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Peter George Psaras, has been investing for over 40 years and has expertise in the following: 1) Quantitative Analysis 2) Qualitative Analysis 3) Macro Economic Analysis 4) Technical Analysis 5) Stock Market History He is the CEO and Portfolio Manager at Conservative Equity Investment Advisors,... More
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Conservative Equity Investment Advisors
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Mycroft's Blue Book Stock Guide 2014
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  • Forget About NetFlix & Amazon, This Stock Is The FCF King In The Space.

    Last week I completed my analysis of Outerwall and bought some shares for my Clients. Outerwall (NASDAQ:OUTR) has been in the news lately because on January 20, 2015 its CEO J. Scott Di Valerio stepped down suddenly and as a result Outerwall's stock price fell by as much as -19.51% in one day. When something like that happens I get very interested as I am a bargain hunter and am always looking to capitalize on Wall Street's mistakes. So I started analyzing the company and once completed I waited for the company to release its earnings.

    On February 5th it did so and I was quite pleased as the CEO's departure was not due to potentially poor results on Main Street as I had expected, but was just a disagreement between the former CEO and the Board of Directors as to the future direction of the company.

    Outerwall beats by $0.07, beats on revenue

    Feb 5 2015, 16:02 ET | About: Outerwall Inc. (OUTR) | By: Mohit Manghnani, SA News Editor

    • Outerwall (NASDAQ:): Q4 EPS of $2.44 beats by $0.07.
    • Revenue of $600.6M (+1.2% Y/Y) beats by $0.74M.
    • Press Release

    In Outerwall's conference call Interim CEO Nora M. Denzel said the following:

    We have a deep bench of talented and dedicated employees in place. And today, we benefit from a very strong foundation. We have leading brands with strong consumer engagement, solid relationships with our retail and studio partners and a sound financial position. The board appreciates all that Scott did to get us to this point. Outerwall's business is evolving and the challenges we now face is how to best capitalize on our assets to ensure that the returns we have delivered in the past will continue in the future. The board and I believe in Outerwall, and we have confidence in its long-term outlook. The board decided a new CEO would provide new perspectives, which will be beneficial to ensure that we successfully move the company forward and build on the assets in order to continue the track record we've delivered in the past. Regarding the CEO search, it's a top priority for the board. It's being conducted expeditiously without sacrificing quality. I'm confident that we'll select the right CEO with the right qualities to lead Outerwall. We'll be looking for an experienced executive with a strong consumer expertise and a proven track record.

    The company does not seem in a rush to find a new CEO as Ms. Denzel seems more than capable of running the company until a new CEO is selected. I welcome everyone to read the conference call as it shows a very confident and capable Board of Directors that are making tough decisions to move the company forward.

    So with that concern out of the way let us start this analysis with some key statistics of the company's Redbox business.

    (click to enlarge)

    Source: StatisticBrain

    The research above is from September 22, 2013, but from what I have been able to dig up as part of my own due diligence, most of the numbers above still seem to be valid. The company has decided to close down its Canadian Redbox locations as the business model was not getting much traction there, but otherwise I believe that the Redbox market share in the physical DVD market is still near the 47.8% number (if not more) as its main competitor Netflix (NASDAQ:NFLX) is concentrating more of its attention to streaming.

    Outerwall, despite what many people think is not a one trick pony but also has the very profitable Coinstar program that allows consumers to bring in their jars of loose change and then have the Coinstar machines count that change and give them cash.

    (click to enlarge)

    This may not sound like much of a business, but according to the company's annual 10-K filing its Coinstar kiosks generated $315.6 million in revenue with an average transaction size of $42.12.

    Outerwall's newest venture that it began a few years ago is ecoATM, which provides an automated self-service kiosk where consumers can recycle mobile devices (smartphones, tablets and mp3 players) for cash and generates revenue through the sale of devices collected at its kiosks to third parties. The company is investing a large chunk of its cash flow in building out this venture and has built out 1,890 kiosks in 42 states to date.

    The company issued the following strategy on why management is so excited about the business.

    A survey from ecoATM found that less than half (49 percent) of Americans have sold, recycled or given their old smartphones to someone else after they are done using it. This lack of phone recycling and reuse leaves countless devices cluttering drawers and closets in American homes, or finding their way into landfills, contributing to the growing e-waste problem.

    "ecoATM provides a convenient recycling option for consumers as e-waste continues to grow at a staggering rate," said Kate Pearce, head of mobility research and sr. strategist at Compass Intelligence. "While the collection of four million devices is an impressive milestone, we expect that by the end of 2015 there will be nearly 425 million idle or inactive mobile devices in the U.S., and of those, only about 100 million will be recycled - a relatively small percentage that we hope will continue to increase with smart solutions such as ecoATM."

    While many investors are attracted to Netflix as an investment, due to its strong subscriber growth and ambitious global streaming expansion plans, they also love Amazon's (NASDAQ:AMZN) prime service, which gives them some wonderful content for $99 a year. Unfortunately for these investors the free cash flow numbers for all three companies tell a very different story.

    (click to enlarge)

    For those new to the ratios in the table above here is a small introduction as to how each is calculated.

    CapFlow

    CapFlow is the name I have given to the ratio (Capital Expenditures/Cash Flow). CapFlow allows us to see how much capital spending (or capital expenditures, CAPEX) a company must employ in relation to its cash flow to maintain itself and more importantly grow the company. This ratio is extremely useful as it is both a qualitative and quantitative ratio in that it acts as a laser beam into the inner workings of a company. Quite simply if a company is increasing its profits and doing so by spending less money relative to its growth in cash flow, it should, in theory, outperform on Main Street. When you can have such an occurrence for more than a few years in a row, it clearly shows you have a wonderful management in place that knows what it is doing.

    The ideal again is to consistently have a CapFlow of less than 33% and avoid any company, like the plague, that has a CapFlow of over 100%, as in such a case Management is spending more in capital expenditures than they are bringing in from cash flow from operations. That is a recipe for disaster in my opinion. Just using this ratio alone will narrow your list of potential candidates for investment substantially and will give you an easy to use tool for judging management effectiveness.

    FROIC

    FROIC = Free Cash Flow Return on Invested Capital

    FROIC= Free cash flow/ (long term debt + shareholders equity)

    FROIC basically tells us how much return in free cash flow a company generates for every one dollar of "Total Capital" it employs. I consider FROIC the primary determining factor in identifying growth companies as one can compare every company on an equal basis using this ratio.

    The question I ask every company I analyze is:

    How much return (in percent) in free cash flow are you going to give us for every dollar of total capital you invest?

    A FROIC of 20% or more is considered excellent and the higher the result the better. Since long-term debt is included in the invested capital part of the equation, one can see quite clearly by using this ratio, on just how well or how poorly Management is managing its debt.

    FREE CASH FLOW YIELD

    Free Cash Flow Yield = Free Cash Flow per Share/ Market Price per Share

    Free cash flow yield is the amount of free cash flow a company generates on Main Street divided by what Wall Street thinks the company is worth at any given moment. So, basically once you learn this simple tool, you won't care much what others think about a stock anymore as you yourself will have gone a long way in determining just how powerful a stock is relative to its stock market price and whether its stock price is justified, way overvalued or undervalued.

    Having used the Free Cash Flow Yield a zillion times over the years, I have come up with these conservative parameters for my own investing.

    SCORECARD

    Finally, we come to the final score for any company under analysis and this is done by combining the three ratio final results into one analysis, we grade each company with either a passing score of 1 or a failing score of 0 per ratio where a perfect final score per stock would be a 3.

    The ideal CapFlow results are anything less than 33%.

    The ideal FROIC score is any result above 20%.

    The ideal Free Cash Flow Yield is anything over 10%.

    So, in analyzing Apple (NASDAQ:AAPL) for example, we get for TTM (trailing twelve months),

    For the Conservative Investor:

    CAPFLOW = 16% PASSED

    FROIC = 34% PASSED

    FREE CASH FLOW YIELD = 7.6% FAILED

    SCORECARD SCORE = 2 (Out of possible 3)

    Outerwall actually makes $205 million in free cash flow (low end of 2015 projection by management) and sells on the stock market for $1.2 billion while Netflix has a negative free cash flow of $-128 million and sells for $27.5 billion. Amazon generated $1.9 billion in free cash flow or 10 times what Outerwall did but also sells for 145 times what Outerwall does. So to equate Amazons price and free cash flow to Outerwall's, Amazon would need to sell for $42.19 a share, but actually sells for $375.14 a share on the stock market and Netflix, which is losing money from a free cash flow point of view is actually selling for 23 times what Outerwall is selling for.

    Last week I went and did a little experiment on my own to test out Redbox vs. Netflix/Amazon. Now people see these Redbox machines in front of their convenience stores, gas stations and supermarkets, but the first thing I heard from my clients after I suggested the stock to them is that "I never see anyone using them". But people do, as Redbox rents out 1700 disks every minute, as the Statistics Brain research above shows.

    So obviously people still rent disks. But how long is that going to last when you have Netflix, Amazon and Huluplus having streaming services? Well I hate to break the news to everyone, but there are millions of people in this country that cannot afford the $50-$100 a month for internet service/cable, so they cannot benefit from these streaming services, but what they can do is go and rent a movie for $1.20 a night from a Redbox or rent a Disney family movie for the same price and have the family of four enjoy a wonderful evening. (Bluray $1.50)

    I went out to try out the service as I needed to go to the supermarket anyways. So I went to the Redbox, swiped my credit card for $1.20 and rented this movie:

    A Walk Among The Tombstones

    I paid $1.20 and did not need to return it until 9PM the next day

    Now I checked Netflix and the movie is not available for streaming, but is available for DVD rental, but it takes two to three days to get it in the mail. But with Redbox I can just walk across the street and get it from my local Redbox Kiosk. Netflix charges $107.88 a year for streaming and another $107.88 for DVD rentals so you would have to pay $107.88 to get this DVD sent to you in three days. For that same price you can rent 90 movies a year from Redbox. if you also subscribe to the Netflix streaming service as well that number jumps to 180 movies. So obviously Redbox is very competitive.

    Now what about Amazon?

    Amazon Prime is $99 a year but when you want to watch the movie above this is what you see on Amazon.

    So you can stream the same movie but you need to pay $5.99 to do so vs. $1.20 for Redbox. As you can see there is a big difference there.

    So when it comes to newer releases Redbox has its niche and dominates that space, so it will not be going away anytime soon. For the costumer, Netflix streaming service is the dominant player along with Amazon, but when it comes to DVD's Outerwall still seems to be the top dog. Redbox is still very popular and allows those who just have a TV and DVD player a chance to get the latest releases at extremely low prices. With the current costs associated of taking a family of four to the mall for a Disney movie, for those who are patient and wait one could enjoy the same movie at home for about $1.50. I rented the movie above and then had an offer to rent a second one for $.50 cents additional, so I did so. I see this as a tremendous bargain both on Main Street and Wall Street as the company seems to me to be very shareholder friendly as it plans to return a great majority of its cash flow back to shareholders in the form of stock buybacks. I welcome everyone reading this to go and rent a movie from your local Redbox and see if you see what I see. I for one was very impressed and see the stock as an incredible bargain going forward.

    Feb 17 6:27 PM | Link | 11 Comments
  • How Safe Is Your REIT's Dividend? Let’s Find Out

    In the current low interest rate environment, income investors have been scrambling to find investments that will allow them to generate a consistent stream of dividend income. These investors, of which many are retired, have been able to find refuge by investing in Real Estate Investment Trusts or REIT's. Real Estate has been a rather safe investment (historically) and this impression has allowed the REIT industry to boom over the last decade.

    This article will concentrate on an analysis of the REIT industry using my free cash flow methods. Before we analyze the actual dividends of each REIT (in order to determine how safe they are) let us first turn our attention to analyzing the performance of each REIT on Main Street. After we have successfully done that we will then generate a free cash flow yield for each. This analysis will allow us to determine how Wall Street ranks each REIT as fairly valued, overvalued or undervalued. Once completed, this analysis should give everyone a clearer understanding on how accurate the valuation is that Wall Street has assigned each REIT relative to its actual Main Street performance.

    Before we show you the final results of our REIT free cash flow analysis, here is a brief introduction to what each of the three ratios, which make up my system.

    CapFlow

    CapFlow is the name I have given to the ratio (Capital Expenditures/Cash Flow). CapFlow allows us to see how much capital spending (or capital expenditures, CAPEX) a company must employ in relation to its cash flow to maintain itself and more importantly grow the company. This ratio is extremely useful as it is both a qualitative and quantitative ratio in that it acts as a laser beam into the inner workings of a company. Quite simply if a company is increasing its profits and doing so by spending less money relative to its growth in cash flow, it should, in theory, outperform on Main Street. When you can have such an occurrence for more than a few years in a row, it clearly shows you have wonderful management in place that knows what it is doing.

    The idea again is to consistently have a CapFlow of less than 33% and avoid any company that has a CapFlow of over 100%, like the plague, as in such a case Management is spending more in capital expenditures than they are bringing in from cash flow from operations. That is a recipe for disaster in my opinion. Just using this ratio alone will narrow your list of potential candidates for investment substantially and will give you an easy to use tool for judging management's effectiveness.

    FROIC

    FROIC = Free Cash Flow Return on Invested Capital

    FROIC = Free cash flow/ (long term debt + shareholders' equity)

    FROIC basically tells us how much return in free cash flow a company generates for every one dollar of "Total Capital" it employs. I consider FROIC the primary determining factor in identifying growth companies as one can compare every company on an equal basis using this ratio.

    The question I ask every company I analyze is:

    How much return (in percent) in free cash flow are you going to give us for every dollar of total capital you invest?

    A FROIC of 20% or more is considered excellent and the higher the result the better. Since long-term debt is included in the invested capital part of the equation, one can see quite clearly by using this ratio, on just how well or how poorly Management is managing its debt.

    FREE CASH FLOW YIELD

    Free Cash Flow Yield = Free Cash Flow per Share/Market Price per Share

    Free cash flow yield is the amount of free cash flow a company generates on Main Street divided by what Wall Street thinks the company is worth at any given moment. So basically, once you learn this simple tool, you won't care much what others think about a stock anymore as you yourself will have gone a long way in determining just how powerful a stock is relative to its stock market price and whether its stock price is justified, way overvalued or undervalued.

    Having used the Free Cash Flow Yield a zillion times over the years, I have come up with these conservative parameters for my own investing.

    For the more Aggressive as well as the "Buy & Hold" investor, I would adjust everything down a notch and for example would make the hold from 2% to 5.9% and the buy from 6% to 9.9% and sell anything under 2%. As for shorting a stock that would be any result under zero, including any negative result. Here is a listing of those parameters for easy reference.

    So, without further ado here are the financial results for the 100's of REIT's under analysis where (NYSE:TTM) means (Trailing Twelve Months).

    So right off the bat you can clearly see (from the table above) that not all REIT's are created equal and that many are very poorly run operations. In analyzing so many REIT's, I believe that I have given each of you enough data so you can analyze your REIT holdings with a great degree of confidence and see how well each ranks on Main Street as well as on Wall Street.

    Having completed the above tasks, let us now proceed and examine how safe the REIT dividends you are receiving are, by doing a "Free Cash Flow Payout Ratio Analysis". Since the lists I am presenting in this article are so massive in size, I am therefore limited in how much space I can devote to explaining how the free cash flow payout ratio is calculated. I will therefore introduce the free cash flow payout ratio by letting you read this excellent article that sums it up as perfectly as I could have, by having you go HERE. There you will learn about the three types of dividend payout ratios.

    In my work I prefer to use the free cash flow payout ratio, as it is the most conservative one. Since many REIT investors are in their retirement years, I highly recommend this approach to them as well, as the last thing you want as a REIT investor is to discover one day that your dividend has been cut or eliminated. Since many investors are basically invested in REIT's just for the dividend income and if that income were to be suddenly reduced or even worse eliminated, that scenario would be disastrous as everyone tends to run for the exits at the same time when the dividend is jeopardized.

    So having said that here are the free cash flow payout ratios I have generated on 100's of REIT's, so you can then take out your portfolio and analyze each REIT you own as part of your due diligence.

    Those highlighted in green represent firms with free cash flow payout ratios of less than 100% and greater than 0%. The lower the result the better and the ideal is any result that comes in under 50%. It is important to avoid REIT's having free cash flow payout ratios of more than 100% or even worse those with negative results as the dividend you are being paid is not being covered by the firms free cash flow and thus the firm needs to either issue more shares or borrow money just to pay you your dividend.

    In conclusion, once you master this system you will need to re-examine your REIT's consistently (at least once a month) as things move very rapidly on Main Street as well as Wall Street these days and by being diligent you will most likely avoid nasty surprises.

    "Defense is ten times more important than offense. The wealth you have can be so ephemeral; you have to be very focused on the downside at all times. If you lose 50%, it takes 100% to get back to where you started-and that takes something you can never get back: time." ~ Paul Tudor Jones II

    Always remember that the results shown above should not be considered investment advice, but just the results of the ratios. The system outlined in this article is just meant to be used as reference material to be included as just "one" part of everyone's own due diligence. So in other words, don't make investment decisions based on just my results, but incorporate them as part of your own due diligence.

    Tags: reits
    Feb 09 4:41 PM | Link | 2 Comments
  • 3D Systems Still Considered A "Short Call"

    3D Systems (NYSE:DDD), despite its large drop from $96.04, still continues to be considered a "Short Opinion" by Mycroft's Blue Book Stock Guide 2014 based on our analysis below. For an introduction to our system, explaining how the results below were derived, please click on the link HERE and read the Introduction to our book.

    (click to enlarge)

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: DISCLAIMERSince we are not privy to each reader’s specific investment objectives, financial situation, or particular needs, this stock blog and our stock guide should not be construed as being investment advice in any way but should be viewed as the opinion of the author on the valuation of each company analyzed. This analysis is based on the methodologies and data presented herein and was developed through actual real world investments in the stock market and by performing backtests. Databases, information, tools and articles published are solely for informational purposes and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. References made to third parties are based on information obtained from sources believed to be reliable, but are not guaranteed to be accurate. Readers should not regard this stock guide as a substitute for the exercise of their own judgment. Any opinions expressed in this book are subject to change without notice and Mycroft Psaras or any affiliated companies or authors are not under any obligation to update or keep current the information contained herein. Mycroft Psaras, associates or clients may have an interest in the securities or derivatives of any entities found in this stock guide. The Author or any affiliate company accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this stock guide. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. The findings from this stock guide are merely a start to a means of further research to uncover a great business and investment. Mycroft Psaras or any affiliated company holds no responsibility for any investment whatsoever that is made by any reader.

    Tags: DDD
    Feb 12 2:02 PM | Link | Comment!
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