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How I Analyze Stocks or, How I Invest Mark Greenberg 1/25/11

How I Analyze Stocks or, How I Invest Mark Greenberg 1/25/11 . Investment management Seminar markgreenbergdenver@comcast.net. Lots of things to learn . What the company does Industry analysis Accounting Statistics Domestic and foreign economies Government regulations

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How I Analyze Stocks or, How I Invest Mark Greenberg 1/25/11

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  1. How I Analyze Stocksor, How I InvestMark Greenberg 1/25/11 Investment management Seminar markgreenbergdenver@comcast.net

  2. Lots of things to learn What the company does Industry analysis Accounting Statistics Domestic and foreign economies Government regulations Some of my rules to live by

  3. First rule, all estimates and forecasts are wrong. Company analysis: What does the company do? Where do they make their money? Where does the growth come from? How good a business is it?, what is the competitive picture? (leave valuation for later)

  4. . 80/20 rule applies to most things in investing. Worry about the part of the company where they make most of their money. You can’t know where you are going until you know where you have been, so its time for some work: Read 10 years of annual reports, 10ks, 10qs, offering documents. Read company web sites. Look at their job postings. Read conference call transcripts, investor presentations.

  5. What did company, industry people expect and what happened? Study financials: revenues, earnings, cash flow, balance sheet, write-offs, changes in reporting methods, changes in accounting standards. Study the notes in the back

  6. How to keep organized: Take notes as you go along. Use a yellow legal pad, draw a line down the middle, and write positives on the left and negatives on the right. Highlight any questions or things you don’t understand.

  7. Industry and competitor analysis: Have to know the competitors, suppliers, customers. Read the trade press. Key question: Why do people buy the product? Why do they buy the competitor’s product?

  8. Key questions: Where is the company going in 3-5 years and how are they going to get there? What will get better or worse? Rate the company and its competitors

  9. Domestic, international, global analysis Coke makes 20% of its profits in the US. Chipotle makes 100% in the US. For global companies, you have to understand the business by region.

  10. Make financial projections Why are margins going to get better or worse? Can they fund the growth? Quality of earnings issues, such as receivables growing faster than revenues, inventory growth faster or slower than sales growth. Understand what Free Cash Flow is. Income adjusted for dividends, depreciation, need for capital, acquisitions. Never as much as you think.

  11. Know what you can and can’t analyze You can’t really analyze financial companies and you can’t understand off-balance sheet operations. GE, Merrill Lynch, Bear Stearns, Lehman, Bank of America. Bank of America not breaking out Merrill businesses so you can’t do apples to apples comparisons.

  12. * Regression to the mean. High margins will come down but low margins don’t have to go up. Accounting is easily fudge-able. Valuation: After you have done all your work then decide what it is worth. P/E, P/CF, P/FCF, Price to Sales. Current, and compared to historical figures and to competitors.

  13. Questions to think about If the CEO walked in this room right now what 5 questions would you ask? If the Board or the company executives asked you to make a presentation, what advice would you give?

  14. Important topics Not just what you think, but what others think too. What are analyst projections? Valuation is key. A great company at a bad price is a bad investment. Keynes’ beauty contest. You will be wrong. GIGO You have to buy what others don’t like and sell what they say is great. Think about what can go wrong and what can go right.

  15. More topics Don’t trade. Look out 3-5 years. Almost no one else is doing that. Has management succeeded in the past? Do you “trust” management to do the “right” thing? These judgments are all difficult. Understand the difference between precision and accuracy.

  16. Still more points You don’t need much math but you do need to understand the relationship between the financial statements, i.e. if there is FCF then interest expense should start going down. 90% of the stocks you look at you won’t want to buy or sell. Think about, if things go wrong, what happens to the stock. i.e. if the underwear bomber blew up the plane last xmas, what would travel stocks do? If oil goes to >$100, how good or bad is it for the company?

  17. Things don’t always make sense, and maybe they won’t ever make sense. Country A-Public debt is 200% of GDP, GDP growing at 1-2%, and 10 year bonds at 1.25% Country B-Public debt is 60% of GDP, GDP growing at 3-4%, and 10 year bonds at 3.4% Who are these countries? Remember, markets can remain irrational longer than you can stay solvent.

  18. On the job Be honest. Tell your boss what you think, buy or sell Tell your boss what part of the analysis you don’t really understand. Look for ideas and give them to the boss. Be assertive. Be honest. If you think something is wrong then don’t do it.

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