THE COMMITTEE MEMBERS BEGAN THEIR IN-DEPTH RESEARCH AT STEP FOUR.
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4. COMPLETE A DETAILED SEARCH ON THE INTERNET
www.google.com/alerts www.moneycentral.msn.com www.bigcharts.com www.finance.yahoo.com www.investor.reuters.com www.cbs.marketwatch.com www.pcquote.com www.seekingalpha.com www.manifestinvesting.com (Forum)
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KEEP IN MIND!
• THE CLUB MAY NEED HELP IN USING THE INTERNET, ESPECIALLY IN “SEARCHING”.
• YOUR MEMBERS MIGHT NOT BE AWARE OF ONLINE RESOURCES.
• YOUR PUBLIC LIBRARY MIGHT HAVE MANY ONLINE SOURCES THAT CAN BE ACCESSED FROM HOME.
• YOUR BROKER MIGHT HAVE PROPRIETARY REPORTS AVAILABLE FOR YOUR USE.
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EACH OF THESE THOUGHTS CAN BE DEVELOPED INTO A CLUB EDUCATIONAL
PRESENTATION!
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Search Local Newspapers
FIND OUT WHERE THE COMPANY HAS ITS HEADQUARTERS AND SEARCH THE LOCAL PAPER IN THAT CITY.
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CHECK SITES DEVOTED TO BUSINESS JOURNALS AND NEWSPAPERS
BIZJOURNALS.COM IS A GOOD EXAMPLE
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KEEP A LIST OF GOOD SEARCH WORDS
Positive cash flow Strong balance sheet Niche Increasing profit margin Low debt Solid asset base Consistent earnings
growth
POSITIVE . . .
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AND NEGATIVE . . . Negative cash flow
Weak balance sheet
Increasing competition
SEC investigation
Change in management
Impending layoffs
Declining earnings
Strike, labor problems
Complaints
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FIND WORDS IN ARTICLES ABOUT THE COMPANY’S
BUSINESS OR PRODUCTS AND THEN USE THESE
WORDS IN ADDITIONAL SEARCHES.
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SIGN UP FOR EMAIL ALERT (googlealert.com)
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CHECK THE ANALYST ESTIMATES TREND
Go to Yahoo! Finance. After bringing up AAPL, I clicked on Analyst Estimates (left side
bar).
NOTE: Trend is UP!
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5. VISIT THE COMPANY WEBSITE
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LOOK FOR . . .
• Brand names
• Business divisions
• Product or service descriptions
• Location of plants/service centers/headquarters
• Organizational chart
• Answers to any questions from may have arisen in steps 1-4
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6. READ THE ANNUAL REPORT
PAY SPECIAL ATTENTION TO MANAGEMENT’S DISCUSSION AND ANALYSIS. LOOK FOR COMPETITORS, FUTURE GROWTH ESTIMATES AND SPECIFIC REASONS FOR SUCCESS AND/OR FAILURE.
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WHEN THE RESEARCH WAS COMPLETE, EACH COMMITTEE MEMBER WAS ENCOURAGED TO REVISIT THE COMMITTEE SSGs AND ALTER THE JUDGMENT CALLS BASED ON WHAT
THEY HAD LEARNED.
This might be the time to discard a company that looks terrible or that has little information available for analysis.
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THE STOCKS WERE PRESENTED TO OUR INVESTMENT CLUB IN OCTOBER 2011.
• EACH STOCK PRESENTATION WAS LIMITED TO 5 MINUTES.
• THE PRESENTATION FOCUSED AT LEAST 75% OF THE TIME ON THE SSG FOR THE COMPANY.
• THE “STORY” TOOK NO MORE THAN ONE MINUTE.
• THE USE OF AN LCD PROJECTOR FACILITATED THE SSG PRESENTATION.
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AND THEN CAME THE FINAL DECISION!
IT WAS UNANIMOUS!
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SINCE THE STOCK WAS AFFORDABLE, WE BOUGHT SOME THAT EVENING.
WE ALSO UNDERSTAND THAT AN INDUSTRY STUDY CAN
LEAD US TO NOT TAKE A POSITION IN THE INDUSTRY. WE MIGHT ALSO PLACE AN UNAFFORDABLE COMPANY ON A POUNCE LIST WHERE
WE WILL PATIENTLY WATCH FOR IT TO BECOME A BUY.
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USING A DEFINED PROCEDURE HELPS
MY CLUB AVOID DISAGREEMENTS
ABOUT WHICH STOCK IS “BEST”.
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REQUIRING AN INDUSTRY STUDY ALSO KEEPS US FROM PURCHASING
A STOCK BEFORE WE DO OUR HOMEWORK!
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GIVE IT A TRY.
IT REALLY WORKS FOR US! 105
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SETTING SOME GOALS
Using BetterInvesting Principles to Boost
Your Portfolio Returns
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Diversify by Company Size
Measured by Yearly Sales
SALES < $500m SMALL
$500m < SALES < $5b MEDIUM
SALES > $5b LARGE
“In selecting stocks ... It seems wise to
choose 25% from major companies, 25% from
smaller companies and the balance from the
rest (medium-sized companies.)”
George Nicholson 107
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“Among the major companies, seek sales growth
forecasts of 5-7%. Among the smaller companies,
you may be able to find sales growth forecasts at
12% and upwards ... Your total portfolio can achieve
a distribution of small and large companies and yet
have an overall growth rate of [10-12%] ... ” –
George Nicholson, page 12.
From the Same Investor’s Guide:
We’ll revisit this when we talk about setting
GOALS for sales growth.
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Nicholson, O’Hara and Janke
gave us the foundation for
successful investing.
So why are so many of us afraid
to apply what we know?
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THEY ALL
TALK
ABOUT THE
LOST
DECADE!
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THEY WANT
YOU TO
BELIEVE
WE CAN
NOT DO
WHAT WE
DO!
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Lost Decade
Graphs go from 1/1/2000 to 8/17/2012
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You can get size diversification numbers.
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THAT WAS THEN
Fifteen Percent portfolio
return per year . . .
. . . to double Your
Money in Five Years!
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We can do better!
This is NOW!
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1. What did Nicholson mean when he set the
original BetterInvesting 15% portfolio goal?
2. Why did he indicate portfolio sales growth
of 10-12% would be sufficient to achieve a 15%
appreciation in portfolio value?
TWO IMPORTANT QUESTIONS
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BEAT THE MARKET BY FIVE POINTS.
In a normal year that means the market will
appreciate by about 10% which is the historical
stock market annual appreciation. Think about
this new goal, however, for extreme markets like
we’ve seen in recent years.
I think he really was saying . . .
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We’ll need measuring tools and some data!
LET’S LOOK AT
TOOLKIT 6
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All values are based on YOUR SSGs.
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You will need a number for the “market” and it
would be nice to have a list of stocks sorted by
YOUR PAR value.
Value Line gives us an
approximation for its
1700 stock universe.
Assuming 5 years
growth, 70% total return
equates to 11.2 %
annualized return. ((1.7)^(.2) – 1)/100
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If we’re aiming to grow 5 points better than the
market, then our portfolio number should be
16.2% – one percent higher than it is!
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This report shows our stocks sorted by PAR in
descending order. PAR, unfortunately, does not appear in
report.
I do know the stocks with the highest and
lowest potential based on my own judgments.
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Using Manifest Investing
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MAINTAINING YOUR
PORTFOLIO
Remembering that Buy and Hold Does
Not Mean Buy and Forget
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The Manifest Investing numbers are
produced daily and are based on ~2500
stocks.
Here’s where my
investment clubs begin
their meetings. The
members are FOCUSED
on portfolio maintenance.
This translates as
constant awareness of
potential returns.
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The portfolio averages give us other
targets as well.
QUALITY
> 65
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The portfolio averages give us other
targets as well.
GROWTH
10-13%
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The portfolio averages give us other
targets as well.
P/E RATIO
NEAR
MARKET
AVERAGE
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The portfolio averages give us other
targets as well.
FINANCIAL
STRENGTH
> 80
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The portfolio averages give us other
targets as well.
EPS
STABILITY
> 80
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What happens at a meeting when the
numbers are all in place?
DON’T MESS
IT UP!
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Focus on the
portfolio as a
whole. When
the numbers
are off, try for
the most
ELEGANT
solution.
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Selling a stock is not un-American. Don’t hold because you’re stubborn and don’t let the tax tail wag the decision dog, either. Take advantage of selling opportunities when you have a good reason.
1. You need the money. This one is personal. Your own life circumstances (college, a vacation,
new car, new house, doctor bills, child’s wedding, bail money, church offering plate) dictate the need. Update your company studies and sell the one that makes the most sense, often the one with the lowest expected return.
Source: “When to Sell: The Challenge of Reason” – Better Investing (September 2004)
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2. Because fundamentals (quality) are in decline.
Watch changes in management, slowing growth rates, declining profit margins, weird footnotes... and the FBI and SEC.
3. Because you can make the portfolio Better!
Improve the expected returns. Maintain the quality of the holdings. Keep the overall sales growth forecast (or dividend yield) strong enough. Prudently diversify.
Don’t be afraid to sell. Portfolios CAN be improved!
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RENREN INC(RENN)
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CVR PARTNERS (UAN)
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“... is to promote BETTER INVESTING, to
make us all think, analyze, weigh, evaluate
and judge before investing our money. There
are always those who will scoff at the notion
of $20/month leading to millions . . . modest
amounts can grow into sizeable sums. If you
follow NAIC principles, your objective is to
buy value, and to think about P/Es. You want
a reasonable EXPECTATION of increasing
your investment, you are suspect of mob
psychology, and you are persistent up to a
point. This is BETTER INVESTING."
The Objective of NAIC:
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LET’S TALK STOCKS!
And now ...
