Finding and Investing in Wonderful Companies

Transcription

1 Finding and Investing in Wonderful Companies Steve Cronin $ 1

2 Agenda: Introduction: Diversify and Allocation your resources carefully Mr. Market and Human Behavior Learn about the world and yourself What is a wonderful company Online Websites, Tools, and Apps for investing Question and Answers after slide 31 Analysis of a few potentially wonderful companies Demonstration of Visual Basic Script $ 2

3 Diversification protects you from yourself: Diversify Across: Asset Types (Stocks, Bonds, Real Estate, etc) Company Size (High, Mid-Cap, Small Cap) Region (USA, Europe, Asia, Developing) $ 3

4 Asset Allocation is 91% of your return Buying a basket of index funds is easier and will likely provide better results for most people. $ 4

5 Keep your expenses low: $ 5

6 $ 6

7 Mr. Market - Short and Long Term $ 7

8 Waiting - Can You Delay Gratification? $ 8

9 Time is the friend of the wonderful company: $ 9

10 Value Investing Classic Books: $ 10

11 Modern Value Investing: $ 11

12 Circle of Competence: Invest in what you actually understand $

13 Be a life long learner: (Current checked out library books) $ 13

14 Investors at Google Youtube: h0ws53hdovgregrweqhcwrjwgp $ 14

15 Earnings Are Reported 4 out of 365 Days per Year Earnings are only reported 4 hrs out of 365 days per year Earnings results are studied less than 1% of the time $ 15

16 Fundamental vs Technical Analysis $ 16

17 Fundamental vs Technical Analysis Fundamental Analysis tells you what to buy Technical Analysis tells you when to buy it $ 17

18 Wonderful Company Quotes $ 18

19 Warren isn t talking about Stock Price here: $ 19

20 What is a Wonderful Company? Has a demonstrated record of profitability: For the past 5-10 years does Company XYZ have: Net Income = Total Revenue Total Expenses Net Margin = Net Income / Total Revenue > 10% Return on Equity = Net Income / Total Shareholder Equity > 10% Free Cash Flow / Sales % = Free Cash Flow / Total Revenue > 10% Has a durable competitive advantage with good management (Read and think about the company) Why is this company important to the world and it s customers? Has the ability to reinvest capital into the business (This makes growth possible) Has avoided becoming overleveraged (Manageable level of debt, or ideally no debt) $ 20

21 What is a Wonderful Company? Wonderful companies have clear strengths, lots of opportunities, and strong processes for managing threats and potential weaknesses Ask yourself: How could this company fail? What could go wrong? $ 21

22 What is an economic moat? Wonderful companies have an Economic Moat Ask yourself: How could this company fail? What could go wrong? $ 22

23 What about Dividend Stocks? Shareholder friendly uses of capital: Reinvest capital back into the business, buy back shares, pay a dividend Wonderful Companies often pay a dividend but not necessarily (Berkshire Hathaway is a good example of a wonderful company that doesn t pay a dividend yet.) Many dividend paying stocks are wonderful! (However since they are paying a dividend they may have a limited ability to reinvest capital back into the business) Important factors for Divdend: Dividend Yield (> 4% ideally) Payout Ratio (less than 50% ideally) Dividend Yield > 10% and Payout Ratio > 100% could be signaling a disrupted business Dividends can always be cut by the company $ 23

24 What is an Awful Company? Consistently Loses Money (Net Margin, ROE, Cash Flow << 5% or Negative) Has declining business prospects and business model ROIC is << 5% or negative; no sign of real market opportunity Debt levels are increasing, Total Shareholder Equity declining (Debt/Equity increasing) $ 24

25 Awful & Mediocre Company Examples: Eastman Kodak (Disrupted by their own Innovation, Digital Cameras) Peabody Energy Corporation (Natural Gas and renewables/solar make coal dead money) Many companies are simply mediocre Lots of competition who can do the same thing for less $ Profitable Occasionally No ability to predictably turn Cap Ex into more cash flow Unable to reinvent themselves (read Innovators Dilemma) Read Clayton Christensen s Innovator books to understand $ 25

26 Awful Companies Yield an Awful Chart $ 26

27 When do you sell a once Wonderful Company? Long term profitability now in secular decline (Net Margin, ROE, Cash Flow << 10% or negative) Durable competitive advantage has disappeared (Business Model has been Disrupted) No longer has the ability to reinvest capital into the business (Profitable growth not possible) Debt levels are unmanageably high (Quick / Current Ratio < 1, Debt/Equity increasing) Technical Analysis Charts can be a Guide $ 27

28 How The Economic Machine Works by Ray Dalio =PHe0bXAIuk0 $ 28

29 Independent Stock Research: Independent Research Lots of data, easy to visualize trends Estimates the current intrinsic value of a stock Morningstar offers lots of free information Morningstar Premium Service is worth it I think AAII Stock Screeners can be a source of good ideas S&P Capital IQ reports are free on E*Trade and Scottrade $ 29

30 Find Ideas from Gurus and Communities: Gurufocus has best one page view of a stock I ve ever seen Gurufocus allows you to see what the Gurus are doing The Motley Fool has lots of content for many stocks from many people The Motley Fool also provides a good view of company performance $ 30

31 Other Investment Resources: $ 31

32 Tracking Results: You can link nearly any account to MINT and SIGFIG MINT allows you to keep track of ALL of your accounts in one place SIGFIG allows you to keep track of ALL of your investments automatically and in real time each day $ 32

33 Online Brokers: Any of these online brokers provide good service $ 33

34 Any Questions? $ 34

35 Disclaimer: I do own all of these stocks currently except ULTA I could be completely wrong in my analysis Even if my thinking and analysis are correct Mr. Market could disagree and you could lose money investing in them for several years $ 35

36 KLIC What Do They Do, and Why is it important? $ 36

37 KLIC - Profitability Profitability Avg Net Margin % Return on Equity % Free Cash Flow/Sales % Net Income = Total Revenue Total Expenses Net Margin = Net Income / Total Revenue > 10% Return on Equity = Net Income / Total Shareholder Equity > 10% Free Cash Flow / Sales % = Free Cash Flow / Total Revenue > 10% $ 37

38 KLIC - Net Income and Free Cash Flow $ 38

39 KLIC Net Worth and Financials $ 39

40 KLIC The Future Largest market share among ball bonding eq. makers Will there be more integrated circuits in the future? General trend toward more electronics in everything Billions of people still don t have smart phones Internet of Things about to scale up New products being developed with customers Conference call indicates soft patch likely over Semiconductor industry notoriously cyclical References: soffa-industries-klic-ceo-jonathan-chou-f2q results-earnings-call-transcript?part=single $ 40

41 KLIC Valuation No Debt $7.33 per share in Cash At $12.63/share you get the entire business for $5.30 per share P/E (past 10 yrs) = $5.30 /.888 = 6.0 (S&P 500 = 25) P/B = 1.1 (S&P 500 = 2.8) Recently bought back 10% of shares Developing new products and technology with customers Seems undervalued currently, and extremely undervalued given reasonable assumptions about the future. $ 41

42 KLIC 2Q-2016 Results: Seems extremely undervalued, and is likely to do well in 2017 and 2018 $ 42

43 Navigator Holdings: $ 43

44 Navigator Holdings: What do they do --> Ship Liquefied Gas around the world Largest Fleet, major price different between world regions Demand for transport References: content/uploads/2015/12/capital-link-conference-mar pdf $ 44

45 Navigator Holdings: $ 45

46 NVGS Valuation Debt is being used to buy ships P/E (past 5 yrs) = $14.5 / 1.12 = 12.9 (S&P 500 = 25) Earnings per share per ship is consistently $.06 / share / ship P/E (future 5 yrs) = $14.5 / 2.51 = 5.8 (4 new ships per year) P/B =.94 (S&P 500 = 2.7) Comment from CEO => I wish we had more ships now Seems undervalued currently due to energy sector sell off but actually benefits from lower energy pricing $ 46

47 Navigator Holdings: $ 47

48 Navigator Holdings: $ 48

49 Navigator Holdings: $ 49

50 Navigator Holdings: $ 50

51 Navigator Holdings: $ 51

52 Navigator Holdings Lessons Learned: What do they do --> Ship Liquefied Gas around the world Largest Fleet, major price difference between world regions Demand for transport Fundamental assumptions can change really quickly! Will there still be enough of a price difference in 3-5 years between regions to make shipping economic? Danger Zone! $ 52

53 Navigator Holdings Lessons Learned: Danger Zone! $ 53

54 Navigator Holdings Impact of missing the boat for now: 5 Day Performance: Diversification can save you from yourself You can be really wrong on one stock on one particular day, and still do pretty well as long as you manage your risk ( < 5% per stock) 5 Day Outperformance is still possible in spite of an ugly drop $ 54

55 T Rowe Price Group $ 55

56 T Rowe Price Group Is it really Wonderful? $ 56

57 Amgen Inc. $ 57

58 Amgen Inc. $ 58

59 Missed Opportunity!: Ulta Salon and Cosmetics $ 59

60 Ulta Salon and Cosmetics: $ 60

61 ... From 166 to 261 per share... $

62 Which company do you think is wonderful? Apple - AAPL Google - GOOG Amazon AMZN Tesla TSLA Berkshire Hathaway - BRK.B Union Pacific UNP Wells Fargo WFC Precision Cast Parts PCP ITC Holdings ITC Cameron - CAM VHT S&P 500 $ 62

63 Visual Basic Script Demonstration: Dim browobj SS = InputBox("Enter the stock symbols you are interested in separated by commas:", _ "Analyze Which Stocks?") If SS = "" Then Wscript.Quit Else End If STOCKS = SPLIT(SS, ",") NUMBER_OF_STOCKS = (UBound(STOCKS)) ' Wscript.Echo "You are interested in " & NUMBER_OF_STOCKS+1 & " stocks. " & vbcrlf & vbcrlf & (NUMBER_OF_STOCKS+1)*16 & " web pages will be opened in total." & vbcrlf & vbcrlf & "I hope your computer can handle it!! ;)" 'intanswer = _ ' Msgbox("You are interested in " & NUMBER_OF_STOCKS+1 & " stocks. " & vbcrlf & vbcrlf & (NUMBER_OF_STOCKS+1)*17 & " web pages will be opened in total." & vbcrlf & vbcrlf & vbcrlf & vbcrlf & "Are you sure your computer can handle it??", _ ' vbyesno, "Can your computer handle it??") intanswer = vbyes If intanswer = vbyes Then For i = 0 To NUMBER_OF_STOCKS ' Wscript.Echo STOCKS(i) WScript.Sleep 5 CURRENT_STRING = STOCKS(i) WScript.Sleep 5 FIRST = Left(CURRENT_STRING, 1) WScript.Sleep 450 $ 63