Two weeks ago I introduced my “back of the envelope” method of analyzing stocks using levered free cash flow, and I am very pleased that it got such a positive response from Seeking Alpha’s readers. For those of you who may have missed it, an introduction to what I will discuss in this article can be found here. I don’t do much short selling myself but instead use an ETF that my friend John Del Vecchio runs “The Advisor Shares Active Bear ETF” (NYSEARCA:HDGE), which you can read about here.
The reason I like the fund so much is because it is actively managed and it lists its holdings and updates them for me every day on its website. It also saves me the trouble of shorting myself and works as a great insurance policy (hedge) for my longs when events like Libya show up.
I took some of the popular stocks in the portfolio and added a few of my own as well to demonstrate how Levered Free Cash Flow (LFCF), found for free on Yahoo Finance’s “Key Statistics” section, can help you in identifying shorts. I like to buy stocks at 15 times or less and sell at 30 times LFCF.
So with the introductions out of the way let us get down to business.
Here is the list:
Levered Free Cash Flow = $1.89 Billion
Shares Outstanding = 451 Million
Owner Earnings per share = $1890/451 = $4.19
2/24/2011 closing price = $177.75
Price to Owner Earnings = $177.75/$4.19 = 42.42
Juniper Networks (NYSE:JNPR)
Levered Free Cash Flow = $332.39 Million
Shares Outstanding = 523 Million
Owner Earnings per share = $332.39/523 = $.63
2/24/2011 closing price = $43.17
Price to Owner Earnings = $43.17/$0.63 = 68.52
Levered Free Cash Flow = $319.55 Million
Shares Outstanding = 52.89 Million
Owner Earnings per share =$319.55/52.89 = $ 6.04
2/24/2011 closing price = $215.18
Price to Owner Earnings = $215.18/$6.44 = 33.41
Green Mountain Coffee (NASDAQ:GMCR)
Levered Free Cash Flow = $-157.32 million
Shares Outstanding = 141.60 Million
Owner Earnings per share = $-157.32/141.60 = $-1.11
2/24/2011 closing price = $41.48
Price to Owner Earnings = $41.48/$-1.11 = -37.37
Levered Free Cash Flow = $316.14 Million
Shares Outstanding = 131.40 Million
Owner Earnings per share = $316.14/131.40 = $2.40
2/24/2011 closing price = $134.32
Price to Owner Earnings = $134.32/$2.40 = 55.96
Levered Free Cash Flow = $591.38 Million
Shares Outstanding = 49.11 Million
Owner Earnings per share = $591/49.11 = $12.04
2/24/2011 closing price = $462.34
Price to Owner Earnings = $462.34/$12.04 = 38.40
Levered Free Cash Flow = $-264.25 Million
Shares Outstanding = 120.60 Million
Owner Earnings per share = $-264.25/120.60 = $-2.19
2/24/2011 closing price = $41.30
Price to Owner Earnings = $41.30/$-2.19 = -18.86
So there you have it: A list of seven popular stocks that I would consider overvalued from a Levered Free Cash Flow point of view. Again, this is the first step in the analysis process and is just a “back of the envelope” quick method to check out your holdings.
Before you decide to act on any of this data, you should do you own due diligence, like my friend John does, when he does forensic accounting before shorting anything. I myself go back as far as I can and use historical analysis, investor sentiment and future Owner Earnings. For those of you familiar with my work, here is a little treat I prepared for you, in showing you how the above stocks rank using my Mycroft Research (MR) System. For those new to my system here is an introduction:
The three methods used in this analysis are:
1) Price to Owners Earnings (OE) = Current and future analysis
2) Cumulative Owners Earnings (COE) = Historical analysis of owners earnings
3) Statistical Indicator Analysis (SIA) = Historical price action
OE and COE are further explained here.
SIA is further explained here.
Here is a table of the stocks analyzed above using my MR system:
I am currently putting a database together for institutional clients that will house 4,000 stocks someday.
Sell Price = 2 times Buy Price
Short Price = 3 times Buy Price
Steal It Price = 2/3rds Buy Price
As you can see, the results from my intensive research almost mirrored exactly that of just using LFCF from Yahoo Finance with these seven stocks, so it is proof that my “back of the envelope” quick test can go a long way in helping the individual investor monitor their investments.
Disclaimer: Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
Disclosure: I am long HDGE.