Zach Tripp

Long only, portfolio strategy, dividend investing, value
Zach Tripp
Long only, portfolio strategy, dividend investing, value
Contributor since: 2010
Thank you Mycroft for another great article. Have you back tested to see if the under-valued stocks revert to the mean (fully valued price)?
Dividend Drive- when I do fundamental analysis I always used diluted shares. I have no especially tried it with free cash flow metrics. It might be helpful to account for convertible stock and stock options that are outstanding (zipper's comments).
I am always very interested in stocks trading with a >10% FCF to enterprise value. In theory if one was to buy the entire company, you could have a 10% return from FCF.
One on my favorite screens is FCF yields (FCF/Market Cap) >10%, which companies like Ford, Apple and Delta currently pass.
The gains mentioned are just picked off the Yahoo Chart, which I do not think include dividends.
Here is a nice back-test using FCF with the Dow Jones:
Psaras, Peter George, Back-Test Showing the Power of Price to Free Cash Flow in the Investment Process 1950-2007 (November 1, 2009). Available at SSRN:
I think there is a version that been updated to 2009. Peter is a great resource and is here on Seeking Alpha.
Final note, S&P Dow Jones now has a FCF Index (finally) but it only uses constituents of the Buyback index.
(1) Nice article, thank you.
(2) Have you considered doing year-over-year comparison on a Per Diluted Share basis (to help maybe account for stock-based compensation and the like)?
(3) Back in 2012 one could of bought Microsoft with 11.3% FCF yield to EV? I missed that :-(
(3a) If you bought Microsoft on 3/1/2013 (after reviewing the FY2012 10-K), you would of had 83% gain by now..
@GeorgeH- for AT&T, it is better to looking at Free Cash Flow payout ratio.
FCF TTM: $14,714,000,000
Dividend TTM: $9,693,000,000
Payout: 66%
@Benni- I agree but I wonder if it is "different" this time (I hate writing that). Are the transports falling b/c on anticipated future lack of demand, ie, weak economy. Or are they falling b/c of community prices? Are community prices falling due to leak of artificial stimulus and/or strong dollar or due to weak economy?
I went to reply to some of the comments and the reply got very long. Here is an instablog with my reply:
Thank you Chuck for another great article. I think (hope) there is more downside in Wal-mart. I bet investors forget about there long-term plan (correct plan) to increase their re-investment rate for future growth and sell off over the next couple earning reports for an even better entry point.
I can't get over how well Pepsi "behaves" over the long-term. Even though Pepsi may not have my level of margin of safety, I can not argue starting or continuing to add at the current "reasonable" level.
thank you for the great summary of the space Factoids
Interesting VVO vs. VTI for creations/redemptions. No love for mid- or small-cap I guess.
Hello Brian, E.W. = Equal Weight (sorry).
Bodhisattva- thanks for the comments. I agree with the low oil prices and low inflation, but, so far the EPS for S&P 500 is trending downward, which means we would need multiple expansion for positive gains for the year.
I do not support selling (unless it is part of a portfolio strategy). Must buy-and-hold should indeed hold tight, I agree. The general purpose of the article was to show that 6-7% S&P 500 growth is mathematical challenging at this time.
Thank you for your comments xpan- they are all very valid.
1) The market doesn't care about the trailing, the market always looks at forward.
ZT: I agree in principal. BUT, trailing earnings are known and future earnings are estimates. The trend feels like it is changing based on recent trailing earnings.
I like to use 17.x trailing earnings as a "reasonable" multiple because that would usually mean 14-16x future earnings depending on growth - unless we are in a high growth period.
2) Q3 and Q4 and maybe 2016 need to be revised downward, mainly because those dinosaur energy companies never have their estimates up to date.
ZT: This is why it is tough to evaluate the "value" (via P/E ratio) of the market using future earnings estimates.
3) 2015 EPS will have negative growth, the first time in this entire cyclical bull. Just as the first time double-digit negative quarterly growth in Q2.
4) One can think that technical traders are clueless, and the fundamental drives the prices. However, I can tell you, investors and traders must know the technical and timing these days.
I agree that next year's estimates seem a little overoptimistic. I have been a bull for a while now...but it is getting more difficult to justify this multiple (or multiple expansion) with declining EPS.
Thank you for the comments RS055- I usually wait until S&P updates the full quarter because it is not always clear if they are reporting EPS reported in the quarter to date or reported plus estimate for unreported companies.
Regardless, the trend appears to continue for declining EPS year-over-year. Q2 CY2014 was $27.14.
Another great article Chuck. I just added Apple and Gilead because they both came up in my Free Cash Flow screen this month for the first time.
Thank you for the analysis William.
"..In 2014, Park-Ohio Holdings' operating income only exceeded interest expense by four times. The rule of thumb for safety lies at five times or more."
If I state this another way, are you saying their interest expense is 20% of their operating income? And is this the net operating income (after interest expense is removed)?
Besides the debt load, they result of the metrics looks positive, no?
In December I look at the worst performers in the S&P 500 in the hopes to find a dividend paying bluechip stock that everyone hated last year. If they are not going out of business, their turn around is usually impressive.
Couple years back, it was Best Buy. I did not have the stomach to buy this brick and mortar. Wish I had.
David- HY came up in one of my screens and I like your analysis here. HY is worth additional investigation on my part.
disclosure: big Dave Ramsey fan, or more importantly, Dave Ramsey Message fan.
I have two issues with his primary talking points. You hit on one of them. the 12% return is just to realistic over the long-term. The first debt I cleared was my car. I have started a car fund and bought two cars (previously loved) with cash.
I knew 12% was not realistic but if someone else started a car fund and did not get 12%, i am sure they would be disappointed (granted, since 2009, 12% has been achievable). I wish he would suggest a index fund and ask people to expect a 9-10% per year over a 5 year period.
I also wish he would recommend a fee-based financial adviser who provides a service and gets paid for that service without hidden fees or costs.
BTW- my current "aggressive growth" portfolio is E.W. VOO, VXF, VB.
@bryan- The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance.
In an equal weight strategy you do lost the momentum effect. Over time, as a company's market cap. increases it has a larger and larger weight in the index. Apple is a perfect example.
Also, in years in which the top 2 or 3 holdings of a cap. weight index do well, the EWI will not do as well so the index will be viewed as under performing "the market".
Interesting article from Forbes:
BTW, I am a fan of EWI.
Thank you for the article Larry.
1.) I think one of the concern with team management of mutli-asset strategy is the team. We know over time active management usually under performs. Trying to guess what the proper macro themes to weight for the next year of so is impossible (IMHO).
May I recommend any future articles use Craig L. Israelsen, Ph.D's 7Twelve portfolio as a baseline for comparison?
Excellent video:
2.) I also would be curious to see how a long-short fund could be included in a balanced portfolio. What are the correlation and beta characteristics when used as part of a larger portfolio?
3.) Finally, can a BDC fund be used for "alternative". I think it is the closest a retail investor can get to private equity.
Thanks for the mention Matt. Even though the primary focus of my article is estimating future earnings (reversion to the mean), the underlying point, which I think you are trying to capture here, is that if the company is strong enough and well enough established brands, the best time to buy is when the crowd is bearish.
To be clear on my stake, I had a fixed amount of capital. I deployed 50% right around the time I wrote the article, then 25% and then the final 25% as it starting climbing off it's recent lows. I tried to dollar-cost average down. Has Mattel bottomed? No idea. Only time will tell.
Lance, thank you for the nicely laid out article. I wish more person (media) would explore the federal budget.
I am a fan of Zack's but they have several of these type of articles which are of a little value. I would prefer to read why they are rated 5-stars and what makes them better than other funds....
Finished my position in $MAT. Showing rel. strength to S&P500. Final cost per share just under $28/share. Time to wait.
Nice article Alpha Gen Capital, I actually have a DIT article half penned but have not finished it due to having to spend my evening’s snow blowing.
Couple comments, I am long DIT and have been a year or so now. I keep up to date on the financials on a quarter basis. I agree with your investment thesis and is very similar to the original thesis I used to make my investment.
Items to note though:
1.) About 18% of the book value is intangibles. Here are my calculations from the quarter-over-quarter growth of Tangible Book Value Per Share:
6/30/2013: 3.8%
9/30/2013: 3.5%
12/31/2013: 0.96%
3/1/2014: (3.85%)
6/30/2014: 2.15%
9/30/2014: 3.3%
12/31/2014: 5.50%
2.) DIT has done a good job of keeping the share count fairly stable in recent years.
3.) The dividend is safe, ranging between 5% - 20% of free cash flow.
4.) I prefer using FCF over EBITDA since interest and taxes are real expenses of a company. The free cash flow margin (TTM FCF / TTM Revenue) has been between 0.2% to 0.8%.
5.) Net Income for TTM Dec-2014 was down -8% from TTM Dec-2013, but FCF for TTM-2014 was up 92% from TTM Dec-2013. For TTM Dec-2013 FCF was 0.47% of revenue and for TTM Dec-2014 FCF was 0.88% of revenue.
6.) The float is only 55% of the shares outstanding and 42% of share outstanding are held by insiders (according to Yahoo! Finance).
7.) Average trading volume (3 month) is 1,500 shares. If an investor wants to limit their exposure to 25% of daily volume (to ensure some liquidity), that limits dollar value investment to $30k.
When I found this company over a year ago, I thought I found a real gem. I have grown to realize that the current management is excellent and focusing on long-term growth. But, my question (and concern) is that with limited float and the limited trading volume, is DIT stuck in the 0.8-1.0 P/B range? Who is going to provide the buying power to move the shares?
Long DIT
It would be interesting to see an equal-weight S&P 500 NCAV per share over time. That would make an great PhD paper for someone.
Getting off topic here, but, I believe the tax cuts did work to fuel the economy along with Reagan's version of a stimulus package, that being military spending. Yes, under Reagan the Federal spending did increase, but it increased by producing hard assets (Stealth Fighters and Space Shuttle missions) and R&D (Star Wars).
Mr. Stockman- nice article, thank you.
Couple points I would like to make.
In regards to the S&P 500, the CY2014 Sales per Share grew 3.5% over CY2013. CY2013 grew 3.5% over CY2012.
CY2014 EPS on the other hand grew 12.3% over CY2013 (for reference Cy2013 grew 9% over CY2012).
Point being, there was no multiple expansion. The TTM P/E at the end of the year for CY2014 was 19.4 and 19.3 in CY2013.
I have the data in this article (at the bottom):
The EPS growth fast outpacing SPS growth in interesting. I would imagine at some point SPS and EPS have to revert to the mean.
I agree with issues with debt - we both understand what too much debt can do.
Speaking of debt, I would imagine when interest rates start to raise, customers will not be able to continue the sub-prime auto loans (since interests will be too high to carryover the principal on the previous unpaid car) and auto sales will drop like a rock.
rali- I encourage you to try to figure it out. The knowledge you gain in doing so will be a huge benefit to you from now until you are 55. A couple hours with Excel and you can probably figure "your number" when you reach 55. The secret is figuring out what source of funds to use from 55-65 and 65 and beyond (due to limitation in ages for withdraws from retirement vehicles).
This is not meant to be a wise a*s remark...