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My Watch List plus Selected Valuations – September 6, 2010 (Value Line Issue 2)

|Includes: EXC, FII, H&R Block Inc. (HRB), JNJ, MDT, MSFT

 I have updated my watch list to include companies from Value Line Issue 2. I have added valuations for companies that have an earnings yield that is greater than 8%. It is important to read the entire post to understand these valuations.

You need to scroll to the right to see the valuations.

My Watch List – September 6, 2010

By way of review, I am primarily focused on tracking companies that have averaged at least 18-20% return on equity over the past ten years.

Here are a few features of the watch list.

  • If a stock is within 10% of its 52 week low, the cell will turn yellow. If it is within 5% of its 52 week low, the cell will turn green.
  • If a stock is within 5% of its 52 week high, the stock’s cell will turn red.
  • Earnings yields of 8% or greater will turn green. These are the stocks you want to pay attention to. As time permits, I will add valuations for all stocks with an earnings yield greater than 8%.

Valuation Methodology

  • These valuations are very simplistic and are based on a linear projection of trends of the past 10 years.
  • The valuations should be viewed as a starting point for your own work. If valuations were as simple as doing a linear projection of past trends, as Buffett has pointed out, librarians would all be rich.
  • The primary question you need to ask yourself is whether the past conditions that produced the company’s historical results can be expected to continue into the future.
  • Although I try to be accurate, I make no representation or warranties as to the accuracy of the data. My source data is from Value Line. You should always check the data from the original sources, i.e. 10-K’s, 10-Q’s, etc.
  • These are not stock recommendations.
  • The valuations do not show an estimate of the company’s intrinsic value, rather they show the total return that is discounted in the stock’s current price if it rises to the projected target price within the next five years.
  • If nothing else, you can invert the expected total return and analyze all the component variables and their attendant assumptions required to achieve it.
  • Where the historical median P/E was greater than 18, I capped it at 18 to be conservative. I show the actual median P/E in the “Comments” field.

Here is an explanation of the various data points used in the calculations:

  • Return on Incremental Equity – Past 10yrs – (Net Profit 2010 – Net Profit 2000) / (Equity 2010 – Equity 2000). This metric attempts to measure how profitable the company’s equity investments were of the past decade.
  • % Net Profit Reinvested in Equity – Past 10yrs – (Equity 2010 – Equity 2000) / Total Profit 2000-2010. This measures the amount of the company’s net profit that was reinvested in the business.
  • Expected Growth Rate to 2015 – (Return on Incremental Equity – Past 10yrs) x (% Net Profit Reinvested in Equity). This attempts to project future earnings growth as function of the level of reinvestment and its profitability.
  • CAGR Shares Outstanding – 10-year trend of the number of shares outstanding
  • Net Profit 2015 – (2010 Net Profit) x (1 + Expected Growth Rate to 2015)^5
  • Median P/E – Median P/E ratio over past decade

The author of this blog is NOT an investment, trading, legal, or tax advisor, and none of the information available through this blog is intended to provide tax, legal, investment or trading advice. Nothing provided through these posts constitutes a solicitation of the purchase or sale of securities/futures. The data and information presented in this blog entry is believed to be accurate but should not be relied upon by the user for any purpose. Any and all liability for the content or any omissions, including any inaccuracies, errors or misstatements in such data is expressly disclaimed.



Disclosure: Long JNJ