Value Investing

[reddog3]

What information is David Dreman, Author of Contrarian Investment Strategies Dreman Value Mgt buys 533K Novation Companies Inc. $NOVC common shares & Goldman Sachs buys 360K Novation Companies Inc. $NOVC common and Blackrock buys 260K Novation Companies Inc. $NOVC common all after $NOVC Board trick the SEC Rule 15c2-11 which stops bid/ask and SEC Filings any news. Why are these whale size investors BUYING millions of a sub-Penny Stock Novation Companies Inc. $NOVC common shares?

What news is Goldman Sachs, Blackrock, David Dreman, Putnam Investments using to BUY millions of Novation $NOVC shares? $NOVC Board triggers SEC Rule 15c2-11 which STOPs both public SEC Filings & Retail Bid/Ask but still allows expert investors aka hedge funds to Trade $NOVC Common Shares off no retail information!

Here is why I believe powerful whale-size investors, many related to $NOVC Board or controlling investors, are buying a sub- penny stock $NOVC off non-retail information courtesy of SEC https://www.marketscreener.com/quote/stock/NOVATION-COMPANIES-INC-120787360/company/

I have confirmed my thesis with both Saxon Capital $SAX ex-CEO Michael Sawyer & Jason Stewart the MREIT Director at www.jonestrading.com (ranked by TipRanks) formerly MREIT Research Director at FBR Friedman, Billings and Ramsey now EJF Capital www.ejfcap.com that investors that control $NOVC Board, $NOVC only Sr Debt to exit Ch 11 and 116M Common Shares Outstanding will not waste Novation Companies Inc. $NOVC $730M NOLs or Rights CCR defined by Section 5.04 of Service Rights Transfer Agreement, SRTA see Exhibit 2.1 of 10Q filed for Q3 2007. $NOVC Board restructured Dynex Capital $DX NYSE tax-exempt MREIT with Fortress. Now Fortress/EJF Capital/Mass Mutual & sub-Barings/Jefferies & White Mountains Capital $WTM are these investors.

Mr. Sawyer and Mr. Stewart both know these investors above and agree they are some of the greatest MREIT Market Makers of all time, specifically Fortress/EJF Capital. Wesley Edens x Blackrock, Lehman Bros/Peter Briger x Goldman Sachs Sr Partner, Co-CEOs of Fortress and Neal Wilson Manny Friedman Co-CEOs of EJF Capital formerly FBR. I shared my thesis regarding what I believe to be the true restructuring of $NOVC balance sheet and capital table. They separately agreed with the concept that $NOVC can break into 2 tax-free companies by spin-out their prior tax-exempt MREIT Novastar Financial Inc. NYSE $NFI which holds CCR cleanup call rights, that can be monetized into MREIT Dividend. The SRTA is P&S between $NOVC & $SAX for sale of MSR mortgage servicing rights, which allowed only $NOVC to retain these CCR rights that control the future use of billions in rich/seasoned collateral assets ideal to be leveraged/securitized into a tax-exempt MREIT dividend & external management fee EMF for Fortress.

Fortress cashed every year over $150M EMF at $RITM aka $NRZ until months ago when Fortress triggered a $400M termination fee. $NOVC Board and Boulay Group a top 100 CPA firm per #AICPA, paid well into 6 figures to audit/certify $NOVC 10Ks fail to disclose this in SEC filings. Fortress/EJF Capital are the 2 top MREIT Market Makers and their ownership of 100% of NOVC only Sr Debt & 27% of all $NOVC common shares are hidden behind CDOs Taberna I & II/Kodiak CDO I which they paid almost nothing to own via CDO Service Rights.

Fortress led the restructuring of Newcastle Investment Corp $NCT now traded Drive Shack $DS which retained all of the $160M NOLs as the 3 MREITs they spun out are already tax-exempt per IRC. Newcastle Investment Corp’s previous symbol $NCT became Drive Shack $DS and 3 tax-exempt MREITs were spin-out including $RITM x $NRZ, $SNR New Senior sold for $2.3B & $GCI formerly New Media X $NEWM. If they copy this restructuring blueprint at $NOVC they make BILLIONS and create an annual cash flow of hundreds of millions in dividends and EMF every year out of a sub-penny stock, not filing SEC documents or providing a retail bid/ask the courtesy of SEC Rule 15c2-11.

Evidence shows $NOVC Board of Directors; Barry Igdaloff & Howard Amster both made a mint restructuring Dynex Capital NYSE $DX with Fortress assistance. Both DX and SAX were MREIT spun out of the same public company based in Glen Allen, VA. Manny Friedman, Neal Wilson, Co-CEOs at EJF Capital were the book runners for both SAX and DX. Board has been working closely with investors Chuck Gillman/Jeff Eberwein, Fortress co CEOs Wesley Edens, Peter Briger, EJF Capital Co-CEOs Manny Friedman, Neal Wilson, Barings and Mass Mutual William Bill Wallis, x Barings CEO/Chief Investment Officer of MassMutual Thomas Finke, ex CEO/COB of Dynex Capital NYSE $DX, ex Board Member at IMH and major shareholder of $NOVC, Thomas Akin, President of Jefferies Brian Friedman, CEO of Jefferies Rich Handler, and Frank Bazos of White Mountains Capital. This is the thesis why related experienced HF investors own almost all $NOVC common, all $NOVC only Sr Debt to exit Ch 11 and control the Board of Directors.

This is the thesis explaining why whale-size investors many related to $NOVC controlling investors are BUYING millions of $NOVC common at sub-penny prices https://www.marketscreener.com/quote/stock/NOVATION-COMPANIES-INC-120787360/company/

[EF5$tocks]

$SSNT Nasdaq play with excellent long-term potential. Just 4.5M O/S, history of spikes to $10+

3Q Earnings were EXCELLENT last week. $10M in sales, little to no debt.

https://www.nasdaq.com/market-activity/stocks/ssnt/earnings

On watch for pop soon, long hold for me.

[Solar_Express]

Saw your post over on the Foxxconn board 2 to look at:

1) INSG 5G Player NASDAQ

INSG News: Vodafone Qatar Premieres the Region’s First 5G MiFi® Mobile Hotspot from Inseego (see I-Hub)

INSG News: Inseego’s 5G MiFi® M1000 Mobile Hotspot Named Mobile Broadband Solution of the Year

------------------------------------------------------------------

2) QTMM Quantum Dot Manufacturer OTC QB

https://www.quantummaterialscorp.com/

I box:
https://investorshub.advfn.com/boards/show_ibox.aspx?boardid=15185


Quantum Materials Corp (QMC) develops and manufactures quantum dots and nanomaterials for use in display, solar energy and lighting applications through its proprietary high-volume continuous flow production process. Combined with its proprietary blockchain technology, QMC’s unique quantum dots are also used in anti-counterfeit applications.

Nano Magazine: Combining Blockchain and Nanotechnology to Fight Criminal Counterfeiters and Build Brand Trust
Article by CEO Stephen Squires: Blockchain can be applied to many different business areas like finance, healthcare, identity and supply chain.

https://nano-magazine.com/news/2019/10/28/combining-blockchain-and-nanotechnology-to-fight-criminal-counterfeiters-and-build-brand-trust

October 2019 Quantum Materials Corp Provides Update on Expansion of Tech City in Assam, India
Construction of Expanded Facility Continues; QD Production to Commence in Q1
Annual Projected QD Volumes to Exceed Original Expectations

http://www.globenewswire.com/news-release/2019/10/24/1935154/0/en/Quantum-Materials-Corp-Provides-Update-on-Expansion-of-Tech-City-in-Assam-India.html

UP-Coming LT Nice Board

[MarketGeometry]

[MarketGeometry]

DOW JONES

[MarketGeometry]

FB WEEKLY CHART ANALYSIS

[~ Blue ~]

CBRX >>>

[MarketGeometry]

AAPL

[MarketGeometry]

FOCPX

[MarketGeometry]

NVDA TA

[MarketGeometry]

TSLA TA

[MarketGeometry]

GOOG TA

[MarketGeometry]

AAPL

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=83047886

[MarketGeometry]

test

[MarketGeometry]

[MarketGeometry]

EXM

[MarketGeometry]

NASDAQ

[MarketGeometry]

GOLD

[MarketGeometry]

thanks for visiting. If you need chart analysis let me know.

[DITRstocks]

Very nice board here. I appreciate the ENTB chart.

[MarketGeometry]

GOOG

[MarketGeometry]

AAPL

[MarketGeometry]

http://finance.yahoo.com/news/forbes-magazine-ranks-ebix-6th-113000768.html

[MarketGeometry]

Chart:
Intrinsic Value $77.02
Current Share Price $19.99
Analysis Undervalued

If we assume initial earnings of $71.4M grow at a rate of 20.00%, and we discount those future earnings at a rate of 15.00%, we arrive at a net present value for the company's next 10 years of earnings of $909.07 million. To account for potential earnings beyond the 10th year, we estimate a growth rate of 6.00%, a discount rate of 12.00%, and we arrive at a continuing value of $1.93 billion. To complete the calculation we add these two figures together, subtract the long-term debt for EBIX ($31.80 million), and divide by the outstanding shares (36.5 million) to get a per share intrinsic value of $77.02



Annual Rates (per share) 10 yrs 5 yrs 12 months

Revenue Growth (%) 24.6 32 19.5

EBITDA Growth (%) 53 43.1 24.9

Free Cash Flow Growth (%) 0 72.2 34.4

Book Value Growth (%) 49.3 52.1 30

P/E 11.97 P/B 2.17 P/S 4.31 Market Cap $729 Mi
l

[MarketGeometry]

EBIX, Undervalued 6th fast growing company in USA

http://www.ebix.com/pdf/EBIX%20Investor%20Presentation%20web.pdf

[MarketGeometry]

http://www.tradingeconomics.com/switzerland/government-bond-yield

[jim1234]

thank you again

[MarketGeometry]

Well I was stating the obvious. Some people would have lost more money. The company is all hype.

[jim1234]

market geometry. sndy

since your post to me on sunday sndy is down. 50 percent to
0118. they were all angry at u last week on the sndy bd for being negative. but u were right

[jim1234]

cbis. market geometry

another hyped stock like sndy?

[MarketGeometry]

there are also paid promotion.

http://newsletter.hotstocked.com/promoters/view/Hot-Shot-Stocks-5

just google sndy and paid promotion. So once the hype is over and volume is lost it can get dumped.

[jim1234]

MarketGeometry SNDY THANK YOU

Yes I got concerned when I was reading that Groups own x percentage of the float.

[MarketGeometry]

Because some groups openly claim they control large blocks. If you read the filing they have continous loss and raising money selling shares. Some are touting its going to 10 cents, 1 dollar or $5. Clearly not. You can trade it but people who bought it at pennys and sub-pennnies are pumping it. If you try to point out they only have 6K in the bank did 3 Reverse splits and recently diluted your post get deleted etc. What i am saying it is okay to trade it for short term(using charts). Don't fall for the hype that its going to dimes and dollars. Fundamentals are not showing any indication. They have almost 7 million of deficit (cumulative). Insiders and High flier group who control large block will just dump it when its convinient. They may have a product but so does all business. Main thing one should looks at when holding long-term is if they have been profitable in past or do they have any competitve advantage. What makes you think they will make profits going forward with ths same product they have not been profitable so far? Bcause endoscopic market has almost few hundrend competitors with better product. If this goes to dollar then thats a market cap of 400million+ . Plis all these financials are un-audited. Just take everything with grain of salt.

[jim1234]

MarketGeometry SNDY

I remember you from CHEMTURA CEMJQ

Why do you feel so STRONGLY that SNDY is a PUMP AND DUMP JOB
with groups controlling the shares?

I have been SMART trading SNDY so I am riding on free shares

Thanks

[MarketGeometry]

Get back to the basics with our Foolish back-to-school special! Start your journey here.

We talk about free cash flow a great deal around here, and with good reason. It is the gold standard by which to measure the profitability of a company's operations. Free cash flow is not perfect, but it is more difficult to manipulate than net income or earnings per share (more on this later). For this reason, it is also likely to be lumpier than net income.

Caveats aside, free cash flow gives an investor an idea of how heavy or light a company's business model is and how clearly it shows a company's ability to reward investors.

What is free cash flow?
Free cash flow is not "free" in the traditional sense of the word. A company can generate plenty of free cash flow, but it might not actually hand it out for free -- companies do have to reinvest in their businesses to generate free cash flow. That said, free cash flow is what a company has left over at the end of the year -- or quarter -- after paying all its employees' salaries, its bills, its interest on debt, and its taxes, and after making capital expenditures to expand the business.

A real-life example
Free cash flow is unbelievably easy to calculate, and both of the pieces you need to make the calculation can be found on the statement of cash flows. Every company files this statement in its 10-Q and 10-K filings with the Securities and Exchange Commission, and in its annual reports. The formula is as follows:

Cash flow from operations - capital expenditures = free cash flow
You can see the math below. I have used Motley Fool Income Investor pick Constellation Energy Group (NYSE: CEG) as an example.

Free Cash Flow
FY 2006
FY 2005
FY 2004
Cash flow from operations
$525,300
$627,200
$1,086,800
- Capital expenditures
($962,900)
($760,000)
($703,600)
= Free cash flow
($437,600)
($132,800)
$383,200
Figures in thousands. Data provided by Capital IQ, a division of Standard & Poor's.
In its most basic form -- and sometimes that is all that's necessary -- that is a free cash flow calculation. You can make the calculation more sophisticated by backing out one-time items and removing any benefits a company is receiving from stock options and counting as an operational benefit. (Hint: They're not operational.) But starting with the most basic calculation and looking over a period of four to five years will give you a good idea of how well a business has performed.

It's what you do with it that counts
As great as it is to find a company with strong free cash flow, the metric itself really lets you peer into only the operational profitability of a business. What a company does with its free cash flow is just as important as whether it exists in the first place. Companies that simply hoard their cash or spend it aimlessly on acquisitions will likely do more harm than good to your portfolio. As an investor, you're much better served by looking for companies that take their free cash flow and put it toward share repurchases when their shares are below their intrinsic value, or better yet, toward a regular cash dividend. The beauty of being an income investor and receiving a cash dividend is not only that you get a guaranteed tangible return, but also that you have the option to reinvest the money received in more shares of the same business, or in another opportunity. The point is that you get to decide how the cash is allocated.

Just make sure that the company pays out a portion of its free cash flow as a dividend, but doesn't pay out more in dividends than it generates in free cash flow.

Foolish final words
As investors, we all want companies that generate or will eventually generate free cash flow. This is as true for currently unprofitable high-growth stories as it is for more mature companies. The only thing a stock price represents, after all, is the market's estimate of the future free cash flows that a business will generate.

[MarketGeometry]

Free cash flow
Free cash flow is the cash a company produces from its operations less the cost of expanding its asset base. It is essentially the money that the company could return to shareholders if the company was to grow no further.
Contents
1 Expanded Definition
1.1 Free Cash Flow vs. Net Income
1.2 Arguments for and against
1.3 More complicated ways to calculate
1.3.1 Free cash flow to the firm (FCFF)
1.3.2 Free cash flow to equity (FCFE)
2 Related Fool Articles
3 Related Community Blogs
4 Related Terms
5 Recent Mentions on Fool.com
Expanded Definition
The simplest way to calculate free cash flow (FCF) is by using the cash flow statement to get both the cash flow from operations and the capital expenditures. The former is the last number of the first section, while the latter is usually the first or second item in the following (financing) section.

One synonym for capital expenditures is "purchase of plant, property, & equipment." Even though this is a negative number, do not subtract the negative (net result of adding "capex" to cash from operations). FCF will always be smaller than cash from operations.
Because free cash flow is a non-GAAP financial measure, companies that use this metric are required to disclose how it is calculated.
Free Cash Flow vs. Net Income
Free cash flow is used by some instead of (or in conjunction with) net income as a measure of a company's profitability. As its name implies, free cash flow is calculated on a purely cash basis whereas net income is calculated on an accrual basis in accordance with generally accepted accounting principles(GAAP).
Let's take the treatment of capital expenditures to illustrate the difference between free cash flow and net income. Suppose a company has $1000 of net income every single year, before depreciation. One year, the company buys a truck for $1000 to help in deliveries. In the year of purchase, and assuming everything else came to zero, FCF for that year would be $1000 cash from operations (in this case, equal to net income) minus $1000 capital expenditure (the truck) equal to $0.
The truck will be depreciated over 4 years at $250 per year. So, for the next four years, net income would be only $750. Cash from operations, though, would be $1000 because depreciation is added back in. Capital expenditures would be zero. So for those 4 years, FCF is $1000.
For the 5 years of this example, here is how net income and FCF compare:
Year Net income FCF
1 $1000 $0
2 $ 750 $1000
3 $ 750 $1000
4 $ 750 $1000
5 $ 750 $1000
Total $4000 $4000
For free cash flow purposes, the amount paid on the truck is subtracted out as a capital expenditure in the first year. However, the cost of the truck is depreciated over its useful life for net income purposes. As you can see, over the long run, free cash flow and net income should roughly equal each other, but over the short term there will be timing differences.
Arguments for and against
Proponents of free cash flow argue that free cash flow is harder to manipulate than net income since it isn't subject to accounting shenanigans. However, free cash flow can also be manipulated by delaying items such as capital expenditures.
Another argument in favor is that it's possible to have positive net income but negative free cash flow. Without free cash flow (or financing), a company can't pay its bills and is in danger of bankruptcy.
An argument in favor of net income is that it's smoother than free cash flow. Since capital expenditures are frequently lumpy, free cash flow can often jump around from year to year. Of course, free cash flow and net income do not have to be an either/or proposition. They can be used in conjunction with each other to identify problem areas. By analyzing the differences between the two, investors can gain useful insights.
More complicated ways to calculate
Free cash flow to the firm (FCFF)
This measures how much cash is available for all claim holders in the firm (debt holders and share holders) after all taxes and needs for reinvestment have been met.
FCFF = EBIT(1 - tax rate) - CapEx + Depreciation - Change in non-cash working capital
This starts with operating profit and then subtracts tax so that it does not include the tax benefit from paying interest. In other words, this pretends that there is no interest expense or tax benefit from that interest expense.
Positive FCFF means that there is cash to either service debt (through interest payments or principal repayments) and / or service the equity holders (through dividends or share repurchases).
Negative FCFF means that the firm will have to raise more cash, either through issuing more debt or selling more equity.
Free cash flow to equity (FCFE)
This measures how much cash is available to equity holders (shareholders) after tax needs, debt needs, and growth needs have been met.
FCFE = Net income - CapEx + Depreciation - Change in NCWC - Debt repaid + Debt issued
Debt is a source of cash for equity holders, so this calculation includes that. When positive, it shows what can be paid out to equity holders (as a dividend or repurchased stock) without doing any damaging the firm's operations or growth opportunities. When negative, it implies that the firm must issue new equity to raise cash.

[MarketGeometry]

BSPM plant tour video

[MarketGeometry]

BSPM CFO AND CEO BUYS


Insider Transactions Reported - Last Two Years
Date Insider Shares Type Transaction Value*
Jun 16, 2011 WANG RONGHUA
Officer
13,800 Direct Purchase at $1.10 per share. 15,180
Jun 15, 2011 WANG RONGHUA
Officer
14,350 Direct Purchase at $1.19 per share. 17,076
Jun 14, 2011 WANG RONGHUA
Officer
35,100 Direct Purchase at $1.23 per share. 43,173
Jun 13, 2011 WANG RONGHUA
Officer
22,050 Direct Purchase at $1.24 per share. 27,342
Jun 10, 2011 WANG RONGHUA
Officer
19,700 Direct Purchase at $1.21 per share. 23,837
Jun 9, 2011 WANG RONGHUA
Officer
12,000 Direct Purchase at $1.22 per share. 14,640
Jun 8, 2011 WANG RONGHUA
Officer
34,600 Direct Purchase at $1.26 per share. 43,596
Jun 7, 2011 WANG RONGHUA
Officer
8,600 Direct Purchase at $1.25 per share. 10,750
Jun 6, 2011 WANG RONGHUA
Officer
10,300 Direct Purchase at $1.24 per share. 12,772
Jun 3, 2011 WANG RONGHUA
Officer
6,900 Direct Purchase at $1.27 per share. 8,763
Jun 2, 2011 WANG RONGHUA
Officer
12,200 Direct Purchase at $1.29 per share. 15,738
Jun 1, 2011 WANG RONGHUA
Officer
9,312 Direct Purchase at $1.30 - $1.38 per share. 12,0002
May 19, 2011 PAN ZIBING
Officer
30,000 Direct Purchase at $1.41 per share. 42,300
Data provided by EDGAR Online
* = Where indicated, some values are estimates.
1= Potential proceeds estimated by the filer.
2= Estimated based on the average of multiple prices reported.
3= Multiple dates reported. Most recent date shown.
Currency in USD.



All Major Holders - Insider Roster

[MarketGeometry]

BSPM Huge margin of safety ! and growth potential CGAR 60-70%

BSPM Trading below book VALUE!!!!!!!
http://www.biostarpharmaceuticals.com/upImgFile/2012111173629826.pdf
http://finance.yahoo.com/q/ks?s=BSPM+Key+Statistics

http://www.biostarpharmaceuticals.com/


INSIDER BUYS!!!!!!!!!

http://finance.yahoo.com/q/it?s=BSPM+Insider+Transactions

[ICEQUITY]

Today Globtrac (GBTR@.20) is up .05 (33.33%) on volume of 11,039... Any entry under .25 is a good one. After the 1:4 R/S GBTR will trade around $1 being VERY Liquid with a price over a dollar and 1.7M to 4.7M in the float... With Equities in control of 60% of issued and outstanding. - IMO

Good Luck & I hope you take this information to the bank!
ICEQUITY

GBTR R/M into Equities.com... ICEQUITY Year of the Dragon Pick! $GBTR
http://ih.advfn.com/videos/just-for-fun/catch-this-wave-gbtr-i-see-equity_EL19vw3P6QE

Globetrac (OTCBB:GBTR)
Last Price (USD) $ 0.20
Change up 0.05 (33.33%)
Volume 11,039

GBTR ICEQUITY 2012 PICK! After 1:4 R/S float will be 1.7M(min) to 4.7M(max) with Equities.com in control of at least 60% issued and outstanding... With a PPS @$1 + or -, will be a very liquid stock. But I'm in it for the long haul, my exit it point is when the site gets bought or the company gets sold.

In my opinion... 1% of Facebook's current value is not to unreasonable for Equities.com the First FREE Global Social Network for Self Directed Investors... That would put my exit price at $42.00 PPS for a $1 Billion Dollar Valuation! I'm allowed to dream... Ha!

Check it GBTR

My 2cents

If you like my last R/M + R/S play BSKS.... You will like GBTR even better! Well at least the float will be better the BSKS


Bluesky .05 to $7.80 in 60 days!

I See Equity in Equities.com R/M into GBTR w/ 1:4 R/S Coming to portfolios near you!
GlobeTrac Inc. Conducts Due Diligence on Equities.com, Inc.

[MarketGeometry]

Profiting From CapFlow: AAR, Microsoft
December 23, 2010 | includes: AIR, MSFT
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I previously had the opportunity to introduce my theory of Cumulative Owners Earnings (COE) and I used AAR Corp (AIR) for my analysis.

Now I would like to take my analysis to the next step and introduce my theory of CapFlow. Basically CapFlow is the name I have given to the ratio (Capital Expenditures/Cash Flow). CapFlow allows us to see how much capital spending a company must employ in relation to its cash flow, in order to grow the company . This is important because the lower the capital expenditures are, the greater the Owners Earnings (OE) are, as long as Cash Flow continues to grow. Since our ultimate goal is to grow Cumulative Owners Earnings at the fastest rate possible, an ideal situation would be to find a company that is growing its cash flow at a increasing rate while at the same time it is decreasing its capital spending or capital expenditures.

This theory is extremely useful as it is both a qualitative and quantitative ratio in that it acts as a laser beam into the inner workings of a company. Quite simply if a company is increasing its profits and doing so by spending less money, it should, in theory, outperform. When you can have such an occurrence for more than a few years in a row, then it clearly shows that you have a wonderful management in place, that know what they are doing. The following is the same table I put up in the previous post but with the inclusion of a new column called CapFlow;


In the previous post I showed that I was able to buy AAR Corp. for my clients at a 3/4 discount to its COE and at about 6.5 times its OE. But if you go to the table above (yellow part) you will notice the CapFlow percentage figures for AAR have been outstanding. At the same time Cash flow went from $0.58 cents a share in 2003 to $3.12 in 2009, which equates to a 32% average growth rate for those 6 years. At the same time, Capital Expenditures went from $0.31 in 2003 to $0.71 in 2009, which amounts to a growth rate of 14,8%. Therefore as a result, OE went from $0.27 in 2003 to $2.41 in 2009, for an average growth rate of 44% per year. The historical average CapFlow for AAR is 41%, so we came in at almost half that in 2009.

On Wall Street, Mr. Market priced AAR in 2003 at a low price of $3.8 which gave you a 0.25 price to COE, which was the steal of the century. The stock then proceeded to climb to $39.40 in 2007 and traded at 30 times its owners earnings. 30 is the target we like to use as our sell price. From $39.40 it fell to $9.70 in 2008 and again it ended up at 6 times its OE and 0.50 times its COE. So basically history has repeated itself. Had you bought it then, you would have seen the stock go up to a high price of $28.61. So as you can see Mr. Market is obviously ready for the rubber room as the company on Main Street had a stellar performance but on Wall Street was given a roller coaster ride.

During market panics opportunities arise and it is important to know what you own and what the true value of the company is. I do not like to hold stocks that are trading at 30 times their OE or more because the stock market is like a casino for most and when I have a large amount of profit and a stock hits my trigger, I do the smart thing and move on and wait for another day. This is not an exact science but selling at 30 times OE has saved me more times than hurt me.

If you look at the year 1999 in my Microsoft (MSFT) blog post, you will notice in that year that Microsoft had an owners earnings of $0.72 and was selling for $58.375, or 81 times its OE. At that price it was also selling for 21 times its COE, which is insane. Now we are some 12 years out and anyone who bought the stock in 1999 is still 50% down on it.

It was not Microsoft's fault but Mr. Market's. Microsoft has grown its business on Main Street at a 22.4% average annual growth rate of OE for the last 25 years, but unfortunately those who bought it for $58.375 a share in 1999 paid the equivalent of $500,000 for a Toyota (TM) Prius, but since they did not know the value of what they were buying they got taken. Only in the stock market and maybe the Real estate market do investors make these types of mistakes. No one in their right mind would pay $500,000 for a Prius, but in the stock market they do so every day. Buying an Index is no better, because when you buy the S&P 500 you are buying 500 stocks that you have no idea what the value of each is. But that's a story for another day.

Disclosure: Long AIR, MSFT No Position in TM

This article is tagged with: Long & Short Ideas, Long Ideas, United States
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Cash Is King In These Troubling Times, Part II Tue, Dec 20
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AIR VS. ETF ALTERNATIVES
ETFs TODAY 3 MTHS 1 YR YTD
XLI 0.9% 16.3% -2.1% -2.2%
UWM 0.8% 26.6% -17.9% -16.6%
AIR 0.6% 13.4% -29.4% -27.9%
PRFZ 0.4% 14.3% -6.7% -6.1%
RWJ 0.3% 18.8% -1.4% -0.1%
IPN 0.3% 2.5% -18.7% -19.5%
SLY 0.3% 17.5% -0.2% 0.8%
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Profiting From Cumulative Owners Earnings: AAR, Microsoft
5 comments | December 23, 2010 | includes: AIR, MSFT
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Today we are investigating a new concept that I have developed called “Cumulative Owners Earnings (COE).” Before I get into the details of how it works, I must first explain what Owners Earnings (OE) are. Further, I believe that both COE and OE are extremely powerful tools for analyzing companies on Main Street. From there, the data can be compared to the price offered per share on Wall Street by “Mr. Market” to see if a positive investment opportunity develops.

Owner’s Earnings is a concept that I learned from studying Warren Buffett. And rather than having me explain I will allow the great one to do so;

In his 1986 letter to Berkshire Hathaway (BRK.A) shareholders, Buffett defines “owners earnings” as:

(a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges… less (c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in (c). However, businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change.)
Our owner-earnings equation does not yield the deceptively precise figures provided by GAAP, since (c) since must be a guess – and one sometimes very difficult to make. Despite this problem, we consider the owner earnings figure, not the GAAP figure, to be the relevant item for valuation purposes – both for investors in buying stocks and for managers in buying entire businesses. We agree with Keynes’s observation: “I would rather be vaguely right than precisely wrong.”

In a nutshell, A+B = Net Income + Depreciation – C or Capital Spending = Owner’s Earnings. (All of those component numbers are usually readily available through Value Line and other sources.)

So to break it down even further, Cash Flow Per Share – Capital Spending Per Share = Owners Earnings.

Mr. Buffett also likes to judge his own company’s performance based on growth in Book Value (Assets-Liabilities) and every year he updates how much Berkshire Hathaway’s book value grew from the previous year. Book Value is an indicator that is measured over a long period and is a measure of value, as it measures the cumulative assets that are left over when all liabilities are removed and it gets updated cumulatively over time. The problem with book value though is that one can really never know what the assets of a firm are really worth and as was shown in the financial crisis of 2008, the assets of many banks were fictional, so it can be hit or miss depending on the company.

Another way to judge a company is by its earnings per share, but then again this is more of a short term barometer and very unstable. From earnings per share you can also develop Cash Flow (Net Income + Depreciation) but then again companies with huge cash flow don’t necessarily equal good investments, as was shown by General Motors (GM) over the last decade.

The best indicator that I have found that allows an analyst to be able to get to the bare bones of what a company is really up to, is to analyze its free cash flow per share and how it relates to its price on Wall Street. By doing so you can see how much a company is spending in capital expenditures to grow or even maintain its current numbers. The ideal companies are those that are able to grow their operations with minimal capital expenditures. Basically companies like Apple (AAPL) grow their owners earnings at scorching growth rates because they only require minimal investment to increase their earnings, by utilizing things like “Economies of Scale” (the bigger you are the more you can buy in bulk and the cheaper your costs are per unit). Companies that are able to produce monster free cash flow growth numbers usually do very well. But a big mistake can occur when most of the darlings of Wall Street are judged on a year to year basis instead of looking at the big picture by introducing history into the mix.

In developing COE I have attempted to introduce a new way to analyze whether a company has shown consistency over time, because I am not just a Quantitative Analyst (Benjamin Graham) but also a Qualitative Analyst (Phillip Fisher) and one of the hallmarks of Mr. Fisher’s analysis of companies was that they needed to establish a firm pattern of consistency and thus minimize surprises. To read more on Mr. Fisher you can go here.

So what is COE and how does it work? Basically what I have done is add up all the yearly reported owners earnings for a company and then totaled them. This is not easy to do as you need to go back to the historical records of a company and get the numbers. But since this data is not readily available, those who can get their hands on it, have the advantage. What I hope to do over the coming years (here on my blog) is analyze a company and publish my research to allow the small investor to do what I do, by giving them access to my original research.

To give you an example of what I mean here are 40 years of Owners Earnings for AAR Corp. (AIR):

[click images to enlarge]



As you can see from the data, AAR Corporation has been a very profitable company on Main Street for over 40 years and has never reported negative OE in any of those years. And if you total its 40 years of OE you get $23.82 cents a share as its COE. What does this $23.82 mean?

Basically the company over the last 40 years has generated $23.82 in OE per share and in 2009 generated $2.41 in OE per share. So with those two results we have two data points to base our analysis on instead of just analyzing AAR relative to its 2009 Price to Owners Earnings or Price to Free Cash Flow alone. I bought the stock for my clients on July 23, 2010 when it was selling for $16.54 a share because as you can see it was selling at that price for 6.86 times its OE and less than 1 times its COE. It is extremely difficult to find stocks that trade for less than their COE and at the same time have a Price to OE of less than 7, but when you find them and then notice that they have a very consistent track record, the odds are definitely in your favor.

The secret to all this is to have a strong price to OE with a strong price to COE. If you can locate such stocks, the odds are in your favor. Since July 23rd AAR has gone up and I have been able to make my clients a 68.56% gain on it. I am not saying that anyone using my theory on COE will have similar results and its current price of $27.88 it is still not overvalued, but is selling for more than its COE.

Nevertheless I feel that I have discovered something important here, because if you look at the standard boilerplate quantitative numbers that most analysts follow, nothing inspiring springs up about AAR that would explain such a large rise in its share price.

For example its return on equity is only 6.55% and it has a profit margin of just 3.38%, which is hardly inspiring. It also has debt of $11.68 a share, which is also considered bad because at the time I bought it its debt was equal to 70% of its market capitalization. Therefore when you have eliminated the impossible, whatever remains, no matter how improbable, must be the truth!

The truth obviously has to do with COE and OE. The reason I say this is that most investors invest in stocks with little or no research involved and fly by the seat of their pants when they make investing decisions. Therefore the cumulative effect of all these actions (fractal geometry) creates opportunities for those who actually know the true value of a company.

It is clear from the chart of AAR below, that COE is quite a powerful tool to use when you can also match it with a low current year Price to Owners Earnings as well.



Another example of my theories in real time testing can also be found in my analysis of Microsoft (MSFT).

In that analysis you will notice that the COE for Microsoft was $14.51 but the reason I bought it for my clients, can be seen from this section of the article;

Since Microsoft closed the books already for 2010 (their annual year ends June 30th) we can therefore look at their latest Value Line page and we get an owner’s earnings of $2.24 for 2010 and an estimate of $2.50 for 2011. Thus we have Microsoft earning $4.74 a share for those two combined years and if we add that to our $14.51 we get $19.25 in owner’s earnings from 1982 to 2011. Multiply that number by the 8.5 billion estimated year 2011 shares outstanding and we get a total owner’s earnings generation of $163.63 Billion in the last 29 years. You will also notice that the combined 2010 and 2011 estimate is equal to 32.67% of the previous 27 year owner’s earnings generation. So with Microsoft you have a stock that is trading at $25.10, or at 10 times its 2011 owner’s earnings estimate with a market capitalization of $213 billion. The company has generated $163.63 billion in owner’s earnings and is selling for $213 billion.

So as you can see anyone buying Microsoft, after reading my blog post, would have seen it go from $25.10, to its current price of $28.25 and would have achieved a 12.55% gain since October 19, 2010. The closer you get to 1 times a company’s COE, the better the odds are for making larger gains and if you are lucky enough to find stocks selling at a deep discount to their COE then you have a greater chance for truly superior results.

One of the drawbacks to this system is that you have to usually swim against the tide as most analysts using antiquated models may find nothing interesting in your stock picks. Also current high fliers like Netflix (NFLX) and Google (GOOG) can not be analyzed using COE as one usually needs 20 years of OE data to make an accurate judgment call. So with companies like that we need to analyze them more from a qualitative point of view, which can be identified in Philip Fishers “15 Points”.

Always remember when analyzing a company using this methodology, to make sure that you have a very low current year Price to OE, to go along with the COE. If a company is not doing well in the present then the past track record of COE will not help you. Eastman Kodak (EK) is a perfect example of this as its COE from 1973-2009 is $71.35, but unfortunately it only had OE per share for 2009 of just $0.15 and at $5.17 a share it trades at 35 times its price to OE, which is bad. So the system only works if you get excellent numbers for current OE and Historical COE. Otherwise you have a value trap. If just the opposite occurs where you have a great current OE and a terrible COE you have a potential growth trap on your hands. The farther away that you are of having the current OE and historical COE lining up the greater your risk is. So if nothing else this system could also be a great way to measure risk.

As I have mentioned above, I will start a long process of analyzing a vast multitude of companies here and show how my system works in real time.

Disclosure: Long MSFT, AIR, AAPL, GOOG, No Position in NFLX, EK

This article is tagged with: Long & Short Ideas, Long Ideas, United States
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Old TraderComments (5042)
Peter,

Can I assume that you've developed this relatively recently? I'll be curious to see how the results of your application work out. 23 Dec 2010, 08:36 PM1

[e-mail] (3)
Hi Peter,

Wouldn't COE for a dividend paying stock would always be overstated. Comparing Market Cap to COE without adjusting for dividends paid in all those years would render the exercise pointless.

Regards
Junaid 27 Dec 2010, 03:26 AM0

BarrytechComments (40)
I cannot understand how you can consistently use COE in any ratio when you don't first specify how many years you must go back in time. Clearly, a company with 50 years of COE will outshine another company with 'only' 20 years, all else being equal.
For instance, comparing the COE with the current share price as you have done doesn't sound logical to me, especially when the number of years is variable. 24 Jan, 05:17 PM0

Mcase003Comments (2)
This is some of the research I have been waiting for. Very insightful, and well thought out process. I am a huge follower of Phillip Fisher, and am going to do my own due diligence on your process and overlap that with some metrics I use. I am a recent college graduate and just started with a research firm, but would love to be a part of the Mycroft team. Sounds like groundbreaking material, thanks again for sharing. 2 Feb, 10:31 AM0

ERIKWJComments (9)
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. 20 Apr, 06:19 AM1
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How to Use Leveraged Free Cash Flow to Analyze Stocks
52 comments | February 14, 2011 | includes: CRM, CSCO, GOOG, JNPR, MSFT, NEM, NFLX, SIRI
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Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.

Since introducing my research system to Seeking Alpha’s readership, I have gotten a lot of positive feedback. Many have asked me how they can get access to the data I use to analyze stocks. I have already taught everyone how to use my Statistical Indicator Analysis (SIA) here:

So one of my four methods of analyzing stocks can be easily emulated and I even provide a free spreadsheet, for anyone who wants to try it on their own.

Unfortunately, this analysis requires that one have historical cash flow and capital expenditure data going back at least 20 years, which is not available to the average investor, as I had to create my own proprietary database from scratch. Over time I will continue to write articles on individual stocks and release my data one stock at a time, but since I am an Investment Advisor, I reserve my proprietary database, strictly to use for picking stocks for my clients.

What I will do though is give you a “back of the envelope” method, which is nowhere as complete as my system is, but nevertheless can assist the individual investor to analyze a stock in a little over a minute and with this one calculation, investors can go a long way in protecting themselves from making mistakes. It can also allow the individual investor to quickly review the portfolios of their own investment advisors or stock brokers and see if they are investing their assets properly for them. Again this is just a short cut, back of the envelope calculation but can go a long way in helping the individual investor preserve their capital and reduce the risk of overpaying.

So here it is:

Levered Free Cash Flow = Cash Flow from Operations – Capital Expenditures

The Levered Free Cash Flow shows you the amount of cash available to pay shareholders after it has paid its debt. It can be a very important figure.

The formula looks like this

(Cash flow from operations) – (Capital expenditures)

This number is very important because unlike earnings or income statements, which can be easily tweaked, it is very hard to manipulate cash flow. It is also important because the amount of cash a company has after paying its bills can be used to help make shareholders money. For example, a company can use earnings to reinvest in the company and/or to give out money to shareholders as dividends. If a company does have a high levered free cash flow it is best to find one that pays out dividends as well as reinvests in itself. You do not want to invest in a company that has lots of cash flow but foolishly spends it.

For those of you who have been following my work on Seeking Alpha, you will notice that the Levered Free Cash Flow ratio is just another name for Warren Buffett’s “Owner Earnings” formula, which is Cash Flow from Operations – Capital Expenditures. That same formula is the basis of my Price to Owner Earnings (P/OE) formula that I use in my writings.

Now for the good news!

Yahoo Finance, besides being kind enough to provide us with historical price action for stocks, also provides us with Levered Free Cash Flow for thousands of companies and it’s free for anyone to use.

All you need to do is go to this page:

(Please bookmark it as it will be your main page for this analysis from now on)

In about a minute you can do a “back of the envelope” quick calculation of Apple (AAPL) and know where you stand.

Let us Begin:

On that page if you go to the very bottom of the table you will see under Cash Flow Statement:

Levered Free Cash Flow (TTM) = $13.88

This basically means that over the last trailing twelve months that Apple has generated $13.88 Billion in Owner Earnings or Levered Free Cash Flow. So we now have that number, but how does it help us?

Well the next step is to move to the right of the table where you will find under “Share Statistics” the number for Shares Outstanding. Apple’s shares outstanding (TTM) = 921.8 million.

Therefore we have all the data we need and the calculation becomes an easy one;

$13880/921 = $15.07 per share.

So we then take Apple’s 2/11/2011 closing price of $356.85 and divide that by $15.07 and we get 23.68.

Thus Apple is trading at 23.68 times its Levered Free Cash Flow (Owner Earnings). If you return to my website page you will be able to download my “60 year backtest of Owner Earnings.”

After reading my historical backtest you will see that I have proved that anyone buying stocks selling for 15 times or less a company’s price to levered free cash flow would have done very well over the last 60 years, putting up results close to what Warren Buffett has achieved, which is only logical as he is the creator of the “Owner Earnings” ratio.

Being a conservative investor I like to buy at less than 15 times and sell always at 30 times regardless of the prospects of the company. But that is just how I do it and you can tweak it depending on your own tolerance for risk. Also remember that these are trailing numbers and not forward numbers and I like to go out one year in the future and analyze Owner Earnings for 2011 and then base my calculations on those results. But this as we said is just a short “back of the envelope” calculation to help you avoid overpaying on overbought stocks. To go out to 2011 you need to buy additional research such as Value Line.

So this back of the envelope method, in the end becomes a very powerful tool for the individual investor in its ability to allow such an investor to quickly analyze his or her portfolio. It can also analyze the portfolio that the investor's investment advisor or broker has put the investor in and not only that, but ETF and Mutual Fund holdings can also be quickly analyzed using this method. So for those of you trapped in employee retirement programs that require you to invest in only a select group of mutual funds, you can now compare each fund's holdings and see which is the more attractive option for you.

Always remember that this method is just a first step in analyzing a company and requires the investor to also read a company’s annual reports and maybe do an SIA as well. There are also qualitative risks that must be factored in such as in Apple’s case, the health of Steve Jobs for example or the ability of Steve Ballmer as CEO of Microsoft (MSFT) to take the company where it needs to go etc... So there is no one shot magic formula for picking stocks, but using Levered Free Cash Flow and SIA, where the data is free to the individual investor through Yahoo Finance, can go a long way in protecting an individual investor from overpaying, not to mention how it can protect them from investing in the wrong stock tips that they may get from a friend or from Jim Cramer.

As I have calculated Apple’s numbers for you, I thought it would be good to show you the results of a few more highly popular companies, so you can see if you are doing your calculations correctly.

So here they are:

Salesforce.com (CRM)

Levered Free Cash Flow = $316 million

Shares Outstanding = 131.40 million

Owner Earnings per share = 316/131.40 = $2.40

2/11/2011 closing price = $141.51

Price to Owner Earnings = $141.51/$2.40 = 58.96

Netflix (NFLX)

Levered Free Cash Flow = $320.62 million

Shares Outstanding = 52.78 million

Owner Earnings per share = 320.62/52.78 = $6.07

2/11/2011 closing price = $231.07

Price to Owner Earnings = $231.07/$6.07 = 38.06

Cisco Systems (CSCO)

Levered Free Cash Flow = $6.17 Billion

Shares Outstanding = 5.54 billion

Owner Earnings per share = 6.17/5.54 = $1.11

2/11/2011 closing price = $18.70

Price to Owner Earnings = $18.70/$1.11 = 16.84

Juniper Networks (JNPR)

Levered Free Cash Flow = $332.39 million

Shares Outstanding = 523.56 million

Owner Earnings per share = 332.39/523.56 = $0.63

2/11/2011 closing price = $43.41

Price to Owner Earnings = $43.41/$0.63 = 68.90

Sirius XM Radio (SIRI)

Levered Free Cash Flow = $231.14 million

Shares Outstanding = 3.93 billion

Owner Earnings per share = 231.14/3930 = $0.058

2/11/2011 closing price = $1.84

Price to Owner Earnings = $1.84/$0.058= 31.72

Microsoft (MSFT)

Levered Free Cash Flow = $17.55 Billion

Shares Outstanding = 8.40 billion

Owner Earnings per share = 17.55/8.40= $2.08

2/11/2011 closing price = $27.25

Price to Owner Earnings = $27.25/$2.08= 13.10

Google (GOOG)

Levered Free Cash Flow = $5.74 Billion

Shares Outstanding = 319.94 million

Owner Earnings per share = 5740/319.94= $17.94

2/11/2011 closing price = $624.50

Price to Owner Earnings = $624.50/$17.94= 34.81

Newmont Mining (NEM)

Levered Free Cash Flow = $1.48 Billion

Shares Outstanding = 493.06 million

Owner Earnings per share = 1480/493.06= $3.00

2/11/2011 closing price = $56.88

Price to Owner Earnings = $56.88/$3= 18.96

There you have it, a quick and easy test of your holdings based on a ratio that Buffett introduced to the world in 1986 - one that I have done a 60-year backtest of the DJIA on (1950-2009) to prove its validity. Please remember to always do your own “Due Diligence” and try to practice “Capital Appreciation through Capital Preservation.” Never buy a stock or act on a tip without doing your own analysis first. More people lose money from stock tips then from any other method I know, so the best tip I can give you is to never buy stock tips.

Disclosure: I am long CSCO, MSFT, GOOG.

Additional disclosure: No position in the others

Disclaimer: Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.

This article is tagged with: United States
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valuestocksonlyComments (293)
Wow! You have worked as an investor for family and friends. I am IMPRESSED! 14 Feb, 10:08 AM0

clipit89Comments (17)
As one of his friends I am INDEED IMPRESSED. 14 Feb, 10:33 AM9

RaiComments (53)
I also crowned FCF as my most important metric and have read your 60-year backtest for the first time.

I was very impressed that a seemingly easy criterion (FCF) can produce such an amazing outperformance over time which would make Buffett himself proud.

The only criticism I would have is, that since you are picking your stocks every year, that you might also get "one hit wonders". Another thing would be that sometimes your yearly portfolio sometimes only consists of a few names.

But of course I understand that your article and paper is for proving your thesis (mechanically) and would differ from real world.

Thanks a lot Peter for another well written article with analysis to back it up! 14 Feb, 11:35 AM3

Peter Mycroft PsarasComments (372)
Thanks RAI,

Since the back-test was only concentrated in 30 stocks, we did get some years where we did have one hit wonders, but I am sure if someone back-tests the S&P 500 they would find many good buys every year. One of your fellow Seeking Alpha readers Jack came up with an interesting discovery about my back-test and I wrote about it here:

seekingalpha.com/artic...

Mycroft 14 Feb, 11:55 AM0

grangerComments (2158)
Outstanding, thank you

I realize Buffett would never use this to look at the market as a whole, but have you ever extrapolated this out to say the S&P 500 as a snapshot?

Is it possible?

does the data exist? where?
(short of doing it individually for all S&P 500 comapnies individually)

Thanks for your thoughts 14 Feb, 12:26 PM0

Peter Mycroft PsarasComments (372)
Hi Granger,

It took me six months of working 8 hours a day to complete the current back-test. I also had to work in the Seattle Public Library as that is the only place I know of that has the data going back to 1950. I tried to buy the data from Value Line to work on the S&P 500 Index, but there is no way for them to sell it to me as it is in their archives. I think it would take a team of a dozen analysts over a year to pull it off. I think only S&P could do it but it would cost them a fortune in man hours to do it. Someday I hope someone does it, but I no longer have the time as I am an Investment Advisor now, as well as an Analyst so my plate is full.

Mycroft 14 Feb, 12:35 PM0

grangerComments (2158)
Also, interesting to see the valuation on some of these firms

I have been spot checking comapnies all morning long, very eye opening 14 Feb, 12:29 PM0

Peter Mycroft PsarasComments (372)
Thanks Granger,

What you are doing is what I am hoping that all investors will do, as the numbers don't lie. If I can just get this message out, that there is a way to check stock tips or what Cramer tells you and see if he is right or not.

Just a minute a stock is all that is needed and its all free on Yahoo Finance. The little guy doesn't stand a chance against the press, CNBC, Flash Traders and Goldman Sachs, but with this one minute test we can even the playing field instantly and not be taken in by the tons of bad research that is pumped and dumped on the individual investor everyday. Imagine if people learn that they can use this simple test to analyze their mutual funds or ETF'S.

I say power to the people and no one can argue with the test as Warren Buffett created it. So Enjoy everyone and practice Capital Appreciation through Capital Preservation.

Mycroft 14 Feb, 12:50 PM0

jimmy46Comments (1148)
So according to your simplistic theory,
stocks like

PBR which has a LFCF of minus $25 Billion
and CHK ............ " ... of minus $4 Billion

Must be terrible investments, yes?

Or are you forgetting that most companies are investing in future growth?

And how do you tell how much of the capital ex is used to maintain the business,
and how much to grow it? 14 Feb, 02:16 PM0

Peter Mycroft PsarasComments (372)
I would not say they are terrible investments, but I just want people to know that they have negative free cash flow and any business that runs on negative free cash flow for too long could end up being a terrible investment. I would have you take those same companies and run my FROIC analysis on them as well.

Free Cash Flow / Invested Capital

free cash flow / shareholders equity + long term debt

So if they are investing so heavily that they are achieving negative returns for every dollar of invested capital then you have troubles.

There are a million ways to invest and I just want everyone to be aware of free cash flow as it is the most powerful financial tool that I know of.

Thanks for posting,

Mycroft 14 Feb, 03:21 PM0

Peter Mycroft PsarasComments (372)
SIA is used as part of a three step system. I have not analyzed SIRI using my system as its COE would have resulted in an extreme negative reading that would have neutralized the SIA you are talking about. Just like JDSU, when you have a stock that drops out of bed like these stocks have, you need to be very careful as they could go out of business in a millisecond. Had John Malone not come to the rescue SIRI would have been sold off in a banckruptcy. Today SIRI is cash flow positive but since 1994 it has been a terrible investment and my system does not work well when you have decades of negative free cash flow. Since 1994 SIRI has lost $-32.28 in free cash flow per share. So when you use SIA remember that if the company is doing terrible on Main Street then it will show up cockeyed on the SIA chart. Palm for example went from $200 down to $1 and JDSU went all the way from $1728 to $2 so you can't analyze such insane investor sentiment. SIA works great on 99% of the companies it analyzes but Palm, SIRI, and JDSU are impossible to analyze using any system as they are pure investment sentiment stocks. 14 Feb, 04:58 PM0

Peter Mycroft PsarasComments (372)
Just click on my profile and it will take you to all my articles.

Mycroft 14 Feb, 05:43 PM0

[e-mail] (129)
Wht is your opinion of siri stock? 14 Feb, 09:14 PM0

Peter Mycroft PsarasComments (372)
Hi Chris,

I am a loyal customer using their service through the internet and in two cars. I think it is one of the most amazing products ever created but as for the stock, I am a very conservative investor and don't like roller coasters. I try to make 15% a year on average for my customers and double their money every 5 years, so I am not interested in taking big risks. What management needs to do is a reverse split and issue 1 share for every 30 and stop paying guys like Howard Stern millions of shares as that dilutes the shareholders stake unless you can lock him in for 5 years and not allow him to sell.

Vonage, Sirius and Sprint are all great companies but they need to bring some sanity to their shares and reduce the roller coaster effect. Running -$32 per share in free cash flow losses over its lifetime is not my idea of a well managed company.

I love the company's products but don't like the management as they are willing at a moments notice to issue untold amount of shares at will and that's dangerous. Berkshire Hathaway's stock sells for what it does as it only has 1.3 million shares. Doing a reverse split would do wonders, but I don't see that happening.

Mycroft 14 Feb, 09:46 PM0

igggyComments (380)
Mycroft,

Would you apply this analysis to retail stocks? TGT, RSH, BBY all look cheap provided they can sustain their performance in the future.

Also, what do you think about Greenblat's magic formula. It looks like a more advanced version of your analysis but I might be wrong.

Thank you. 15 Feb, 03:24 AM0

Peter Mycroft PsarasComments (372)
Igggy,

The whole idea behind this article is for you to analyze the three stocks you mentioned and not to rely on others. Go do them, post them here and then I will check them for you to see if you are right.

First, there is no such thing as a magic formula on Wall Street. There are just tools that you can use to make you successful. The only magic formula that I know of is the one Thomas Edison came up with which is:

"Genius is one percent inspiration, ninety-nine percent perspiration"

Having said that I do admire Mr. Greenblat and take my hat off to anyone who tries to even the playing field for the individual investor.

Looking forward to your analysis,

Mycroft 15 Feb, 06:16 AM0

Mr. GanComments (5)
I have been using this method for a while.

So according to owner's value calculation,
Radio Shack is worth investing,
price at 15.67
levered FCF:192.62M
shares outstanding: 113.82M
This gives you a ratio of 9.25

Isn't this a bargain, I think it is, I am long RSH 15 Feb, 07:07 AM0

Peter Mycroft PsarasComments (372)
Radio Shack is definitely a value play on the wireless world and allows people not living in the urban centers a chance to go to their local Radio Shack and get the same offerings that they can in a mall. Competition is fierce, but the stock has fallen 25% since November, which means that the speculators have lost interest in the stock. Which is a good thing in my book.Good Luck with it and thanks for posting.MycroftDisclosure to position in RSH 15 Feb, 07:32 AM0

The HammerComments (1519)
RE rsh has lots of goodwill and what is this goodwill worth? The free cashflow, how reliable is it? Does it really have a competitive advantage? I think not this is why i have avoided it.

RE Csco: I like to factor in stock options as an ongoing cost when calculating fcf's. They buyback billions of shares but it does not lower share count anywhere near amount spent.

Goog trades at 35 times. A great company but it appears priced in to me with little downside margin at least at this price.

NEM is the big sleeper here imo. The mining shares have been mismanaged for sometime, but this is changing. Mgt is avoiding issuing new shares to fund operations and make acquistions while their underlying commodity is priced strong (Mainly gold but some copper which can be cyclical). FCF's imo are going to get stronger. Fcf's are going to really turn up here.
Does not appear to be to much hedge fund support either. 15 Feb, 09:28 AM1

Alph1eComment (1)
Thank you for sharing this with us. I have a question. When I review your numbers and Yahoo's of Leveraged Free Cash Flow, I do not get the same numbers. For example, Yahoo states that MSFT leverage free cash flow is 17.55. TTM EBITDA of MSFT was $27,092 its TTM capex was 2,221 and if you include their R&D of 8,951 this totals 11,172. Taking that number away from 27,092 equals 15,920. If you use another Earnings before non operating income of 26,384 minus 11,172 you get 15,212. I just can seem to get to the number 17.55. Can you help? 15 Feb, 11:40 AM0
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[SpecTrader]

kool It was a scary time back than so I can say the same...

[MarketGeometry]

hind sight is always 20/20

[SpecTrader]

LOL Ouch...

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=33028487

BTW he's talking about DTG the most epic stock comeback in this recession. His little 2k would of been worth 175k right now.

[Danzo]

FEEL has BIG TIME potential, IMO. Gross profit went 4.65 TIMES what it was a year ago, and they cut their net loss by 59%. They're setting up a booth at the PGA show in January.

It's only .0001 per share right now. FEEL is on the upswing financially, and I expect the FEEL stock price to do the same. I own 21 million shares myself. I suggest you load up on FEEL shares too.

[MarketGeometry]

Subject: Analysis - Return on Equity versus Return on Capital
Last-Revised: 7 June 1999
Contributed-By: John Price (johnp at sherlockinvesting.com)

This article analyzes the question of whether return on equity (ROE) or return on capital (ROC) is the better guide to performance of an investment.

We'll start with an example. Two brothers, Abe and Zac, both inherited $10,000 and each decided to start a photocopy business. After one year, Apple, the company started by Abe, had an after-tax profit of $4,000. The profit from Zebra, Zac's company, was only $3,000. Who was the better manager? I.e., who provided a better return? For simplicity, suppose that at the end of the year, the equity in the companies had not changed. This means that the return on equity for Apple was 40% while for Zebra it was 30%. Clearly Abe did better? Or did he?

There is a little more to the story. When they started their companies, Abe took out a long-term loan of $10,000 and Zac took out a similar loan for $2,000. Since capital is defined as equity plus long-term debt, the capital for the two companies is calculated as $20,000 and $12,000. Calculating the return on capital for Apple and Zebra gives 20% (= 4,000 / 20,000) for the first company and 25% (= 3,000 / 12,000) for the second company.

So for this measure of management, Zac did better than Abe. Who would you invest with?


Perhaps neither. But suppose that the same benefactor who left money to Abe and Zac, also left you $100 with the stipulation that you had to invest in the company belonging to one or other of the brothers. Who would it be?

Most analysts, once they have finished talking about earnings per share, move to return on equity. For public companies, it is usually stated along the lines that equity is what is left on the balance sheet after all the liabilities have been taken care of. As a shareholder, equity represents your money and so it makes good sense to know how well management is doing with it. To know this, the argument goes, look at return on equity.

Let's have a look at your $100. If you loan it to Abe, then his capital is now $20,100. He now has $20,100 to use for his business. Assuming that he can continue to get the same return, he will make 20% on your $100. On the other hand, if you loan it to Zac, he will make 25% on your money. From this perspective, Zac is the better manager since he can generate 25% on each extra dollar whereas Abe can only generate 20%.

The bottom line is that both ratios are important and tell you slightly different things. One way to think about them is that return on equity indicates how well a company is doing with the money it has now, whereas return on capital indicates how well it will do with further capital.

But, just as you had to choose between investing with Abe or Zac, if I had to choose between knowing return on equity or return on capital, I would choose the latter. As I said, it gives you a better idea of what a company can achieve with its profits and how fast its earnings are likely to grow. Of course, if long-term debt is small, then there is little difference between the two ratios.

Warren Buffett (the famous investor) is well known for achieving an average annual return of almost 30 percent over the past 45 years. Books and articles about him all say that he places great reliance on return on equity. In fact, I have never seen anyone even mention that he uses return on capital. Nevertheless, a scrutiny of a book The Essays of Warren Buffett and Buffett's Letters to Shareholders in the annual reports of his company, Berkshire Hathaway, convinces me that he relies primarily on return on capital. For example, in one annual report he wrote,"To evaluate [economic performance], we must know how much total capital—debt and equity—was needed to produce these earnings." When he mentions return on equity, generally it is with the proviso that debt is minimal.

If your data source does not give you return on capital for a company, then it is easy enough to calculate it from return on equity. The two basic ways that long-term debt is expressed are as long-term debt to equity DTE and as long-term debt to capital DTC. (DTC is also referred to as the capitalization ratio.) In the first case, return on capital ROC is calculated from return on equity ROE by

ROC = ROE / (1 + DTE),

and in the second case by:

ROC = ROE * (1 - DTC)

For example, in the case of Abe, we saw DTE = 10,000 / 10,000 = 1 and ROE = 40% so that, according to the first formula, ROC = 40% / ( 1 + 1) = 20%. Similarly, DTC = 10,000 / 20,000 = 0.5 so that by the second formula, ROC = 40% (1 – 0.5) = 20%. You might like to check your understanding of this by repeating the calculations with the results for Zac's company.

If you compare return on equity against return on capital for a company like General Motors with that of a company like Gillette, you'll see one of the reasons why Buffett includes the latter company in his portfolio and not the former.

For more articles, analyses, and insights into today's financial markets from John Price, visit his web site.
http://www.sherlockinvesting.com/

[MarketGeometry]

Free Cash Flow Yield

Free cash flow yield is one of the best indicators used by fundamental analysts to select and assess companies. The higher the number the more free cash per share the company generates.

Do you know the free cash flow yield of the companies in your portfolio? If not then read on to get an idea if they have the potential to achieve your expectations.

Free Cash Flow Yield Definition

For investors, cash in the bank is king. It is hard to hide financial misdeeds or problems in a company’s bank accounts. These bank balances show the truth in the financial performance of a company. This is why investors like to look at cash flow and free cash flow.

The free cash flow yield calculation starts with the Company’s Cash Flow Statement. On the cash flow statement, find the Cash Flow from Operations line. Then subtract Capital Expenditures to derive Free Cash Flow. Free Cash flow is the money that is left over in the company’s bank accounts after paying the company’s bills and investing in new capital projects and equipment to help the company grow. It is best to use the annual cash flow numbers, so you have a more complete picture of the company’s financial situation.

Here is the free cash flow yield formula:

Free Cash Flow Yield = (Cash Flow from Operations – Capital Expenditures) / Enterprise Value.

The standard way to calculate free cash flow yield is to use market capitalization, or total common shares outstanding times the share price. To find the free cash flow yield percentage divide free cash flow by market capitalization. This number is a calculated ratio indicating how much free cash flow is available per common share. Market Capitalization is readily available on the financial site such as Yahoo!Finance.

Some analysts believe there is a better measure to use than market capitalization. They prefer to use enterprise value, as it accounts for debt, value of preferred shares, minority interest, and cash. Enterprise value differs significantly from simple market capitalization since it is a more accurate representation of a firm's value. For example, if there company were to be acquired, the value of a firm's debt would need to be paid by the buyer. This makes enterprise value a more accurate valuation measure.

Using enterprise value as the divisor adjusts the free cash flow yield for the companies that hold debt, have a large amount of cash and have preferred shares. Using enterprise value in calculating free cash flow yield provides a better measure when comparing of companies for possible investment. At Trading Online Markets LLC, we use enterprise value as the divisor to calculate free cash flow yield as one of our selection criteria for stocks on our Premium Members Watch List.

Comparing Free Cash Flow Yield

The table below compares the free cash flow yield for two quality companies, Accenture Ltd (ACN) and EMC (EMC). Accenture is a successful global consulting and IT outsourcing company. EMC is a manufacturer of storage devices for data centers and a developer of software that manages multiple computers, offers security services and document management for a number of industries. Each company generates significant cash flow and free cash flow. Since EMC is a manufacturer, they tend to have higher capital investment requirements than Accenture, a services company. This may lower their free cash flow on a relative basis. In addition, EMC has a debt to equity ratio of 26.5%, while Accenture essentially has no long-term debt.

When analyzing companies, I like to see the free cash flow yield be at least 10%. As shown below both companies have free cash flow yields above this threshold, indicating they are potentially good investment opportunities. The fact that Accenture’s free cash flow yield is higher than EMC’s, does not necessarily make them a better choice. However, it does offer an excellent way to compare the potential performance of several companies. The free cash flow yield measures the ability to generate cash, the risk in the balance sheet and the share price, all in one meaningful statistic.

Earnings Yield Comparisons ($000)

Earnings Yield Calculations Accenture (ACN) as of 3/25/2009 EMC (EMC) as of 3/25/2009
Total Cash Flow from Operating Activities $3,302,851 $3,565,008
Free Cash Flow $2,999,387 $2,869,109
Market Capitalization $19,270,000 $23,880,000
Free Cash Flow Yield using Market Cap 15.6% 12.0%
Enterprise Value $15,550,000 $19,360,000
Free Cash Flow Yield using Enterprise Value 19.3% 14.8%
Debt to Equity Ratio 0.01% 26.5%
The Bottom Line

The free cash flow yield measure is the best fundamental statistic available. By basing it on a company’s cash flow, it removes the accounting treatment that is inherent in our current financial statements. Free cash flow measures the ability of the company to generate excess cash and provide money to reinvest in the company to help it grow further. Using the enterprise value incorporates the total value of a company used to generate profits. Moreover, the free cash flow yield is not hard to calculate. The information is available from the widely used financial sites as well as a company’s financial statements. Investors will do themselves a service by comparing the free cash flow yield of companies they are considering or own.

[MarketGeometry]

Foolish Fundamentals: Return on Invested Capital
By Motley Fool Staff | More Articles
December 30, 2005 | Comments (0)

Return on invested capital, or ROIC, is one of the most fundamental financial metrics. But despite its importance, it does not receive the same kind of press coverage as do earnings per share (EPS), return on equity (ROE), and the price-to-earnings ratio (P/E) do. One reason it gets neglected is probably that you cannot obtain ROIC straight out of financial statements. Nevertheless, the concept is fundamental in measuring how much value a company creates.

So what exactly is ROIC? It is defined as the cash rate of return on capital that a company has invested. It is the true metric to measure the cash-on-cash yield of a company and how effectively it allocates capital. And that metric is:

ROIC = net operating profits after taxes / invested capital
Net operating profits after taxes (NOPAT), the numerator, is perhaps the best metric to measure the cash that operating activities generate. It is a better metric than net income because it excludes items such as investment income, goodwill amortization, and interest expense, which are non-operating in nature. NOPAT's focus on operations makes it a better measure than EPS.

For example, in its 2004 fiscal year, Motley Fool Hidden Gems pick Alderwoods Group (Nasdaq: AWGI ) had a net income of $9.3 million. However, more than $6.9 million of that figure (after tax) came from interest and investment income. Obviously, Alderwoods' net income is not very representative of the profitability of its operations. Once adjusted to reflect operating activities, Alderwoods' NOPAT amounted to $47.7 million.

Fools do not invest in companies for their ability to generate investment income but, rather, for the profitability of their core operations.

The simplified formula to calculate NOPAT is as follows.

Start with:

+ Reported net income
Add back:

+ Goodwill amortization
+ Non-recurring costs
+ Interest expense
+ Tax paid on investment and interest income (effective tax rate * investment income)
Subtract:

- Investment and interest income
- Tax shield from interest expenses (effective tax rate * interest expense)
Invested capital, the denominator, represents all of the cash that debtholders and shareholders have invested in the company. Invested capital can be calculated by subtracting cash and equivalents and non-interest-bearing current liabilities (NIBCLs) from total assets. Cash is subtracted because it does not yet represent operating assets. NIBCLs -- which include accounts payable, income tax payable, accrued liabilities, and others -- are subtracted from capital because they bear absolutely no cost (interest-free).

Note that to calculate ROIC, we use the average invested capital for the period. For Alderwoods, invested capital for its fiscal 2004 was $1.4 billion.

So, here's how to calculate invested capital.

Start with:

+ Total assets
Subtract:

- Cash, short-term investments, and long-term investments (excluding investments in strategic alliances)
- NIBCLs
The ROIC for Alderwoods is thus calculated to be 3.5%.

You can measure this ROIC against the company's weighted average cost of capital (WACC). Without the WACC, ROIC is not very useful, since the WACC represents the minimum rate of return (adjusted for risk) that a company must earn to create value for shareholders and debtholders. When the ROIC is greater than the WACC, it means that the firm creates value; otherwise, it destroys value. The difference between the ROIC and WACC is called the ROIC-WACC spread and is expressed as a percentage.

So what does all of this mean for investors? For starters, Fools are better off tracking ROIC-WACC spreads than they are following EPS, net income, or ROE, since studies have shown that stock prices are highly correlated to ROIC-WACC spreads. Value creation is the key, and simply looking at EPS or net income does not indicate whether a company creates value. Furthermore, high sales growth can be harmful when new capital is being invested in value-destroying projects, yet EPS, net income, and growth do not tell how much capital was required to generate those numbers. There is thus a fundamental flaw inherent in using these traditional metrics.

ROIC can also be used to understand why stocks trade at different multiples, whether we are talking about P/E, enterprise value/invested capital (EV/IC), or price-to-book value (P/B). The P/E ratio is not only a function of growth, but also of ROIC.

Generally speaking, companies with higher ROICs are more valuable. It is important for Fools to understand, however, that it is not only the level of ROIC that matters, but also the trend. A declining ROIC may be an advanced indicator signaling that a company is having a hard time dealing with competition. On the other hand, an increasing ROIC may indicate that a company is outdistancing its competitors or that it is being more efficient at deploying capital. In all, ROIC is a valuable tool to assess the quality of a company.