Index Funds Make Markets Less Efficient [View article]
A short inspired rant…. All companies will eventually expire and cease to be. Most die a bloody death, some get chopped up, others are eaten whole, but if you hold on to any stock long enough it will eventually expire by one means or another. Indexing allows investors a way to shield themselves from the perpetual blood bath that is the markets and invest in the phoenix principal that serves as the backdrop for the games; with every companies demise there is another stronger company to take its place. So long as humanity progresses and we keep the equity markets as our median the phoenix principle will grow wealth. Qualitative analysis, due diligence, and that little pinch of good old fashioned scuttlebutt, that go into individual stock analysis is needed for long-term market efficiency. The individuals who use these tools best will gain wealth, the individuals who do not will lose wealth by equal measure. Why do investors put in so much time, energy, and money into this zero sum game?...Because they are all convinced by their ego and their fancy numbers that they belong to the winning side. Half of them are right and when you mix them with the other half you have the glue that holds the markets together and makes phoenix principle investing possible.
5 Steps To Avoid Disaster When Your ETF Closes [View article]
Hi Ron, thanks for the article. I understand that some ETF's can close in a hurried mess, but do you see this as the rule, the exception, or something that can be deciphered with a little poking around. I noticed that Claymore closed SEA in 2010 in a hurry with little pain to investors. I have been tempted to add to my RRF position for some time despite the fact that it now has less than 5 million in AUM. Currently over 70% of the funds assets are in different types treasury bonds. It seems like a liquid market that would enable Wisdomtree to close down with minimal costs to investors. And with all their other fund offerings it seems unlikely they would want to risk the reputation with a high one time fee. It regularly trades significantly below its NAV and seems an easy way to pick up a liquid and safe asset class on the cheap. Anyways, i like the funds overall strategy (has a futures component as well), but have the fear of closer in my mind. if anyone has some ideas or opinions it would be greatly appreciated.
As a foreigner living in Indonesia I would caution your optimism. There have been concrete pillars along major roads in Jakarta for almost five years now. What is the purpose of these concrete pillars that sit vacant and hold up absolutely nothing?….“Jakarta’s mass transit system”. It has been in contract deadlock for years and will most likely remain so. Having worked on major fiber optic cable contracts throughout the country, I can tell you that time between executive allotment of cash and ground breaking is at the best years away, likely to be mothballed entirely, and certain to have its scope and impact mitigated by graft and kickbacks. I believe Indonesia is poised for serious growth and represents a wonderful investment opportunity, but I would not rest the case for this on the government’s allocation to public works. The president has taken a firm stance of “do nothing", and when the government tried to cut back on its crippling gas subsidies recently there were riots in the streets before it was repealed the day prior to taking effect. In short, the government doesn’t want to do anything, the people won’t let the government do anything, and what little sneaks through will see 50% go to kickbacks and bribes. Indonesia will find a way to grow none the less, but it will be in spite of large government proposals, not because of them.
Getting Bearish? Think About Being More Active About It [View article]
Great Article. and thanks for the clarification on the 3.29% vs. 1.85%. I read your previous article and the ensuing debate regarding these percentages, Don't like anything that doesn't clearly state the fees, but it looks like 1.85% to me and that they are giving guarantees not to raise the rates for the short term. I like this, and it seems reasonable. If they gouge later i might decide to drop them, but given how fees in the short game are hard to manage, i would be more suspicious of the fund if they agreed to hold it at 1.85% for years to come.
By the way, Thanks for the article! The data is great and it was presented well. You give great reasons for why Americans need to have the emerging market in their portfolio. I just believe saying 40-50% based on economic growth is a bit much. Will look for more articles from you in the future
If you are investing in emerging markets largest and most profitable company’s chances are good that your largest fellow shareholder is the home government. This works great for international investors when the company’s goals are the same as the governments (it’s always nice to have an uncle in the politburo), But what happens when interests diverge, and the interests of international investors are different from the government/primary shareholder. I could write a doomsday scenario here, but I won’t. The truth is we don’t know what will happen because by and large it hasn’t happened yet. But, any fool can see there is a serious conflict of interest. Basically, my point for fellow investors is this; it’s great to go Goo-goo over the growth rates, but these are not “companies” in the traditional sense. They are a new animal, company government hybrids, and we don’t know how they are going to behave long term. I own VWO and I believe every investor should be in the emerging markets, but to blankly state 40-50% in EM based on growth rates, without seriously evaluating the political risks, is just grabbing headlines. Economic growth does not necessarily equal returns for investors.
(Part One) A Well Diversified Equity Portfolio In 2-3 Hours A Month [View instapost]
Hi Wbress, Thanks for your comment. Let me see if I can answer your questions. I believe that when you say “Total Value” you mean the percentage of funds I allocate to the “VCA equity portfolio” verses the “Cash/Cash equivalent” portfolio I talk about in Part Three. I have put 60% of my allocated funds into the” VCA equity portfolio” and 40% into the “Cash/Cash equivalents” portfolio. My portfolio's standard deviation is approx. 21% and this, along with historical market norms, lead me to believe 60/40 is the most equitable distribution. (More on this in Part Two if your interested) But, really it’s up to the individual investor. Just look at it this way, too much in the VCA account and you’ll run out of funds in your “cash/cash equivalent” portfolio just when the market is at its best prices. Too little in the “VCA equity” portfolio and you will lose out on the capital appreciation that has you in the equity market to begin with. I like a 60/40 split, but other options are definitely out there. I’m not sure but you might be saying “total amount” when you say “total value”. If you are asking how much should be dedicated to this portfolio. I would say that the amount dedicated to any portfolio depends on the particular situation and predisposition of the individual investor. As I said in part one of my article series this Value Cost Averaging portfolio is designed for myself and I am a; buy and hold investor, with a 20+ year investment horizon, a good appetite for volatility, and a 2-3 hours a month to dedicate to my portfolio’s management. For me personally, what you see above is my retirement portfolio and this is where I keep the majority of my invested funds. I have a separate emergency fund which is designed to have less volatility and thus modest returns that are quickly and easily accessible. I also have a hedge portfolio which is designed to protect me against systemic failure and monumental change in the equity markets. And I also like to keep a small “fun times” portfolio that allows me to test trading ideas in the open market. But, most of my capital is in this “Value Cost Averaging” portfolio that you see above. Because this portfolio is designed to make numerous small volume trades, it is easily replicated in small accounts. The one thing to watch out for here is the commissions! I personally have this portfolio split between Etrade and TDAmeritrade brokerage accounts so that nearly all of my trades are commission free. The few ETF’s included in my portfolio that are not commission free, I reevaluate only once a year, so I can minimize commission fees. In regards to paring down the portfolio so that it contains fewer ETF’s, this is definitely possible. VT (total market) is a wonderful ETF put out by Vanguard and this could easily serve as a one stop ETF for the equity portion of the VCA portfolio. I actually use it as a rough outline for weighting my VCA portfolio. However; what you lose by consolidation are; 1.) The benefits of volatility within geographical, market cap, and market sectors. (VT goes up and down in one package, VCA allows each ETF component to float around on its own) 2.) The improved risk/reward that comes from owning more underlying businesses (VT is well diversified, but way less than the VCA portfolio) 3.) The added security of having multiple funds and issuing banks. ( why not put your egg in a few different bank baskets given today’s financial status) 4.) Perhaps some Alpha gained by choosing ETF funds that have a strong record in their perspective area. (Wisdomtree does a great job with foreign small caps in my opinion) 5.) You have the more ability to custom fit your portfolio to meet your specific goals. (I like getting exposure to different currencies, but I don’t want to invest in the appreciation of the yen, I can do this with a personally constructed VCA portfolio) 6.) As an opposite to number five; with the VCA portfolio you have more options of getting out of particular positions that you just don’t have the option to when you own something all-encompassing like VT. Well I hope that answers your questions. Thanks for the post. Erik
Exhausted Unemployment Benefits Could Pull Economy Under [View article]
Sorry to hear about your employment predicament, I have several friends in your position and it’s most definitely a raw deal and I sincerely wish you the best. If you don’t mind me asking, how do you look back on your MBA education in retrospect? You no doubt spent a lot of $ for your education and in return they filled your brain with all the skills needed to make rational economic decisions. Using those wonderful skills you acquired at school would you - if given the chance to do it over again, enroll in an MBA program? I ask because I have several friends with MBA’s who state “all I learned from my MBA program was that I shouldn’t have spent the money on the program” Anyways, I would truly enjoy any response you have. All the best, Erik
Why I Am So Bearish: Time to Be a Deep Value Investor, Part II [View article]
I was wondering what you think of non-leveraged currency ETF's like BZF, CCX, and CEW. Kind of like a foreign money market account. (but not exactly) you earn a better interest rate than the dollar and reduce your ex-poser to the greenback. I am holding a fair amount of my portfolio in cash at the moment and have been eying these as a better short to medium term parking place. Any thoughts?
Self-Dealing Red Flags for Paragon Spin Off IPO Box Ships [View article]
Wonderful article, and thank you for your time. while i currently see great potential in the dry shipping market, i am scared off yet again by their corporate decisions. Dry shipping seems to have some kind of corporate culture inclined to "less than straight forward" business deals. Why?, i have no idea. A strong tie between management and share holders ought to be a simple prerequisite to any investment/sustainable business, yet as your article illustrates PRGN along with most of the Dry bulk sector (in my opinion) fails to meet this most basic requirement. If anyone here has a name of a dry shipping company with a less than deceitful corporate culture i'd love to hear it. As for myself, PRGN used to be included on his list. DSX being the last name remaining. But, as always i look forward to hearing a good opinion.
Why I Am So Bearish: Time to Be a Deep Value Investor, Part II [View article]
Hi Peter, I have had a great time working with some of your security analysis models and thought i might get some feedback from you if you have the time. After sifting through a few candidates I ran across MFW and decided to run the numbers for P/OE, COE, and a 3650 trading day SIA. MFW is an odd mix of several different businesses, some of those businesses appear to have a strong future; menthol additives for cigarettes. Others look to be going the way of the horse and buggy; Check printing services. MFW is also the maker of scantron tests which are used by just about every school kid between the elementary to university level. there's a bunch of other odds and ends businesses, but taken in totality, it seems an odd but relatively strong mix from my perspective. The Chairman Ronald Perelman controls 43% of the shares outstanding and appears to have some flaws in his ethical record, but most of the opinions from analysts and commentators seem to believe revenue is tweaked lower if anything. So assuming the Auditors are doing a decent job, it seems interesting from a narrative perspective. And so i'll move on the the numbers.
MFW…P/OE (TTM): Levered free cash flow (seekingalpha.com/symbo...) is 323.31 million and Shares outstanding are 19.33 million, this works out to about 16.73 per share. The share price for MFW as of closing on April, 21, 2011 was 24.04. The closing price of 24.04 divided by the OE (seekingalpha.com/symbo...) per share of 16.73 gives you a price to OE value of 1.44. Looking mighty nice!
MFW…P/COE: The P/OE analysis above was done using the numbers provided on Yahoo finance under Quick statistics. Finding the COE was a bit more difficult as it called for finding the MFW’s OE for the past 15 years they have been trading as a publicly traded company. Using the 10-K forms available on EDGAR I was able to come up with some numbers I am reasonably confident with. The equation I used for levered free cash flow was: Net Sales + (cost of sales) + (selling, general and administrative expenses) + (interest, investment and dividend income) + (other expenses) + (provisions for income tax). There are a lot of equations out there, and so for simplicities sake I just decided to go with this one. Finding information for the number of shares outstanding each year was surprisingly difficult as well, and in the end I decided to use the current shares outstanding amount for all the past years as I could not find any information signifying issuing of more shares, or share buy backs. The total COE for MFW going back to 1995 is $29.33 (according to my calculations, which I am not 100% confident in). With a current share price of 24.04 as of 4/21/2011, this would give MFW a P/COE of 0.819. Looking nice once again.
The average per share price for MFW during the past 3650 is $16.35. This means that with a current share price of 24.04 (April, 21, 2011) MFW is trading for 1.47 above its 3650 SIA. Ideally it would be nice to have an SIA value bellow 1, but given substantial increases in OE in the last three years I wonder if the current SIA of 1.47 is not in some way justified. (interested to hear what you might think about this)
MFW…Cap Flow analysis:
MFW has engaged in a relatively large amount of acquisitions recently and figuring out how those will play out will no doubt be an important part of the security analysis puzzle. The ratio Cap Flow or the relationship between Capital Expenditures/Cash Flow seems to be the most logical approach to evaluating these acquisitions, but prior to pushing forward I thought I’d drop this post and see if you had any comments.
Well Peter, thank you very much for your time. I truly enjoy your posts and opinions, and look forward to reading those to come. You are providing a great service to the financial analyst community and wonderful resource to those of us just wetting our feet in the field.
Profiting From Cumulative Owners Earnings: AAR, Microsoft [View article]
I have truly enjoyed reading all of your post and want to thank you for taking the time to make your thoughts and findings public. Your COE model is particularly intriguing and I was hoping I might be able to ask you a few questions on the subject. I have noticed that others have already posted you in regards to the fact that an older company will naturally have a higher COE than a relatively younger company even if the companies are otherwise identical in all respects. I found this facet of your COE model perplexing at first, as it would seemingly overvalue an older company while undervaluing a relatively younger company. But, after a moment I then found myself asking the question is 15 or 20 years of positive OE a more reliable indicator of future OE, than say 3 or 5 year record of positive OE? If it is, and I believe this to be the case, the COE model is a real valuable tool for security analysts. With the idea supporting this concept of a longer track record of positive OE being a superior indicator for future OE I decided to make a list of narrative reasons why it may be true. (Just a shoot from the hip mental exercise.) 1.) A strong corporate culture dedicated to OE is difficult and time consuming to build but is relatively easy to maintain. Thus a higher COE for an older company is justified, as the corporate culture of respect for OE is firmly in place, while the younger company’s is not. 2.) Shareholder fraud takes time to become visible, and is more likely to occur among young companies than established companies. Therefor the longer a company exists the more likely it is that shareholder fraud is not occurring. Furthermore, the longer a company exists the less likely it is to begin engaging in shareholder fraud. Again justifying a higher COE for the older company. (have some doubts if I believe this one) 3.) While it is impossible to predict future business conditions, similarities between the future and the past will no doubt exist. Therefor an older company should have more experience in dealing with differing business conditions than a younger company. Once again justifying a higher COE. 4.) Business is a social dynamic that transcends the bottom line. A company that has existed and performed well for two or more decades has built relationships with customers and within the industry that will aid it in ways which are significant yet difficult to quantify. The longer you’ve been around and doing well, the stronger those ties ought to be. Therefor the COE helps to quantify that nebulous value that comes with age. 5.) A long track record of positive earnings can be an important component of receiving credit and getting it at the optimal rate. When it comes time to go to the bank, a company with a five year record will no doubt be at a disadvantage when compared to a company with identical numbers but a 20 year track record. Thus giving a higher COE to an older company with proper justification.
Well, these are some of my thoughts shooting from the hip. I am sure some great arguments could be made that negate what I just wrote or at least severely mitigate it, but I would be interested to get your thoughts on the whole process. Is the idea of the COE model that a long track record of positive OE is a superior to a short track record of positive OE, as an indicator for possible future OE? If so why? and How do you use this information in your analysis? I see that you use it in conjunction with SIA but i'm not sure how you fit them together...is it a prerequisite, or weighted against other criteria in some way? Anyways, thanks again for time and openness. It is greatly appreciated.
How to Use Leveraged Free Cash Flow to Analyze Stocks [View article]
Sorry Peter, i was typing two things at once there and got a bit side tracked. 14 1/2 years is what the statistical Indicator analysis calls for. the COE calls for all the years the company has been publicly traded. despite that mistype, if you do know of a way to retrieve OE more than 5 year old, it would be great to hear. thanks again, ERIK
Index Funds Make Markets Less Efficient [View article]
All companies will eventually expire and cease to be. Most die a bloody death, some get chopped up, others are eaten whole, but if you hold on to any stock long enough it will eventually expire by one means or another. Indexing allows investors a way to shield themselves from the perpetual blood bath that is the markets and invest in the phoenix principal that serves as the backdrop for the games; with every companies demise there is another stronger company to take its place. So long as humanity progresses and we keep the equity markets as our median the phoenix principle will grow wealth. Qualitative analysis, due diligence, and that little pinch of good old fashioned scuttlebutt, that go into individual stock analysis is needed for long-term market efficiency. The individuals who use these tools best will gain wealth, the individuals who do not will lose wealth by equal measure. Why do investors put in so much time, energy, and money into this zero sum game?...Because they are all convinced by their ego and their fancy numbers that they belong to the winning side. Half of them are right and when you mix them with the other half you have the glue that holds the markets together and makes phoenix principle investing possible.
5 Steps To Avoid Disaster When Your ETF Closes [View article]
thanks for the article. I understand that some ETF's can close in a hurried mess, but do you see this as the rule, the exception, or something that can be deciphered with a little poking around. I noticed that Claymore closed SEA in 2010 in a hurry with little pain to investors. I have been tempted to add to my RRF position for some time despite the fact that it now has less than 5 million in AUM. Currently over 70% of the funds assets are in different types treasury bonds. It seems like a liquid market that would enable Wisdomtree to close down with minimal costs to investors. And with all their other fund offerings it seems unlikely they would want to risk the reputation with a high one time fee. It regularly trades significantly below its NAV and seems an easy way to pick up a liquid and safe asset class on the cheap. Anyways, i like the funds overall strategy (has a futures component as well), but have the fear of closer in my mind. if anyone has some ideas or opinions it would be greatly appreciated.
New Growth Catalyst For Indonesia [View article]
Getting Bearish? Think About Being More Active About It [View article]
Consider 40-50% Long-Term Equity Portfolio Allocation Towards Emerging Markets [View article]
Consider 40-50% Long-Term Equity Portfolio Allocation Towards Emerging Markets [View article]
(Part One) A Well Diversified Equity Portfolio In 2-3 Hours A Month [View instapost]
Thanks for your comment. Let me see if I can answer your questions.
I believe that when you say “Total Value” you mean the percentage of funds I allocate to the “VCA equity portfolio” verses the “Cash/Cash equivalent” portfolio I talk about in Part Three. I have put 60% of my allocated funds into the” VCA equity portfolio” and 40% into the “Cash/Cash equivalents” portfolio. My portfolio's standard deviation is approx. 21% and this, along with historical market norms, lead me to believe 60/40 is the most equitable distribution. (More on this in Part Two if your interested) But, really it’s up to the individual investor. Just look at it this way, too much in the VCA account and you’ll run out of funds in your “cash/cash equivalent” portfolio just when the market is at its best prices. Too little in the “VCA equity” portfolio and you will lose out on the capital appreciation that has you in the equity market to begin with. I like a 60/40 split, but other options are definitely out there.
I’m not sure but you might be saying “total amount” when you say “total value”. If you are asking how much should be dedicated to this portfolio. I would say that the amount dedicated to any portfolio depends on the particular situation and predisposition of the individual investor. As I said in part one of my article series this Value Cost Averaging portfolio is designed for myself and I am a; buy and hold investor, with a 20+ year investment horizon, a good appetite for volatility, and a 2-3 hours a month to dedicate to my portfolio’s management. For me personally, what you see above is my retirement portfolio and this is where I keep the majority of my invested funds. I have a separate emergency fund which is designed to have less volatility and thus modest returns that are quickly and easily accessible. I also have a hedge portfolio which is designed to protect me against systemic failure and monumental change in the equity markets. And I also like to keep a small “fun times” portfolio that allows me to test trading ideas in the open market. But, most of my capital is in this “Value Cost Averaging” portfolio that you see above. Because this portfolio is designed to make numerous small volume trades, it is easily replicated in small accounts. The one thing to watch out for here is the commissions! I personally have this portfolio split between Etrade and TDAmeritrade brokerage accounts so that nearly all of my trades are commission free. The few ETF’s included in my portfolio that are not commission free, I reevaluate only once a year, so I can minimize commission fees.
In regards to paring down the portfolio so that it contains fewer ETF’s, this is definitely possible. VT (total market) is a wonderful ETF put out by Vanguard and this could easily serve as a one stop ETF for the equity portion of the VCA portfolio. I actually use it as a rough outline for weighting my VCA portfolio. However; what you lose by consolidation are;
1.) The benefits of volatility within geographical, market cap, and market sectors. (VT goes up and down in one package, VCA allows each ETF component to float around on its own)
2.) The improved risk/reward that comes from owning more underlying businesses (VT is well diversified, but way less than the VCA portfolio)
3.) The added security of having multiple funds and issuing banks. ( why not put your egg in a few different bank baskets given today’s financial status)
4.) Perhaps some Alpha gained by choosing ETF funds that have a strong record in their perspective area. (Wisdomtree does a great job with foreign small caps in my opinion)
5.) You have the more ability to custom fit your portfolio to meet your specific goals. (I like getting exposure to different currencies, but I don’t want to invest in the appreciation of the yen, I can do this with a personally constructed VCA portfolio)
6.) As an opposite to number five; with the VCA portfolio you have more options of getting out of particular positions that you just don’t have the option to when you own something all-encompassing like VT.
Well I hope that answers your questions. Thanks for the post.
Erik
Exhausted Unemployment Benefits Could Pull Economy Under [View article]
All the best,
Erik
Why I Am So Bearish: Time to Be a Deep Value Investor, Part II [View article]
Why I Am So Bearish: Time to Be a Deep Value Investor, Part II [View article]
Self-Dealing Red Flags for Paragon Spin Off IPO Box Ships [View article]
But, as always i look forward to hearing a good opinion.
Majority U.S. vs. Foreign Revenue Performance Among S&P 500 Members [View article]
Why I Am So Bearish: Time to Be a Deep Value Investor, Part II [View article]
I have had a great time working with some of your security analysis models and thought i might get some feedback from you if you have the time. After sifting through a few candidates I ran across MFW and decided to run the numbers for P/OE, COE, and a 3650 trading day SIA. MFW is an odd mix of several different businesses, some of those businesses appear to have a strong future; menthol additives for cigarettes. Others look to be going the way of the horse and buggy; Check printing services. MFW is also the maker of scantron tests which are used by just about every school kid between the elementary to university level. there's a bunch of other odds and ends businesses, but taken in totality, it seems an odd but relatively strong mix from my perspective. The Chairman Ronald Perelman controls 43% of the shares outstanding and appears to have some flaws in his ethical record, but most of the opinions from analysts and commentators seem to believe revenue is tweaked lower if anything. So assuming the Auditors are doing a decent job, it seems interesting from a narrative perspective. And so i'll move on the the numbers.
MFW…P/OE (TTM):
Levered free cash flow (seekingalpha.com/symbo...) is 323.31 million and Shares outstanding are 19.33 million, this works out to about 16.73 per share. The share price for MFW as of closing on April, 21, 2011 was 24.04. The closing price of 24.04 divided by the OE (seekingalpha.com/symbo...) per share of 16.73 gives you a price to OE value of 1.44. Looking mighty nice!
MFW…P/COE:
The P/OE analysis above was done using the numbers provided on Yahoo finance under Quick statistics. Finding the COE was a bit more difficult as it called for finding the MFW’s OE for the past 15 years they have been trading as a publicly traded company. Using the 10-K forms available on EDGAR I was able to come up with some numbers I am reasonably confident with. The equation I used for levered free cash flow was: Net Sales + (cost of sales) + (selling, general and administrative expenses) + (interest, investment and dividend income) + (other expenses) + (provisions for income tax). There are a lot of equations out there, and so for simplicities sake I just decided to go with this one. Finding information for the number of shares outstanding each year was surprisingly difficult as well, and in the end I decided to use the current shares outstanding amount for all the past years as I could not find any information signifying issuing of more shares, or share buy backs. The total COE for MFW going back to 1995 is $29.33 (according to my calculations, which I am not 100% confident in). With a current share price of 24.04 as of 4/21/2011, this would give MFW a P/COE of 0.819. Looking nice once again.
YEAR: FCFE: Shares outstanding: FCFE/Share:
1995: 13.8 19.33 0.71
1996: 20.9 19.33 1.08
1997: 21.0 19.33 1.09
1998: 38.5 19.33 1.99
1999: 17.6 19.33 .91
2000: 19.1 19.33 .99
2001: 5.9 19.33 .30
2002: 18.6 19.33 .96
2003: 22.6 19.33 1.17
2004: 25.2 19.33 1.30
2005: 24.0 19.33 1.24
2006: 36.2 19.33 1.87
2007: (4.2) 19.33 (0.22)
2008: 67.7 19.33 3.50
2009: 119.7 19.33 6.19
2010: 120.9 19.33 6.25
Total COE: $29.33
At 24.04 (4/21/2011) this gives a P/COE value of 0.819
MFW …SIA analysis with a 3650 timeframe:
The average per share price for MFW during the past 3650 is $16.35. This means that with a current share price of 24.04 (April, 21, 2011) MFW is trading for 1.47 above its 3650 SIA. Ideally it would be nice to have an SIA value bellow 1, but given substantial increases in OE in the last three years I wonder if the current SIA of 1.47 is not in some way justified. (interested to hear what you might think about this)
MFW…Cap Flow analysis:
MFW has engaged in a relatively large amount of acquisitions recently and figuring out how those will play out will no doubt be an important part of the security analysis puzzle. The ratio Cap Flow or the relationship between Capital Expenditures/Cash Flow seems to be the most logical approach to evaluating these acquisitions, but prior to pushing forward I thought I’d drop this post and see if you had any comments.
Well Peter, thank you very much for your time. I truly enjoy your posts and opinions, and look forward to reading those to come. You are providing a great service to the financial analyst community and wonderful resource to those of us just wetting our feet in the field.
Sincerest thank & all the best,
ERIK
Profiting From Cumulative Owners Earnings: AAR, Microsoft [View article]
1.) A strong corporate culture dedicated to OE is difficult and time consuming to build but is relatively easy to maintain. Thus a higher COE for an older company is justified, as the corporate culture of respect for OE is firmly in place, while the younger company’s is not.
2.) Shareholder fraud takes time to become visible, and is more likely to occur among young companies than established companies. Therefor the longer a company exists the more likely it is that shareholder fraud is not occurring. Furthermore, the longer a company exists the less likely it is to begin engaging in shareholder fraud. Again justifying a higher COE for the older company. (have some doubts if I believe this one)
3.) While it is impossible to predict future business conditions, similarities between the future and the past will no doubt exist. Therefor an older company should have more experience in dealing with differing business conditions than a younger company. Once again justifying a higher COE.
4.) Business is a social dynamic that transcends the bottom line. A company that has existed and performed well for two or more decades has built relationships with customers and within the industry that will aid it in ways which are significant yet difficult to quantify. The longer you’ve been around and doing well, the stronger those ties ought to be. Therefor the COE helps to quantify that nebulous value that comes with age.
5.) A long track record of positive earnings can be an important component of receiving credit and getting it at the optimal rate. When it comes time to go to the bank, a company with a five year record will no doubt be at a disadvantage when compared to a company with identical numbers but a 20 year track record. Thus giving a higher COE to an older company with proper justification.
Well, these are some of my thoughts shooting from the hip. I am sure some great arguments could be made that negate what I just wrote or at least severely mitigate it, but I would be interested to get your thoughts on the whole process. Is the idea of the COE model that a long track record of positive OE is a superior to a short track record of positive OE, as an indicator for possible future OE? If so why? and How do you use this information in your analysis? I see that you use it in conjunction with SIA but i'm not sure how you fit them together...is it a prerequisite, or weighted against other criteria in some way? Anyways, thanks again for time and openness. It is greatly appreciated.
How to Use Leveraged Free Cash Flow to Analyze Stocks [View article]
thanks again,
ERIK