Jason Rennie's Personal Finance and Investing Pensieve

Numbers to use for selections:

20, 22, 24, 26, 28, 30, 1, 3, 5, 7, 9, 11, 13, 15, 17, 19, 21, 23, 25, 27, 29, 2, 4, 6, 8, 10, 12, 14, 16, 18,

Six most recent purchases:

CBI (2)
CYTK (4)
ELNK (6)
FRX (8)
GIGM (10)
GNI (12)
JTX (14)
LO (16)
MTXX (18)

9/11/07 - Stock selection procedure:
1. Check news to make sure no merger/buyout in process. If high volume (near continuous price graph), use market order.
2. If low volume, place limit order at current ask.
3. Skip stocks with exceedingly low volume (~1 execution/hour or less)
1/3/06 - Schedule:
- Regular: on or after the 1st of the month (2x on even months)
- Helen's IRA: on or after the 10th of the month
- Jason's Roth: on or after the 20th of the month
10/5/07 - Was going to sell 595 sh. of KSW, but it came up as the MFI selection, so I didn't take any action. Will keep it around for up to another year. Okay to sell it if convenient.
9/11/07 - Bah! I tried to be "smart" and do a limit order on NPLA below the ask price. It didn't go through. Then, the next day, the price jumps 10% and is up again today. Once a stock has been selected, I MUST buy it. If there is sufficient volume, use a market order. If not, place a limit order at the going ask price. DO NOT play price games. DO NOT worry that the stock has had a single-digit gain compared to yesterday. If the gain is double-digit, then select another stock.
6/27/07 - I've been trying to follow the MFI web site very closely. Generally, I pick a random stock from the top 25 list (min $1m cap). Only caveat so far has been to skip companies which are in the process of being purchased (buyout has been announced). Today I ran into a randomly selected stock which I think was against the spirit of MFI: BP Prudhoe Bay Royalty Trust. It's a oil trust. Seems that it should fall under the "financial" umbrella of companies that MFI is supposed to screen-out. So, I skipped it and used the next random number on the list, which corresponded to EPIC.
5/29/07 - One year anniversary (5/25) of Magic Formula investing: 124% return (vs. 20% for VTSMX); invested $45k, made +$20k vs. +$5k for VTSMX.
2/13/07 - It's an even month, need to make a second purchase. No new money coming in, so we need to sell. I think BBBY/PCAR would be a good choice. BEBE is also available, but I think BEBE is closer to an MFI stock than BBBY/PCAR.
12/31/06 - No new money for January---need to sell stocks to make the next purchase. BBBY (7.6%), KSWS (11.9%), PCAR (10.9%), PSUN (2.9%), QSII (4.5%), SAFT (20.9%) and TTMI (14.1%) are all candidates to sell. I'll need to sell PSUN, QSII and BBBY (25 shares) to generate enough cash for the next MFI purchase. I'll be buying #22 VCI (Valassis Communications).
12/1/06 - Bought CVCO and CLST, getting rid of EXBD and HWAY. QSII just avoided the cut (very slightly higher yield than HWAY). Need to update gnucash and tax spreadsheet.
11/27/06 - Grr... CAW is being purchased for $12/share. Need to reiterate: make sure that company is not under contract to be purchased before making share acquisition! Well, at least the purchase was made in the Roth account, so I don't have to wait a year to sell...
11/27/06 - [Roth] Sold some VTI, bought CAW.
11/24/06 - Since next purchases will bring us above $60k, I'll make both purchases $3k. I think I should deposit $4k and sell two companies (∈ EXBD, HWAY, QSII). Initializing the deposit now...
11/21/06 - For next MFI purchase, I will buy one w/ $2.5k, one w/ $3k. Appx $1k will come from sale of EXBD. The rest will be new cash added to the account. Might be good to update some of the calculations, though there are few sell-able companies that can compete with EXBD for over-value-edness (HWAY and QSII). Note that EXBD will not become a long-term gain until 11/29/05---no premature selling! However, I will need to make my ETF deposit soon.
11/17/06 - Before buying a MFI stock, I should make sure that there isn't a standing buyout offer (e.g. the offer for NVidia to buy PortalPlayer).
11/14/06 - Oh, and you gotta love the MFI book review on Amazon rated most "helpful":
If you are under the age of 12 and know diddley squat about how stocks work, buy this book. ... All you need to know you could have gotten for free at Morningstar: buy companies with high ROC (return on assets or "ROA") and high earnings yield (inverse of P/E ratio -- the E/P ratio).
The reviewer doesn't know enough to know that he doesn't know what he's talking about. I sure wouldn't mind if the MFI book remains a bit of a secret... :-)
11/14/06 - MFI is still working wonders. Still 180% annualized return. I want to buy another MFI stock for my Roth portfolio toward the end of November, then I buy two MFI stocks in the regular portfolio at the beginning of December.
11/6/06 - Time to buy a new MFI stock. Finally received my ETF deposit into my Scottrade (took 3 business days!!!). Selection is #4, BVSN (Broadvision). One annoyance is that their share price is < $1, so the Scottrade commission is $7 + 1/2% of the principal. Translates to a commission of ~$22. I looked at how many of the MFI stocks currently trade under $1. The answer is two. Even if every one of them was under a dollar, my commissions would still be less than 2%/year. Since nearly all of them are above $1, my commissions end up well less than 1%/year. So, I think I should go ahead and make the purchase and not worry about the higher commission. Another difficult thing about BVSN is that it is traded very thinly. The bid-ask spread is over 5% of the bid. I'm going to place a limit order for yesterday's closing price ($0.73). If no-one takes the bait today, I think I'll just select a new stock for tomorrow.
10/25/06 - Found an article on Joel Greenblatt which is basically notes taken from a talk he gave at NYSSA. Included is one detail of the Magic Formula I didn't realize: if net working capital is negative, use zero. I.e. don't give the company credit for negative working capital. Here's another article on Greenblatt's strategy.
10/24/06 - Magic Formula is back! Though, I went ahead and bought VTI for my Roth port, so I'm going to wait a few days before moving any of the money into MFI.
10/24/06 - Ahhh! Turns out the Magic Formula web site hasn't updated since 10/18/06...
10/24/06 - Roth IRA money has been moved over to Scottrade. Time to buy some Magic Formula stocks! Though, the daily update doesn't seem to have happened yet (as of 8:15am).
10/22/06 - A new book on value investing has been published by the same publishing house that published the Magic Formula book. One of the Amazon reviewers makes an excellent point: look at the track record of the guy who wrote the book. the Tweedy Browne funds (of which Christopher Browne is the directory) have performed quite poorly over the past five years. TWEBX (U.S. equity fund) has a 5-year annualized 6.43% return, which is well below 8.3%, the 5-year annualized return of VTSMX. TBGVX (Global equity fund) has a 5-year annualized 12.49% return, which is two percentage-points below the benchmark index that Morningstar uses. OTOH, the Tweedy Browne funds did extremely well in the '96-'01 period. Though, not enough to put them in the top half of their Morningstar Group... Also, from reading reviews, it sounds like this book provides more philosophy than substance. I.e. you won't be able to read it and immediately be able to begin picking "value" companies.
10/3/06 - I've decided to drop my tax calculations from my stock spreadsheet. Only one stock (MRH) has an unusual tax situation (no tax due to Bermuda HQ) and I plan to sell it soon after the anniversary date rolls around. For all of the other stocks, I have a rate between 35 and 40 percent. I don't think these variations are large enough to warrant my attention. And, most of those rates are guesses anyway and could easily be wrong. It's difficult to figure out what the "correct" rate for a company should be. Better to not worry about it since I don't think it has a significant impact. Also, pre-tax numbers make it easier to reconcile with the MFI site.
10/3/06 - The chosen stocks are KSW (not to be confused with KSWS) and OVTI. Both had good earnings yields according to my calculations. Pre-tax yield for KSW I calculated is 31%; for OVTI, it is 21%. Numbers are both fairly close to what the MFI site list: 30% for KSW and 25% for OVTI. I think the discrepancy for OVTI might have to do with the minority interest; OVTI includes the operations of partially-owned companies in its operating earnings, then later subtracts out the portion that they don't own ("minority interest"). MFI's higher yield number could be a result of not subtracting the minority interest. However, a 21% yield is still well within the top 25 yield range (lowest yield is PALM at 13%).
10/2/06 - Here are some random numbers for tomorrow: 15, 18, 16, 4. Start with the stock corresponding to the first number. Only reason to skip to the next number would be if the stock price spikes high enough that it might move well off the top 25 list. Only if the price jumps 5% or more should we consider skipping the stock.
10/2/06 - I bought one MFI stock last month. I'm going to buy two this month. I'll continue the 1-2-1-2 pattern, altering the purchase amount (currently $2500) so that I turn over my entire portfolio about once every 12-13 months. In order to buy two stocks this month, I need $5000. That means I have to sell. CDWC, FDO, KSWS, PCAR, SAFT and TTMI are the six stocks that I've owned for more than a year. FDO (4.46%) has the lowest yield, followed by CDWC (5.34%), PCAR (7.19%), TTMI (7.38%), KSWS (8.07%) and SAFT (14.46%). My FDO position is small. If I sell both FDO and CDWC, I'll have about $6k, a bit more than I need to buy two MFI stocks. The MFI web site is still using prices from last Friday, so I'll have to wait until tomorrow to see what stocks I'll be buying.
9/8/06 - I arrive at the pre-tax Earnings Yield listed on the MFI web site for WNR by using operating earnings (not OE minus D&A plus CapEx, as suggested in the book footnote). I get the listed RoC. TTM OE is $275.139m. To calculate net capital employed, I sum AR, inventory, prepaids, PP&E and subtract AP and accrued liabilities, which yields $241.359m. RoC > 100%.
9/6/06 - Once again, my yield calculation doesn't match up with MFI's calculation. I get about 10%. The web site shows 19%. Seems worth noting that WNR's recent capital expenditures have been quite large. If I had used operating earnings in my yield calcualtion, I think the number would have been close to 19%... Makes me wonder about the web site. Is it using CapEx in place of D&A as discussed in the book?
9/5/06 - Time to buy a new magic formula stock! After revising my yield calculations to use capital expenditures in place of depreciation & amortization, HWAY (1.9%) and RECN (4.61%) have the lowest yields of stocks I've held for at least a year. I purchased 23 shares of AMHC (now HWAY) on 8/24/05; I purchased 35 shares of RECN on 7/19/05. These sales will yield appx $2000. Combined w/ ~$1000 cash on hand, I can make a MFI purchase of $2500. Now, to select the MFI stock...
ceil(rand()*25) yields "24", which corresponds to Western Refining (WNR).
8/17/06 - I think I should up my purchase amount to $2500 and buy 3 stocks every two months. I'll sell each stock after 12 months. That will require $45k of capital and give me regular holdings across 18 different stocks. I made two purchases in June & July and one in August. I think I'll buy one in September and two in October, then one in each odd month, two in each even month.
8/16/06 - MFI is working fabulously. I think my plan should simply be to invest in a new MFI stock each month, selling stock as needed to fund the new purchase. Things to think about: is one MFI stock/month sufficient "diversification?" How long of a holding cycle should I use? As close to 12 months as possible? 18 months? Do I need to worry about taking out cash in a semi-emergency?
8/8/06 - The randomly selected MFI stock is PALM. Hmm... only trouble is that PALM jumped 2.4% in price today... Also, using yesterday's closing price, I calculate a pre-tax earnings yield of 11.3% (lower than the 13% that MIF.com reports). Current price: 10.9% pre-tax EY. Welp, I took the dive. Now a proud owner of PALM.
8/8/06 - I put together a spreadsheet that will allow me to easily calculate earnings and FCF yields as new information is released. Each company has it's own "sheet" with one column per quarter listing various items from the financial statements. The "Yield" sheet presents these numbers, one company per line and calculates the yields. I've bolded the stocks which are I've classified as "for sale."
Based on this spreadsheet, I've put in sell limit orders for CVH @ $54 and TTMI @ $13. CVH has the lowest earnings yield (6.07%) of any company up for sale; and it's financials are complicated. TTMI has been very volatile and at $13, TTMI's EY would be 6.15%. If someone will take the LT portion of my holdings for that price, I'll oblige. If one of those orders go through, I should put the money into a randomly selected stock from the MFI web site.
8/8/06 - Didn't take long for the TTMI purchase to yield a nice gain. Already up over 20%. SAFT has also been pretty amazing. Earnings still have yet to show signs of being affected by the new insurance rates.
7/27/06 - The order went through. As I told Kai, I'm in disbelief.
7/27/06 - Seems that one of the essentials to spectacular returns in the stock market is being able to respond quickly when there is a major change in price. For example, the sharp climb of SLAB, the gradual eroding of KSWS (until earnings), the sharp fall of TTMI (immediately after earnings), and the sharp fall of MRH. One key is to not buy unless you know that the company is solid in terms of EY and/or ROTA. In the case of TTMI today, the press release gives me enough information to recalculate earnings yield and see that TTMI has EY close to the MFI stocks (though ROTA isn't nearly as high, somewhere around 30%). Though, isn't this what MFI does for you? Identify those badly beaten-down stocks? Though, it's certainly a bit better to jump in-or-out of stocks you know---less likely you'll miss an important detail!
7/27/06 - I've placed a limit order at $9 for TTMI. That low, I know it's a bargain. I don't want to get tempted to follow the price upwards. It's currently around $9.44. If it drops, great. If not, I'll find a bargain elsewhere.
7/27/06 - TTMI looks extremely tempting. 2Q income was $15.6m operating, $10.6m net. Cash & STI are up to $101.2m. That makes ttm op. earnings $43.35m (after tax: $28.18). With a current EV of $288m ($9.30 share price), that's a 15.1% pre-tax earnings yield and 9.8% after-tax earnings yield.
7/25/06 - Another reason why interest rates are the correct tool to evaluate a company's earnings yield: the Leveraged Buyout. This is where a group of investors pool money equal to a fraction of the total buyout price (e.g. 20-30%) and use debt to finance the rest of the purchase price. If (ignoring options effects) the earnings/FCF yield is higher than the rate at which debt can be secured, and the company can maintain or increase that level of FCF/earnings, a leveraged buyout makes sense. LBO makes even more sense if the company is likely to grow. The New York Times recently published an article on the buyout of HCA.
7/24/06 - SLAB shot up like a rocket today due to the earnings report. I couldn't resist the chance to dump it near $34/share. It has the lowest earnings yield of any company I've owned for 1+ year and though it's FCF yield ain't so bad, much of that extra cash comes from option tax rebates. I used half of the cash to purchase shares of DLX a company that prints checks and provides other basic business services. Their after-tax earnings yield is about 10% and they're sporting a dividend around 10%. Also, they have had some success exploring new business areas and there is likely room for them to increase margins via cost cutting. I selected DLX via ceil(rand()*25) from the top 25 MFI companies with market cap of $1m or more.
7/12/06 - I should include VNUS in any future company comparisons. The business is valued around $48m, yet it is consistently growing revenues and had a 2005 operating earnings yield of appx. 8%.
7/11/06 - Berkshire Hathaway (BRK is quite cheap at the moment. Market cap of $140b ($3033 class B share price). Cash & fixed maturity securities (i.e. bonds) of $74.1b, another $49.8b in equities, and non-operating liabilities (including debt) of $38.9b (includes debt for insurance, utilities & energy, plus all liabilities in financial products division). I.e. enterprise value of appx. $55b (140-85). Net earnings have averaged about $8b/year for the past three years. Granted, some of the $85b of net liquid assets are tied-up in the insurance business, but $55b for $8b/year of earnings is quite inexpensive (about 7 "P/E").
7/8/06 - Alberto-Culver Company (ACV) is planning to spin-off the Sally Beauty Company.
7/5/06 - Upon further investigation of PCAR, interest expense is not broken out explicitly. I.e. it's very hard to determine interest expense. It can be found in the annual report under the notes on debt. However, no quarterly information is available. Furthermore, the "other" included on the interest expense line is never described. Doesn't exactly give me a warm, fuzzy feeling inside... Though, this means that the yield numbers I have calculated for PCAR are too conservative.

7/5/06 - Didn't buy anything last month. SCSS is listed as Tom's top pick for new money on the latest Hidden Gems report. I'd like to establish a position. But, I don't have enough cash to meet my $1500 requirement. And, we probably won't be able to add cash soon, so I'd like to sell something. But, what to sell??? Here are the candidates, paired with their earnings and FCF yield based on the trailing twelve months:

	Earnings Yield	FCF Yield
BWA	4.82%	3.07%
CDWC	6.33%	4.27%
CVH	6.27%	11.35%
KSWS	9.92%	12.24%
PCAR	6.77%	2.36%
SAFM	1.35%	-18.99%
SAFT	17.29%	18.88%
SLAB	2.36%	5.4%
TTMI	3.98%	5.34%
SCSS	5.61%	6.59%

Here's the gnumeric spreadsheet I used to do the calculations. SAFT is by far the best company according to these metrics. SAFM exhibits the worst numbers and looks like a strong candidate for disposal. BWA, PCAR, SLAB, and TTMI also look somewhat poor, though SLAB and TTMI both have solid free cash flow, whereas BWA and PCAR have solid earnings. I know that SLAB is a favorite of Tom's and has been spending a lot on development of new products, so I'm a bit hesitant to sell it. BWA looks unattractive to me and I think is the next candidate to sell after SAFM. I'd like to buy SCSS, since it is Tom's current best pick for new money. But, SAFT looks like a "sure thing" investment. What I'll do is sell BWA and SAFM and use the proceeds to buy SCSS and SAFT.

6/27/06 - Need to figure out what stocks to sell. Took a quick look at BWA and CDWC. Similar P/E's. BWA has higher op. CF, but also spends a ton on CapEx. BWA also has non-trivial net debt. CDWC otoh, has substantial net cash position and CapEx expenditures are similar to depreciation/amortization (though there was a sharp increase in CapEx in '05). CDWC requires little cash to run the business (besides expenses) and has been using excess cash to repurchase shares (over $200m in '05). I think CDWC is the better company of the two.
6/3/06 - Magic Formula Investing procedure:
- While no stock purchased:
  - Use octave "ceil(rand()*25)" to select a stock from the top 25 w/ minimum market cap of $1 million.
  - If stock purchased via this method in last 6 months, skip.
  - Check that the company has filed most recent appropriate 10-Q or 10-K with SEC.
  - Calculate operating earnings yield and return on capital as described by Greenblat.
  - If SEC reports filed and EY and RoC match up with web site numbers, buy the stock. Else, skip.
- Greenblat encourages diversification on the order of 30 companies/year. Might be best to buy two stocks/month.
6/1/06 - Took some work, but I finally found some good resources for historical stock market returns. Crestmont Research provides a nice color-coded chart of S&P index annualized returns for every year-based period 1900-2005 inclusive. The double-page tax-exempt nominal chart is the most useful, IMHO. It provides dollar returns (not inflation adjusted) and ignores taxes. The only caveat is that it deducts 2% (of assets) per year for "transaction fees." I.e. add two percentage points to each of the return numbers to get the true return. Also interesting is Robert Shiller's spreadsheet of S&P index values and dividend amounts since 1871. Here's a local copy of the Crestmont chart, and a local copy of Shiller's spreadsheet.
5/27/06 - Let the games begin! Kai wants to compare his JOE puts and VNUS long position to the two MF stocks I recently bought, CUTR and AEOS. For the record, the JOE $50 puts cost $7.10 and expire Jan 18, 2008, VNUS was recently at $7.20 or $110.5m cap. I bought CUTR at $17.78 or $223.5m cap and AEOS at $30.99 or $4.737b cap.
5/25/06 - Ack! I bought another Magic Formula stock. This time CUTR, a manufacturer & distributor of laser hair-removal products. Their wart is the fact that a company and hospital (MGH) are suing them for patent infringement on the products they sell! Egad! Many of the Magic Formula companies have something very unattractive about them---recent bankrupcy, major loss of business, lawsuit, etc. But, they also seem to have excellent prospects if things go their way. And, the nature of the long position is that you can do well even if half of your positions go bankrupt! (which seems like a good worst-case scenario)
5/25/06 - Bought my first Magic Formula stock today. AEOS was listed in the top 25 with a minimum market cap of $100m. I think American Eagle's prospects are substantially better than Gap's, yet their prices (net of cash and debt) are nearly identical. AEOS has a market cap of $4.6b, cash and marketable investments (including medium-term bonds) of $897m, net tangiable assets of $309m, and ttm operating earnings of $461m. We get an earnings yield of 12.4%, and a return on tangable assets of 149%. GPS has a market cap of $15.6b, cash and marketable investments of $2987m, net tangiable assets of $3922m, and ttm operating earnings of $1745. We get an earnings yield of 11% and a return on tangable assets of 44.5%.
5/16/06 - JimZipCode posted an excellent FAQ for the mechanical investing board at the Motley Fool. Part 1 includes an introduction to mechanical investing, MI math, taxes, comissions, ands spreads. Part 2 explains some lingo and addresses the many issues with backtesting. Part 3 hits the data providers, and screens, screens, screens! Part 5 hits on more practical issues, including screens for various portfolio sizes, as well as some philisophical questions. He correctly defines annualized return (yeah!), and provides links for calculating internal rate of return (XIRR in Excel). He defines GSD, which stands for geometric standard deviation; basically standard deviation of log-returns assuming a Gaussian distribution; he correctly notes that Gaussian is a bad assumption. He bashes "stop losses" (yeah!), noting that they keep you out of large gains. He includes a good discussion of the practical issues of trading, such as taxes, commissions, and spreads. Part 2 identifies the issues with backtesting---good discussion. Seems that most of the screens the MI people use are based on following trends. Ick! But, it seems like the MI is useful to continue to read since at least they take a fairly systematic approach to investing, which I think is important for success.
5/2/06 - Just read Joel Greenblatt's The Little Book that Beats the Market. Amazon reviews are entertaining. Seems that so many people want so badly for Greenblatt to fail. But, that's kind of the whole point of the book. Part of the reason the "magic formula" works is because emotions are stripped from the selections. The book reminds me a bit of the stories of AI researchers designing neural networks to drive a car on highways. Everyone was convinced that complexity was the way to go. But, in the end, a simple network was highly effective. Seems that the same may be true here.
5/1/06 - Q1 earnings announcement for AWGI indicated that the buyout will close by the end of the (calendar) year. AWGI was trading at $19 during after-hours trading. Assuming the deal will close 240 days from now (just a few days before the end of the year), the market is demanding an 8% annualized return. That's quite nice considering that the 6-month treasury is currently yielding 4.76% and 2-year A-rated corporate bonds are yielding 5.4%.
4/28/06 - Kai says I should look at VNUS. Current market cap is $118M ($7.85 share price). Share dilution might be a bit of a concern. Company went public in Q4 of 2004. Increased share count by 3.7% from end of '04 to end of '05. Holding $72m in cash + STI. Sharply increasing operating income and revenue (they lost money in 2003, made $2.65m in op. inc. in '04, $3.85m op. inc. in '05). Revenue has increased 87%/year annualized since 2000 (increased 29% '04-'05). SG&A expenses are also shooting through the roof, +36% '04-'05. Cash flow has mostly stayed above income except for 2005.
4/20/06 - Then again... SOLD just increased their guidance and the stock price promptly jumped 16% (after hours).
4/19/06 - A year from now, I think I could easily look back at SOLD and MRH as mistakes. Reason being that I didn't sufficiently consider the future. Yes, both companies look like a spectacular value if you look at the past. But, neither has particularly good future prospects. MRH has passed along much of its risk (and, hence, reward) to reinsurers. SOLD will be spending a lot of money on developing a competitor to zillow.com and will see a substantial hit due to option expensing. SOLD probably won't even be able to match last year's income/share. Well, we'll see. Though, I should get in the habit of comparing a set of companies and choosing the best among them, rather than simply identifying one company that looks cheap/promising and buying it. A good exercise would be to take the latest four HG recs and determine which one is the best value.
4/13/06 - Replied to a post about MRH on the Motley Fool boards. MRH is currently priced assuming about $100m/year income. Income on investments (mostly fixed income securities) alone almost matches this number. So, if they return to combined ratios anywhere near '02-'04 levels, MRH will be a gold mine. But, basically, as long as they can continue to sell insurance and net a combined ratio of 95% or less, MRH is undervalued.
4/13/06 - Note to self: limit orders are only useful for guaranteeing the sales price. They should not be used for helping to determine when to sell. Why? Because the goal of a sell isn't to maximize your gain on the stock you are selling, the goal is to move out of a stock that is fully valued and into one that is undervalued. As long as the new stock is clearly a better buy than the old stock (and other criteria are satisfied---minimum purchase amount, holding at least one year, one day before selling), then small price movements are unimportant.
4/13/06 - Sold CORI and IART and used the proceeds to buy SOLD. SOLD seems just too good to be true. Company with rapidly growing income, little share dilution, no debt, lots of cash, cash flow from ops. higher than net income and a P/E around 8.5 once cash + ST investments and interest income are backed out.
4/11/06 - Another great buy right now: Berkshire Hathaway. 2005 was a bad year due to reinsurance losses. Yet, it still made $8.5b in profit. And, it's sitting on $34b cash (net of LT debt). So, the effective P/E is around 12.
4/11/06 - Another perk to KSWS is corporate governace---everything I read about KSWS is very straightforward, to the point and not manipulated to sound better than it really is. Reports are frank and seemingly truthful. Useful details are divulged.
4/11/06 - I should also consider buying more KSWS. The stock has been in a holding pattern while the company has grown stronger. Foreign sales are skyrocketing. Year-over-year changes are 50%, and 58% for the periods ending 2005 and 2004, respectively. Domestic sales are flat with y-o-y changes -5% and +7% for 2005 and 2004, respectively. Foreign sales are now 24% of total, so continued foreign growth will have a substantial impact on revenue and income in the coming years. KSWS is very good about returning profits to shareholders. Each year for the past 4 years, they've re-purchased between 2% and 5% of outstanding shares. Also, they yield a substantial dividend, equal to 8.3% of net diluted income for 2005. Between the dividend and share buy-backs, the company returned about 15% of net income to shareholders in 2005. Most of the rest of 2005 income ended up on the balance sheet as cash and cash equivalents. I.e. it's not unreasonable to think that virtually all income will be returned to shareholders. If we assume that domestic revenue remains flat but foreign income grows 40%, and income grows in-line with revenue, we should see income of about $82.5m in 2006, an increase of nearly 10%. I think 10% growth in income with near 90%+ yield of income to shareholders are very reasonable assumptions. These assumptions make KSWS look very attractive at today's prices ($1b market cap, 14 P/E).
4/11/06 - I think I'm going to buy shares in SOLD. They provide leads for real estate agents and are developing a business for providing leads for mortgages. They have been growing rapidly---year-over-year growth has consistently been over 50% on a diluted net income per share basis. Cash flow is growing in-line with income. However, once cash ($59m), ST investments ($26m), and interest income ($1.5m) are backed out, the company is trading at an adjusted 8.5 P/E. I.e. it's priced as though growth prospects are nil and there's a chance the company will be going bankrupt soon! It seems like the discount is partially due to expectations of the popping of a housing bubble. Even if the housing market deflates, I don't think SOLD will stop growing. Growth will slow, but at these prices, that's fine with me.
4/7/06 - Was involved in a discussion about PLPC on the Motley Fool boards.
4/7/06 - Have upped my buy amount to $1500. I'm wondering whether I should actually move it up to $2000. $2000 isn't even 5% of my portfolio at this point! Would certainly help me avoid too much dilution. I think I'll stick to $1500 for now, but AWGI will be bought out soon and I'd like to move money from CORI soon after the 1 year anniversary. At least over the next few months, $2k should be easy to deal with. Feel like I'm diluting too much with all these purchases!
4/4/06 - Bought MRH. Has suffered tremendous losses because of Katrina and other 2005 hurricanes. But, it's still on solid financial footing. It's market cap at time of purchase was about $1b. Yet, it has $3b in cash, bonds and other liquid investments and has made well more than $100m in each of its full years as a company other than 2005. Shareholder's Equity is about $1b. Q3 2005 was a horrible quarter, but Q4 wasn't far from breakeven. Barring another Katrina, I'm certain MRH will be profitable in 2006 and I'd guess it'll be well over $100m in net income by the end of 2006. MRH did a round of financing (sold lots of stock) toward the end of Q3 and in Q4. Serious share dilution. But, it was a one-time thing.
4/4/06 - Alderwoods is being acquired by a larger funeral services provider. I'd guess that means that the turnaround experts who took the helm after the bankrupcy will be leaving to find yet another company to turn around. I shouldn't forget their names. They are John Lacey and Paul Houston.
3/29/06 - Pencils put together a nice collection of Fool articles on valuation, terms and market ratios.
3/27/06 - Yahoo has a nice page listing current federal, municipal and corporate bond rates. The 20 year A corporate bond yield is might be a better starting point for valuing corporate income than the Vanguard high-yield fund.
3/8/06 - It's official. I'm dumping Stock Advisor for Hidden Gems. HG just has too much juicy information. And, the track record is better. This isn't clear from a quick glance at the scorecard. But, if you take average returns since July 2003 (which is when HG started), HG (Tom) had a 36.4% return (as of 3/7/06) vs. 17.8% for SA (Tom). HG has certainly been helped by small- and mid-cap outperformance of large-caps over the past three years. But, I'd guess the returns also might have to do with Tom putting more energy into HG. Before HG started, some of Tom's SA picks looked like HG picks (e.g. Quality Systems). And, I want to be getting Tom's best picks, which I think can be found in the HG newsletter.
3/7/06 - If SAFM is able to grow profits gradually (due to inflation) while seeing returns of 10%+ in invested capital, it's almost certainly an excellent buy.
3/7/06 - For future reference, SAFM's current share price is $21.78.
3/7/06 - Their stock valuation formula is incredibly simplistic. Sanderson: "We do it by multiplying pounds times an average market price and come out with more earnings because of more pounds and multiply that by 10, 11 or 12 and you come out with a higher share price." I.e. Sanderson thinks that an appropriate SAFM P/E is 10-12. Mike Cockrell indicates that 2002 was a bad year and '04 and '05 were good years.
3/7/06 - Ewwww.... conference call shows that the SAFM CEO has tunnel-vision with respect to stock valuation. Sanderson says, "We build the plant when our balance sheet says we can. We know our primary responsibility is to increase the value of our stock. And to do that we believe we must grow revenues and earning[s]." Yes, the EO's should be focusing on increasing the value of the stock, but they should focus on increasing revenues and earnings only if it produces a solid return on invested capital. That said, I like the fact that he is willing to go forward with captial projects even with market conditions aren't the greatest. He has a long-term mind set, which I like.
3/7/06 - Average GA dock price/lb is down (to .69) substantially from a year ago (.7375). But, this is higher than '01-'03 (which ranged .62-.64). Leg quarters are down 10% from about .31. Again, above '01-'03 prices (.18-.22). Wings are down to .87 from 1.05 a year ago. Lower than '01 (.91), but higher than '02-'03 (.63-.70). Breast prices (1.13) are lower than any of the past 5 years (1.29-2.09). 2006 Q1 reflects lower volume (Katrina) at some plants. Mgmt. says that no further Katrina effects will be seen in quarterly reports. Collins plant has been converted to
3/7/06 - Chill Pack plants process medium-sized birds and handle about twice as many birds as large bird plants. The mixed plant (Collins, MS) processes the equivalent of 1.575M/week medium-sized birds. I.e. it processes a bit more than the other plants. The new plant (Moultrie, GA) represents an increase of 17% in production capacity. Prices (whole bird, GA dock price) have been high the past two years compared to '01-'03. It's possible, if not likely that we'll see a drop in profit in the near future, esp. w/ Avian flu decreasing demand.
3/7/06 - Questions: How much did each plant cost to construct? How much in earnings does each plant produce?
3/7/06 - SAFM focuses on the value-added chicken market, which means that they do additional processing, e.g. removal of unwanted parts, weighing, packaging, labeling, and chilling and/or freezing. Sounds similar to a processing plant from which Whole Foods might buy fish. SAFM notes that the value-added market has less price volatility and higher margins. Greater than 99.5% of SAFM's revenue is derived from value-added products. About 90% of SAFM's revenue is chicken like you'd find on a grocery store's meat department. About 10% comes from processed and prepared foods (frozen lunches?). As of 10/31/05, SAFM had 7 processing plants
- Large/Big Bird - 625k/week
  1. Laurel, MS (Jones County)
  2. Hazlehurst, MS (Copiah County)
  3. Hammond, LA
  4. Collins, MS (Covington County) (was mixed, 475k/week large, 625k/week medium), converted '05-'06
- Medium/Chill Pack - 1.25M/week
  1. McComb, MS (Pike County)
  2. Bryan, TX (Brazos County)
  3. Moultrie, GA - NEW opened 2005/Q4, fully operational 2006/Q4
  4. Waco, TX - FUTURE
Page 11 of the 2005 10-K has graphs of spot prices for the last 5 years. SAFM breaks down the market into large (big bird), medium (chill pack) and small. Margins are smallest in the small bird market and SAFM does little business in this area. SAFM largely sells to supermarkets and distributors. SAFM contracts with farms to grow the birds. SAFM owns its own hatcheries, then hires farms to grow the chicks from one day old to 7-9 weeks old. SAFM provides the feed to the farms. In 2005, SAFM used over 2 million tons of feed. SAFM is sensitive to market feed prices as it does not store feed or buy long-term feed contracts. SAFM has one "foods" plan for processed foods:
1. Jackson, MS - could easily increase throughput
SAFM's corporate offices are located in Laurel, MS. They operate 7 maintenance shops that serve 613 vehicles. They also operate a child care facility. SAFM began building a new coporate headquarters in fiscal 2005 in Laurel, MS. SAFM expects to incur $9.2m in expenses during fiscal 2006. No customer accounted for more than 10% of revenues in 2005.
3/7/06 - SAFM's "annual report" is worthless compared to the SEC filings. The 10-K (annual SEC filing) includes break-down of revenue by type and plant.
3/7/06 - How do we deal with the possible time-lapse between capital expenditures and increased profit? How to deal with lapse between retained earnings/debt issuance and captial expenditure is clear---cash assets increase. Note when machinery/equipment/building/land are sold, it is the equivalent of a negative/reverse capital expenditure.
3/7/06 - Would be helpful to break out revenue/income as finely as possible. In the case of SAFM, we should break out each facility as finely as possible. Only ones that are part of a "processing pipeline" should be grouped together.
3/7/06 - It's difficult to project and analyze earnings because minor percent changes in prices can have a huge percent change in earnings. In many cases, it might be easier to look at sales. And, it may be better to look at raw numbers of widgets rather than the revenue (if sales prices fluctuate substantially). Instead of using acutal profits, we might estimate an average or expected margin and use that to calculate a sort of "smoothed" profits. E.g., for SAFM, we keep track of chickens sold. We keep some record of chicken prices, including some accounting for inflation. We calculate expected revenue as expected # chickens sold times our inflation-adjusted chicken price. We also track operating margin for the company and calculate operating profits as revenue times margin. This allows us to easily deal with temporary dips in margin.
3/7/06 - It's somewhat easier to see what a company should do with debt---it should increase earnings at a rate higher than the coupon (before interest charges). This increase should be retained for the life of the debt. When debt is retired (principal payments), the capital is reduced. Though, the capital is often transfered to retained earnings (the money used to retire debt). I.e. when debt is retired w/ retained earnings, our expectation of greater-than-coupon earnings should be replaced with expectations of a rate of earnings above the current rate for corporate bonds (e.g. from VWEHX).
3/7/06 - Should proceeds from stock issuance be included in capital? This ignores the pricing of the stock---no distinction is made between 1 million shares @ $100 and 10 million shares @ $10, but if you're a shareholder, you'd rather see the first case.
3/7/06 - Each dollar of capital should increase profit---permanently. Capital includes retained earnings, as well as proceeds from debt and stock issuance. Rate of return expected should be greater than the rate of return on corporate bonds. I think a good barometer of the corporate bond market is the Vanguard High-Yield Corporate Fund, VWEHX.
3/6/06 - SAFM is getting sufficiently cheap that I'm seriously considering purchasing additional shares. But, before I do so, I want to solidify my valuation method. Need to analyze three major aspects of the business:
1. How company receives money
  - Net cash provided by operating activities
  - Proceeds from issuance of common stock
  - Proceeds from sale of property and equipment
  - Issuance of debt
2. How company spends money
  - Capital Expenditures
  - Retirement of debt
  - Dividends
  - Stock purchase/retirement
3. Liquible assets
  - Assume that property and equipment are worthless unless we have specific information to the contrary
  - Check to see that accounts receivable and payable are not out-of-line
  - Count assets as cash and cash equivalents minus LT debt and non-operating liabilities
SAFM:
1. How company receives money
2. How company spends money
3. Liquible assets
  2/24/06 - Okay, I am very tempted to sign on to Hidden Gems. It's jam-packed with ideas and information, moreso that Stock Advisor. And, I like that Bill Mann (the 2nd analyst) is also a value nut-head like Tom. Yes, it's a bit more than SA, but it's less than 1/2% of assets per yer (and that expense is certain to shrink over time). And, the extra analysis and discussion between Tom and Bill is great. Also, I have the feeling that Tom puts more effort into HG than SA.
  2/20/06 - Tim Hanson pens a nice article on why management is so important:
  While today's average CEO tenure has dropped to less than five years, 84 of the 100 top-performing small caps of the last decade had either a founder or experienced and devoted CEO leading it to market-trouncing results.
  
  2/17/06 - Took out a 30-day trial of the Hidden Gems newsletter. Looks like a great newsletter for ideas. They literally throw 5-10 stocks at you every month with 2 regular recs plus tiny gems and the watch list. So, if/when I switch to making my own decisions on stocks, this might be an excellent companion. That said, I don't see an advantage over Stock Advisor for someone like me who simply buys Tom's recommendation each month. Bill Mann is the 2nd analyst of the newsletter. His style is more like Tom's in that he takes more of a value approach and tries to follow in the footsteps of the "great investors." But, the stocks have much smaller market caps, on the order of $500m to $1b, which means that it might be more difficult to catch them at the recommended price. On the plus side, Tom seems to be more willing to re-recommend stocks, which might lead to better long-term returns. And, a check of the last four recommendations shows that the closing price was between 1-3% higher than the price at the time of recommendation (+2% mean), so it's not hard to get a price very close to the recommendation price. The newsletter comes out every fourth Thursday of the month. Buy Tom's latest recommendation. Decide whether to renew FA or subscribe to HG. Update PFAT, GnuCash.
  2/17/06 - Bought $1500 worth of BBBY per Tom's rec. Still have about $2k in cash. I think with all of the recent cash flow, future cash flow and stocks I am/will be free to sell in the near future (AWGI, KSWS, SAFM, CORI, GPS?), I can regularly fund $1500 purchases.
  2/15/06 - Sold about half of my TTMI position. It has shot up in price and for a while I've had a dilemma: Tom only made one recommendation of TTMI, but I opened three positions. Roughly speaking, this sale gets me back in line with a portfolio that tracks Tom's recommendations. It also ensures that I'll have enough cash on-hand to follow his recommendations near term.
  2/10/06 - My thoughts about hiring a cleaning lady:
  - My wife and I recently hired a cleaning lady. It's likely that she'll be coming to clean our place once every two weeks (appx. 3 hours per visit). I think we'll be paying her about $1500 this year (just above the limit). While finalizing our federal taxes last night, I noticed line 62, household employment taxes. This got me wondering---is our new cleaning lady a household employee? I found pub. 926 and gave it a read. It cleared up some issues, but left me with two questions:
    1) Is our cleaning lady a household employee? Though we potentially have control over "what work is done" and "how it is done," she is being hired for a very specific service that is her line of work. Seems closer to the "lawn care" example in 926 than the "babysitter" example.
    2) Are we required to determine whether she can legally work in the U.S.? Even if she is not technically a "household employee," do we have any obligation to check her eligibility?
  - Thinking about this some more, it seems that the "household employee" designation is intended for someone who does not have a specialized business and who spends a significant amount of time in your home. Someone is an "employee" of a company if their pay is not directly tied to delivery of a product/service and their responsibilities may change as the needs of the company change. An independent contractor (IC) generally establishes a contract with a company for specific deliverables in exchange for pay. The IC has a specialized business, provides his own supplies and materials and may offer his products/services to other companies. Pay & contract must generally be changed before the IC would take on new responsibilities and/or offer new products/services to the company.
    Thinking of our household as a company, our cleaning lady would be classified as an independent contractor. She offers the service to others. She brings her own supplies. We have a verbal contract of specific services in exchange for pay. I think the "household employee" designation is for someone who, if your hosehold were thought of as a company/workplace, would be considered an employee.
  2/9/06 - Motley Fool boards confirmed my opinion that you must replace stock in order to qualify for a wash sale. E.g. if you buy a block of stock, sell the entire block of stock and never buy again, it's not a wash sale.
  2/9/06 - Learned from the Motley Fool boards that expensing use of your home is optional. This would have been clear had I simply read the first few pages of publication 587, but it's always nice to have someone confirm the opinion.
  2/6/06 - May not have enough cash to deposit for this month's rec. Stocks that I could consider selling include GPS, TTMI, KSWS and SAFM. Since Tom has only recommended TTMI once, I have three blocks of shares and I know little about the company, I think I would be wise to sell the first two blocks (199 shares) of TTMI.
  2/3/06 - Finally discovered the nomenclature for return calculations. For PFAT, I am calculating "True Time-Weighted Return". The difficulty with TTWR is that it requires valuation at each cash flow. The "Modified Dietz Method" assumes a constant rate of return and so avoids the need for valuations at each point of cash flow. There is also "Money-Weighted Return" or "Internal Rate of Return" (IRR). I think there's a mistake in the IRR formula in the above link. The first 1+r(T) quantity should be taken to the power T.
  1/30/06 - MoneyChimp has lots of information about stocks, mutual funds, etc.
  1/28/06 - SeekingAlpha provides transcripts of conference calls for about 400 public companies.
  1/27/06 - Matt Richards has a nice set of articles on Keeping Track of Your Returns; don't forget to read Part II. This is similar to how I calculate returns for PFAT, though his annualized rate of return is incorrect (as he notes). Matt pens an excellent follow-up article, Computing Your Investing Returns, Redux. TMF1000 has a nice set of articles on valuing a company
  1/20/06 - Bought BEBE with a limit order slightly below the recommended price the Tuesday after Tom's recommendation. Scottrade recently decided to stop their ETF service to deposit funds; I didn't realize this 'till Thursday night. Dropped off a check Friday afternoon, was able to access the money for trading Tuesday morning.
  1/17/06 - The New York Times has a nice page summarizing the government bond market.
  1/16/06 - Zweig (pg. 398) provides a nice run-down of Return on Invested Capital (ROIC). ROIC is Owner Earnings divided by Invested Capital, where Owner Earnings (OE) is:
  - operating profit
  - + depreciation
  - + amortization of goodwill
  - - federal income tax (paid at the company's average tax rate)
  - - cost of stock options
  - - essential capital expenditures
  - - fake pension fund income
  and Invested Capital (IC) is
  - total assets
  - - cash (as well as ST investment and non-interest bearing current liabilities)
  - + past accouting charges that reduced invested capital
  OE is similar to free cash flow. I think IC accounts for depreciation in adding past accounting charges. IC should basically account for net receipts of retained earnings and stock purchases/sales. This does seem like a very good way to evaluate management. The trick is to calculate it correctly. I doubt you can simply divide FCF by stockholder equity...
  1/16/06 - Buffett makes two very astute observations in his article that appears as Appendix 1: (1) "You want to be sure you are in with honest and areasonably competent people," and (2) "You don't try and buy a business worth $83 million for $80 million. You leave yourself an enormous margin."
  1/16/06 - Graham (pg. 523-524) outlines business principles worth following in any endeavor:
  1. Know what you are doing---know your business.
  2. Do not let anyone else run your business, unless (1) you can supervise his performance with adequiate care and comprehension or (2) you have unusually strong reasons for placing implicit confidence in his integrity and ability.
  3. Do not enter upon an operation---that is, manufacturing or trading in an item---unless a reliable calculation shows that it has a fair chance to yield a reasonalbe profit. In particular, keep away from ventures in which you have little to gain and much to lose.
  4. Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgement is sound, act on it---even though others may hesitate or differ. (You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.)
  1/16/06 - Zweig (pg. 402) highlights Lucent as one of the many stocks to have avoided during the recent tech-craze. In particular, he notes that "Lucent treated the cost of developing new software as a `capital asset.'" By capitalizing, Lucent converted a routine operating expense into a future depreciation expense (to pump-up earnings in the short-term).
  1/16/06 - Zweig notes some traits of successful investors:
  1. They are disciplined and consistent, refusing to change their approach even when it is unfashionable.
  2. They think a great deal about what they do and how to do it, but they pay very little attention to what the market is doing.
  1/16/06 - On pg. 350, Graham notes the connection between bond rates and stock prices. He suggests that the earnings/price ratio of one's portfolio should be no higher than the current high-grade (AA) bond rate. My interpretation of this is that a company which produces a constant stream of $1m in earnings paid out as a dividend, should be priced as 1/Y, where Y is the current high-grade bond yield.
  1/16/06 - I think Graham's stock-picking checklist is weak (pg. 337). He requires the company to be (1) large, (2) to have a strong financial position, (3) to have continued dividends for the past 20 years, and (4) no earnings deficit for the past 10 years. #2 is certainly essential, but the others, I think are somewhat silly conditions. #3 & #4 are desirable, but hardly necessary. Though, I'm sure his criteria worked much better in his day than they would now...
  1/16/06 - Jason Zweig gives some suggestions for books to read about corporate accounting:
  - Financial Statement Analysis by Fridson and Alvarez
  - The Financial Numbers Game by Mulford and Comiskey
  - Financial Shenanigans by Schilit
  - The Interpretation of Financial Statements by Graham
  The Graham link is to the 3rd edition (1975) with Charles McGolrick. After reading reviews, I think this edition (or the 2nd, 1964) would be more useful than the original edition (which was originally published in 1937).
  1/16/06 - Just finished reading The Intelligent Investor by Benjamin Graham with commentary by Jason Zweig. The Zweig commentary is an excellent addition as a good bit of the original Graham writing is downright dull and out-of-date. But, there are lots of great insights in the book and overall Graham's advice is excellent and insightful. There is one sentence that I consider to be a horrible mistake: "In fact, according to the arithmetic, if a company could be assumed to grow at a rate of 8% or more indefinitely in the future its value would be infinite, and no price would be too high to pay for the shares." This isn't generally true. The company's value hinges on how it handles the earnings. If all the earnings are paid out to shareholders (via a dividend or by buying-back shares), then Graham is correct to say that such a company is infinitely valuable. If, however, the company retains all earnings, and it grows earnings at 8%/year, then the company is no better than a low-expense index fund, such as VTSMX (which, historically yields a return of about 10%). I don't discount Graham for this sentence, however. He would never have invested in a company that didn't pay a dividend, so I think he implicitly intended for the 8% growth company to pay out a fixed share of its earnings, which would be enough to achieve the infinite valuation.
  1/10/06 - Went to a panel-discussion on careers in finance for MIT Engineers. On the panel were Andrew Lo, along with three people currently working in finance jobs, Jay Damask, Paul Mende and Hai-Yan Helen Xing. Sounds like I do have a good background for such a job. They repeatedly mentioned the need for experimentation skills and knowledge of how to predict the future based on past and current observations. Seems right up the alley of a machine learning PhD student. Paul Mende seemed the best speaker of the group, possibly because he was the eldest. He also had a nice situation---a partner in a small hedge fund. Might be a good person to talk to if I have serious interest. I'm sure I could get contact information from Prof. Lo. I got to ask the panel about interesting problems in finance. Lo started with the following: how do you allocate $100m among a group of (say 10) traders so as to maximize profit? Do you feed the winners? Feed the losers? Spread the initial money equally and then hands off? Damask specializes in bonds---I didn't understand his problem very well. Can't remember what Mende posed, but I think it was somewhat interesting. Xing was a bit hard to understand. Lo suggested some "airplane books" for gauging interest in the work, Bernstein's Capital Ideas, Derman's My Life as Quant, and Bass's The Predictors. Mentioned more than once was the general problem of using past stock price movements to predict future movements. Overall, the problems were moderately interesting, but not super exciting. Also, my guess is that work focuses quite heavily on relatively short-term returns.
  1/9/06 - theSequoia recommends SmartMoney and ClearStation for portfolio trackers.
  1/7/06 - Motley Fool has a nice article on return on invested capital.
  1/4/06 - Wow. F is a company with FCF (operating cash flow minus capital expenditures) greater than market cap. Market capitalizaiton is currently $15B. Trailing twelve month (ending 9/05) FCF is $19.6B. That FCF is even being put to good use. Over $12B worth of debt has been paid off (ttm). More than $.7B was paid out in dividends (ttm). 'course, I'm sure that depressed valuation has something to do with pension liabilities and the $172B of long term debt, so a (much) closer look would be necessary in order to determine whether its stock is currently underpriced...
  12/30/05 - There's a nice discussion on valuing the assets of a company on the Fool Berkshire Hathaway board.
  12/26/05 - EODData provides free historical stock quotes for registered users (today's quotes available at 10pm; mutual fund quotes not available). Yahoo provides historical prices for free download in CSV format. The NASDAQ provides historical quotes, but in a somewhat awkward format. To get historical prices from nasdaq.com for a stock, select charts, enter a stock symbol, then click on the chart of the returned page. The window that pops-up will have a link to download the data in Excel spreadsheet format. Silicon Investor provides free historical stock quotes and mutual fund quotes. IntegrateIR provides historical stock quotes (no mutual funds).
  12/26/05 - ComStock provides stock quotes to MSN and AOL. Yahoo gets their quotes directly from the exchange for the U.S. exchanges. Hemscott provides dividend information to Yahoo. Silicon Investor uses QuoteMedia. StrikeIron sells historical quotes at semi-reasonable prices.
  12/20/05 - Another rationale for this philosophy is that the bond market is the market for income. I.e. income can be viewed as an asset that has a market price. If an asset has various uses or interpretation, then the value of that asset is the value for its maximum (over uses that the company can exploit) value use. E.g. cash is either face value or income. Since most companies stash their cash in money markets or ST bonds, it's often better to discount any interest being earned from cash and treat the cash as an asset for valuation purposes. A company's real estate can either be valued (1) as part of the necessary assets to produce income, or (2) at market value. It might also be reasonable to value the real estate at market value and reduce income by the rental payments that would be necessary to lease such land. However, it is worth noting that real estate ownership comes with its priveleges. No one can completely force you out if you own the land.
  12/19/05 - A nice example of how interest rates affect valuation is MO. An appeals court recently threw out a verdict that was negative for MO; i.e. the burden of legal liability has largely been lifted. MO pulls down a very steady stream of income and cash. Income for the past three years ('02,'03,'04) is $11m, $9.2m, and $9.4m, respectively. Operating cash flow is $10.6m, $10.8m, and $10.9m. Free cash flow hovers around $9m. The company is capitalized at $160b. MO isn't a growing company, so those "capital expenditures" are probably operating expensies. Hence, FCF is a good estimate of owner earnings (amount MO could continually pay as a dividend). FCF represents a 5.6% yield on capitalization, which is slightly higher than the 5.06% yield on long-term investment-grade bonds. I.e. it's not unreasonable to assume that a company with steady owner earnings will be valued at approximately 1/Y, where Y is a yield that is a slight premium to the yield on LT IG bonds.
  12/18/05 - Been thinking about company valuation... a company priced such that it can produce a yield equal to the going rate for investment-grade corporate debt is nearly fairly priced, isn't it? It's fair to say that a stockholder would want some premium beyond the debt yield since bond-holders have higher priority in bankrupcy proceedings. But, if bonds yield 6% and there is a company INCM that is on extremely solid financial footing, has no debt, and has no risks to its income stream, and pays all of its income as dividends, isn't INCM fairly priced if it yields 7%? Of course, there is no company that doesn't have yield risk. First, the executive officers may be too greedy. Second, you can never discount competition. Third, there's always poor management and diworsification.
  12/16/05 - Bought PSUN with a market order. Worked very smoothly. I got exactly the last quoted price. The fooladvisor.com site stopped working between about noon and 12:05pm (I guess because they were updating it). Around 12:05pm, I was able to get the rec.
  12/14/05 - Read an interview of MMM's CEO (used to be with BC). Very sensible-sounding, down-to-earth sort of guy. I wonder if one or both of those companies might be worth an investment some day. BC looks almost like a growth company trapped in a slow-growth P/E ratio! Here's a Fool article on BC. Note that this company is almost certainly (in Lynch's terminology) a cyclical. They sell (boat, bowling & fitness gear) the sort of stuff that people will avoid during hard times. This is probably why income has ramped-up so much over the past few years. Would have been an awesome buy in '02. Only a good buy today if the "top" is still some ways ahead. MMM would also be worth a look. Due to depreciation, cash flow from operations is quite a bit higher than net income, so the P/E is really closer to 15 than the 19 that Yahoo finance shows. They also yield a nice dividend and buy back stock.
  12/12/05 - Read the introduction to Benjamin Graham's "Intelligent Investor." Reads like a text book and sounds like it will have minimal valuable insight. He talks about buying with a margin of safety (he must have been the one to coin this term), but he emphasizes the tangible asset value, which is useless for valuing many companies. The Buffett introduction suggests reading chapters 8 & 20; maybe I'll do just that...
  12/12/05 - I think one takeaway message of Lynch's book is that it's more important to buy fundamentally sound companies than it is to use a precise valuation system. The problem with valuing companies precisely is that the information you need to create a precise valuation (esp. growth information) simply doesn't exist.
  12/12/05 - One thing I forgot about Lynch. Some of the best value plays come when the financial statements of a company are unrelated to the actual financial position of a company. This often happens when a company has a large amount of depreciation. The assets may be worth more than the original purchase price, but accounting rules say that all(?) assets must be depreciated. Depreciation masks real income and may make an asset look worthless when it is extremely valuable.
  12/12/05 - The Nasdaq web site has a listing of all securities for each of the major markets (3359 listings in the Nasdaq, 3952 listings in the Nyse, 1304 listings in the Amex). Interesting that a lot of the listings (esp. on Amex) are not companies, but spiders, vipers, etc.
  12/12/05 - Turns out that stock splits are a bad thing for a NASDAQ-listed company---the annual fees increase according to the number of shares outstanding.
  12/12/05 - Finished reading Lynch's "One Up on Wall Street" (just started reading Saturday). Really nice book. The Gardners are clearly proponents of his philosophies. His core advice is extremely simple and sensible: buy companies priced well below their intrinsic value and hold on until fully valued, or until the business prospects change for the worse. He lumps companies into six major categories: (1) slow growers, (2) stalwarts (medium growth), (3) fast growers, (4) cyclicals, (5) asset plays, and (6) turnarounds. Fairly valued slow growers are to only be used for income. Stalwarts can be great relatively short-term investments (1-2 years) if the company is well run and the company is undervalued. Fast growers should be bought after the concept has been proven, but there is still tons of room to grow. Lynch suggests that the P/E should be no higher than the earnings growth rate. Cyclicals are tricky; you have to make sure the company is solid, and buy near the bottom of a cycle. In asset plays, you are looking for assets that are worth more than the valuation of the entire company (or assets + earnings more valuable than market cap.). Turnarounds are companies that have gone through hard times, but can easily be turned around with semi-sensible management. Lynch discusses the advantage that individual investors have. We can find companies through our everyday experiences (e.g. retail outlets). But, much research is necessary even after finding a company that looks like the next "it." Lynch says that it's easiest to find cheap companies with great prospects when they are boring, have a monopoly (or near monopoly), have repeat business and manage their money semi-intelligently (avoid dumb acquisitions). Avoid companies in fiercely competitive industries. Look for companies that supply products to these industries or take advantage of technology produced by these industries. And, don't worry about perfect management---it's better to buy a company with mediocre management that can be easily managed than a company with excellent management that is extremely difficult to manage. The second case is more likely to fail. Dull, boring, disagreeable, depressing and negative-sounding rumors are good. Spinoffs are better than IPOs. The fewer analyists and the smaller institutional ownership, the better. It's easier to find an undervalued company in a no-growth industry (e.g. death-care) than one in a high-growth industry (e.g. technology, health care). The bigger the wall separating it from competitors, the better; rock pits have an extremely local monopoly since hauling is so expensive relative to the cost of the material, that only an idiot would try to compete with you! It's better when the consumer is compelled to buy repeatedly (e.g. coffee, advice, toy store). The fact that insiders are buying is a good sign, but insider selling tells you nothing (since it could be for a huge variety of reasons). It's a good sign when the company is buying back shares. Avoid companies that make poor acquisitions. Avoid companies that have more than a quarter of their sales tied up in a single customer (this gives the customer too much pricing power). Each stock you buy should have a story (2-minute drill) explaining why it is an excellent company and why the stock will appreciate. Once the stock/company no longer has a good story, sell. Don't buy a fast grower until the concept has been proven; i.e. make sure that cloning will work, that the fast growth will really be successful. There are two types of debt, (1) bank debt, and (2) funded debt. Bank debt is bad because it can be "due-on-call," which means that the debt owner can ask the company to "pay up" at any time. For a company with struggling financials, this can be the trigger that sends the ship to bankrupcy. Funded debt is much nicer. There is a specified due date and as long as the company continues paying interest, the debt can't be "called." A company with excellent margins is great at the top of a cycle, since earnings won't drop that much during a recession; a company with poor margins is great at the bottom of a cycle, since earnings will skyrocket during the turnaround as margins improve. You should own as many stocks as there are situations in which you've got an advantage.
  11/28/05 - Now that SSNC is de-listed, it appears that it is impossible to get historical price quotes for SSNC. This means I may have to find a better source of historical quotes for my PFAT software.
  11/28/05 - SSNC buyout completed. Nice that no commission is charged. Just $37.25/share added to my cash account. Used half of the money to establish a position in EXBD (another one of Tom's top stocks in his 6 month review). Saving the rest for the December purchase.
  11/22/05 - SSNC will complete the buyout/merger tomorrow. Once I get the money, I should use it to buy EXBD and save the remainder for future purchases.
  11/18/05 - Ended up buying QSII and AMHC for prices less than 101% of the recommendation price, so I can't complain too much. But, I should definitely use a limit order at the last ask price in the future to avoid unnecessary stress.
  11/18/05 - Welp. Tried to buy QSII and AMHC using limit orders slightly below the current price. Worst case scenario happened: no ask orders came in at or below my price, so the orders didn't execute. If I'm going to place a limit order where I really want to buy the stock, I should make the limit price the last ask price. This should nearly guarantee execution of the order.
  11/17/05 - Deposited enough cash to make two purchases tomorrow.
  11/16/05 - Sold MCIP at $19.76, a bit below merger price. But, I'd rather have the money now to invest rather than having it sit, effectively earning money market interest. I'm amazed at the price I got. I had a limit order placed for $19.74 and 2 seconds AMO, my order executed for all shares at $19.76. The amazing part is that I got the highest price of the day and I might have been part of the only transaction that executed at that price---all of the 5-minute charts show no price outside of a $19.72-$19.68 range. Limit orders are the way to go for all but the most time-sensitive transactions.
  10/31/05 - MCIP merger consideration should be at least $20.19/share ($20.40 worth of VZ minus bankrupcy claims & liabilities of up to $.21). Worth selling if MCIP hits $20.20 or if I have a better place for the money. I.e. don't wait for the merger to happen. But, wait 'till 11/10/05 (one year from purchase) to place a limit order. Don't sell SSNC (take the $37.25 cash from the merger so that I don't pay a sales commission). Keep SAFM.
  10/24/05 - Bought BBBY. Had enough cash to fund the buy & SSNC is off the buyout price, so I didn't sell SSNC. Buyout is supposed to close sometime in Q4, so I might-as-well just wait for the buyout. But, it's okay for me to sell if I need the cash for to buy a Tom recommendation.
  10/11/05 - Kai and I were discussing GOOG. I think it might be undervalued; Kai wouldn't touch it with a 10-foot pole. I noticed that GOOG has had ROE of 50% and 40% the last two quarters (Q income times 4 divided by last Q's equity). I mistakenly thought (previously) that GOOG wasn't focused on making money, but I don't think you can achieve ROEs like that without being very careful about monetary outlays. Even though GOOG has a valuation appx. 60x owner's earnings, if ROE stays near current levels, FCF/Income will close in on 1/10th very quickly; if 40% ROE continues, FCF/Income will be $4759M by 2008, $6966M by 2009. However, "equity" is simply assets-liabilities. What I really want to know is "return on total monies invested in the company." What's a good way to calculate that?
  10/11/05 - Discovered F via a mention in a discussion Kai and I were having about Ford bonds. Though F has $200B in debt, it also has outstanding FCF---over $10B for each of the past 3 years. And, yet, it's market cap is a mere $16B. Kai recently purchased F bonds that are yielding 10+% (I guess b/c people think that the company is going bankrupt). Looks like a very solid company to me (at first glance). Might be worth a closer look & even an investment.
  10/11/05 - My GeoIndex.
  10/06/05 - Finding the total valuation of all companies on the market. I can calculate the total market capitalization of the market using VTSMX. VTSMX's top holding is XOM, at 2.63% of total assets (as of March 31, 2005). Since VTSMX's proportions are the same as the total market, XOM represented 2.63% of the total market capitalization on March 31st. March 31st, XOM stock closed at $59.60 and there were 6,336 million shares outstanding. Thus, XOM's market cap was $379,413 million. Hence, the total market's capitalization was 379413/.0263 = $14,426 billion, or about $14.4 trillion. Similarly, VLO made up 0.94% of VIMSX and closed at 73.27 on March 31st with 256.732 million shares outstanding. Thus, the capitalization of the "mid-cap" portion of the market was $2,001 billion or about $2 trillion. Finally, CNX made up 0.28% of NAESX and closed at 47.02 on March 31st with 91.310 million shares outstanding. Thus, the market capitalization of the "small-cap" portion of the market was $1,533 billion or about $1.5 trillion. Hence, the "large-cap" portion of the market makes up about $10,892 billion or $10.9 trillion. So, for gauging how VTSMX will be affected according to the individual marked indices, the weighting should be about 75%, 15%, 10% (large, mid, small).
  9/30/05 - The American Association of Individual Investors published an article critiquing the Motley Fool Foolish 8 criteria for selecting small- and mid-cap companies. Turns out the Foolish 8 does quite well compared to the market at-large. AAII does a nice job of tracking performance of a large number of different stock screens.
  9/19/05 - Bought FDO. Weirdness with Scottrade. I place a limit order at the Friday close price. After waiting for an hour or so, decided to cancel the limit and place a market order. But, the order wouldn't cancel. After a few hours, I called Scottrade. Turned out they were having issues. Eventually, it all worked out and I got the stock at a discount to Tom's purchase price.
  8/24/05 - Bought AMHC at a 5% premium to Tom's recommendation price (grrr...)
  7/19/05 - Sold HYC per Tom's recommendation. Bought RECN.
  6/23/05 - Sold PACR, bought PCAR. Fortunately, the prices of the two stocks followed similar paths, so I mostly just lost the $14.04 of extra commissions...
  6/20/05 - Realized that I bought the wrong stock(!) Tom recommended PCAR, not PACR. Have to wait three days for PACR buy to settle before I'm allowed to sell.
  6/20/05 - Sold part of KSWS holdings. Bought $1000 of PACR.
  6/3/05 - I should follow a Tom sell recommendation if it will help me purchase a Tom buy recommendation.
  5/25/05 - Tom issued a sell recommendation for HYC. I decided not to sell. Although HYC is hardly a perfect company, I think it has an excellent chance of rebounding and I think the stock is somewhat undervalued. In particular, revenues are growing and the company has fairly strong cash flow. In the most recent quarter (Q1 2005), they produced $4,536k of free cash flow (net cash provided by operating activities - purchase of property/plant/equipment - software development costs capitalized). This compares to a slightly negative FCF from a year ago (-$154k in Q1 2004). Also, revenue grew 10% from a year ago.
  5/23/05 - Rules for following Tom's advice: (1) if at all possible, I must buy $1k of the monthly recommendation; (2) if additional money is available, I may either (a) purchase more of the recommendation, (b) select one of Tom's top pick from his last 6-month review, (c) purchase a recommendation from the last 12 months that I missed, or (d) save the money for next month; (3) I must try to ensure that I have money available for the next recommendation; (4) I do not have to listen to Tom's sell recommendations (I should make my own judgement call).
  5/23/05 - Bought CDWC per Tom's recommendation.
  5/14/05 - SAFM has shown increased SG&A expenses and increased capital expenditures. The 2005 Q1 10-Q report indicates that these are both due to "the start up of the new poultry processing complex in south Georgia which the Company expects will begin operations during the fourth quarter of fiscal 2005." The report also says "the Company expects to realize savings of between $60.0 million and $65.0 million during fiscal 2005 as compared to fiscal 2004" due to lower prices for feed grains. A nice thing about SAFM is that their reports are relatively straightforward and clear.
  5/11/05 - Another reason to not sell KSWS: a discounted cash flow (DCF) analysis says it is currently undervalued by 56%.
  5/4/05 - Do not sell KSWS, unless for a very good reason. KSWS is buying back shares, improving margins, reducing expenses. Only flaw in Q1 '05 report was very low cash flow (around $2k). However, the people running the company own little stock and have been selling lots of options lately.
  5/3/05 - Rule change: When I sell, I don't have to sell everything I own, if the money is put toward a newsletter recommendation.
  5/3/05 - New rule: After the initial purchase of a security, I'm only allowed to make one additional purchase (beyond what Tom recommends).
  5/3/05 - Sold NLY and bought TTMI. NLY is a great company, but I think I can get better returns elsewhere. TTMI is a Motley Fool newsletter recommendation from a while back. Priced dropped to what I think is a ridiculously low level after the chairman of the board left and CSFB downgraded its recommendation. They say management is guiding lower due to weak demand. But, TTMI is currently priced as a no-growth company. Free cash flow is growing and was $33m in 2004. I bought at $7.91 or $325m market cap, so P/FCF of 10. Also, Royce funds held 11.3% of the stock as of 12/2004. I think it's a good long-term bet. May take a few years to pan-out, though.
  4/21/05 - Bought BWA. They appear to be well run. Financial statements are clear, they're growing but priced as a no-growth company (P/E and P/FCF around 12). Margins have been slowing a bit, but management thinks this will reverse in 2005.
  4/20/05 - Both POSS and BWA look like good candidates for new money. POSS has been smacked-around by the market, but is a well-run company at a low valuation. BWA is also well run, has seen steady growth and is valued as a no-growth company. AMG also looks like a growing, inexpensive buy.
  4/18/05 - Bought CDWC per Tom's recommendation. CDW is a web retailer of computers and computer parts. They've been around more than 10 years and have shown continuous growth. They mainly sell to small businesses and focus on customer service. Reasonably valued for a growing company with a solid history: P/E and P/FCF both around 20.
  4/8/05 - Old rule: all stock must be held for at least one year. Besides the tax advantage for gains, this will encourage me to thoroughly investigate a stock before buying.
  4/8/05 - New rule: I am not allowed to make a purchase of less than 1/20th of my total portfolio value. Also, when I sell any stock in a company, I must sell it all. This will force me to concentrate on my best stock ideas.
  4/7/05 - Bought AWGI, CORI and SLAB. SLAB is a triple recommendation of Tom's. I've done my own analysis and I also think it's a very good value at the current price ($1.5B). Both P/E and P/FCF are about 20 and the company is growing very quickly, 40% in '04, 100% in '03. Unless they hit a brick wall in terms of growth, I can't see the stock doing any worse than a P/E of 20 for the near future. AWGI was mentioned in Motley Fool marketing material. The company went through bankrupcy in 1999. They are not a growth company, but I think they are significantly undervalued at the current price ($500M). They recently made the smart move of incurring one-time expenses to refinance and reduce their long-term debt. They went from $360M @ 12.25% (2003) to $200M @ 7.75% (2004). They used proceeds from asset sales to reduce the debt amount. And, they have great FCF. For 2003, they produced $137M from continuing operations and used $25M for property/equipment. For 2004, they produced $103M from continuing operations and used $37M for prop/equip. My educated guess is that they can easily produce $75M-$100M/year or more in FCF, especially considering that their interest payments will be much lower. Should double in price in a year or two once income aligns with FCF. I read about CORI in this Motley Fool article. They are a small ($130M) company that produces software for financial institutions such as banks. Number of outstanding shares is increasing slowly (4% increase for 2004). P/E and P/FCF are 12 and 10.5, respectively. Valuation is for a no-growth company, but they seem likely to grow significantly in the future. Increases for 2004: 10% revenue, 26% gross profit, 15% FCF. They were losing money as recently as '02.
  
  Last modified: Thu Nov 8 13:40:09 EST 2007
  
  Cash + CE $34,616k
  
  LT Debt $10,917k
  
  Net Cash $23,699k

Cash + CE	$34,616k
LT Debt	$10,917k
Net Cash	$23,699k