Posted by: sanjayshetty | June 16, 2008

Stock Data For Research In India

A reader of my blog, wrote the following:

I have following queries for you:

Do you invest in Indian market? If yes will you be able to help me to find following parameters:

1. Return on Invested Capital (ROIC)

2. EQUITY

3. SALES

4. FREE CASH

from Indian stock site like:

Rediff.com or moneycontrol.com.

I was just able to figure out EPS from rediff.com and not able to find the other parameters because they might be having different name compare to USA market sites.

Thanks,

Nilesh

Nilesh, I can completely understand how confusing this can be when you look at the Indian stock market sites. Yes some of the terminology is different. I’ve taken two sites one free and one paid and have tried to put down information, which I feel will be useful for anyone using Indian stock market information sites and relating to the above terminology.

I’ve been able to compare and compile a list of free sites and the data one can grab from them in order to do Rule#1 calcualtions for Indian stocks. In some cases I’ve used items which are closest to what I think Phil suggests in his book Rule#1.

I’ve included references such as BL: for Balance sheet, PL: for Profit & Loss or Income statement.

In the table I’ve also listed MSN as a source however it’s for only comparisons.

In India Equity or Book Value is known on Indian Balance Sheets as Networth as is given on the www.Moneycontrol.com site. There are terminology differences between the Indian and the US centric site http://moneycentral.msn.com

Items given XXXXX I’ve been unable to find on those individual sites, however for instance if it’s not available in KotakSecurities it’s available via MoneyControl and vice versa.

Also between these sites the terminology used is different at times for e.g. on Moneycontrol.com Net Profit and on Kotaksecurities.com Reported Net Profit.

ROIC Calculations

ROIC = NOPAT / ( Equity+ DEBT) (This  is based on Phil’s ROIC Calculation)
Note: Here Equity refers to Book value.

(Ok I know the table below looks a little wonky but sorry the controls at WordPress regarding Tables suck!)

Value MsnMoneyCentral KotakSecurities MonyeControl
NOPAT – Net Operating Profit after Tax.  Net Income can be used instead of NOPAT. Note: Ideally use NOPAT as some times companies receive income from other sources or have other conflicting items in their net income. Reported Net Profit Net Profit
Equity OR Total Shareholders  Equity also known as net worth or book value Total EquityIs already pre-calculated on MSN it is= Total Assets – Total Liabilities Equity = No. of Shares*BVPS
“Book Value (Excl Rev Res) Per Share (Rs.)” is given on the Ratios page.No. of Shares = BS:Number of Equity shares outstanding (in Lakhs)
Equity = BL:Networth – BL: Revaluation Reserves

Equity = Equity Share Capital + Preference Share Capital + Reserves. If Reserves include  Revaluation Reserves that needs to be subtracted.
Equity = No. of Shares*BVPS

No. of Shares = PL:Shares in issue

Note:
Here figure is given in lakhs hence need to divide it by 100 to get figure in crores.

BVPS = PL: Book Value

Debt   BS: Long Term Debt You need to manually total up the following two items found on the BS:

  1. Secured Loans
  2. Unsecured Loans
BS:Total Debt
Sales Total Revenue     Operating Income PL: Sales Turnover
EPS   Found in Income Statement Found in Ratios page, Reported EPS PL: EPS
 
Data on Free Cash Flow needs to be calculated by looking up figures reported by the company in their annual reports. Another site which I’ve often found useful, for Indian stocks is:http://investing.businessweek.com/research/company/overview/overview.asp
 
WARNING
In my experience I’ve found that relying completely on the numbers of the above sites doesn’t work at all. Sometimes I’ve seen data on the sites change at a later date. E.g. If at one time the Networth is given as 10000 another time I’ve found it to change to 8000 etc. Weird yeah I know. I would suggest go to the website of the individual company which you are analyzing and double check the numbers given by them out there.
 
Well I hope this helps Nilesh and others like him who are stuck due to the terminology used on Indian Sites. I know the above list is not complete, so if you think I’m missing something, post a comment and I’ll update.
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Posted by: sanjayshetty | May 23, 2008

Satisfaction, Loyalty and Affinity

Satisfaction -> I like you

Loyalty -> I recommend you

Affinity -> I defend you

Ok now I know you’re wondering what the hell is he talking about.

Lets talk about companies thinking of the above.
Note: The following are just examples and don’t represent any factual data, I’m giving these examples purely for illustrative reasons, to help take a different view on the kind of companies which could possibly be good research candidates for investments.

Below is a list of feelings I have with respect to certain companies/Brands

Satisfaction Loyalty Affinity
Google Yahoo Dell, Microsoft
Pringles Oral-B Braun (products)
Duracell

 

The first row contains technology companies, all of whom I like, however as a consumer of these companies. I have different relations with most of these companies, some I just like, some I recommend to others, and some I go even beyond in defending (i.e. Have a very strong opinion about).

Now companies which are able to build strong affinity for themselves/their products are companies which can usually do good irrespective of how the economy is doing or if there is a general downturn. For e.g. I use an electronic toothbrush, ok now you didn’t need to know that right, however, when I looked for a replacement the only brand under which I was looking for one was Braun. Same goes with batteries I buy. I just pick Duracell and I’m so super duper happy with it. Same goes for my Dell laptop, there are just so many people I’ve not only recommended but convinced on why they should buy Dell laptops with their Complete Care Warranty which is just awesome.

Similarly I’m sure you have different products/companies/brands which you swear by. Start looking their numbers up, and I’m sure you’d find gems amongst them.

I recently started doing this exercise and noticed that quiet a few of the brands I like for e.g. all the items in Row 2 in the above table, they all belong to one company, P&G. Nope I’m not recommending P&G as a company, I haven’t even seen their balance sheet yet. However I definitely will. So if you’ve already studied it, please do share in the comments.

I trust you get the general idea on how to use the above idea to possibly find good candidates to evaluate as an investment opportunity. Start making your list of products/brands which make you happy and then evaluate the companies.

Happy hunting 🙂

Posted by: sanjayshetty | April 1, 2008

I’ve been out

It’s been some time since I’ve made a post on my blog, I’ve had personal family health issues which have kept me at bay. Next week I will be back on time. Thanks for your paitence, to those who have posted comments but not yet received responses from me.

Posted by: sanjayshetty | January 22, 2008

The great sale has begun!!!

It’s an amazing time for the Intelligent investor. Markets globally have fallen considerably. Is there more downside, I have no clue, and I don’t care as long as I get companies at a discount to their intrinsic value. Stock prices have fallen the value of stocks/companies hasn’t changed.  Who knows when such an opportunity might come again, or maybe it will last for some time 🙂 Eitherways, based on research you’ve done, it’s time to check and probably buy companies which you feel are great Rule#1 companies at a discount.

Sadly most people I’ve spoken to can’t even make purchases/sales via the various brokerage sites, it’s quite silly. However, the panic is driving prices further down, which is all the more better for the patient Intelligent Investors.

In a recent interview on CNBC (Aug 15 2007), Buffett said:

“Generally speaking, when there’s a certain amount of chaos in certain sections, it is unpredictable where the fallout will be, but the fallout offers some real opportunity”

(P.s. I know this is the shortest post I’ve recently made. However please don’t email or request me to recommend a specific company, as I’m quite busy myself right now doing my final selections on companies I want to buy, which are currently trading at a discount.)

Cheers, Happy Investing!

Posted by: sanjayshetty | December 5, 2007

Rule #1 Don’t lose money

Rule #2: Don’t forget Rule #1. However, how does one go about ensuring that one doesn’t lose money.

Ok! First the reality, even the greatest investors who proclaim the above tenet have lost money, even Buffet! However, it is important to understand the underlying essence of the statement.

“Making sure that the chances of a loss is minimal“. As Benjamin Graham said “investment is most intelligent when it is most businesslike”

So how does one do that?

Ok if you’re getting over eager to get to the meat of the article, move on. As one of the first things which you need is a LOT OF PATIENCE. It’s like slow and steady wins the race; remember the childhood story about the Tortoise and the Hare…

The key to Rule #1 is making sure of a lot of things; like making sure the company has good numbers, it has to have a sustainable moat, great management etc. I’ll examine a few of these things.

A tenet which is oft repeated to ensure Rule #1 is; make sure the company you’re investing has a sustainable moat. Well, to figure out if a company has a sustainable moat is an exercise which is going to take you some time. As you have to not only assess the company’s strengths and future prospects correctly, but also analyze how it stands up with regards to it’s competitors. So time and patience, plays a big role. Now let’s say you’ve found a company which has a great set of past numbers, good management and seems to have a reasonable moat, you might think you’ve found a winner right? Wrong! Past data is not very good at predicting future results. (Read up Tweedy, Browne Study entitled “Great 10-year Record = Great future, Right? How well did companies with great 10-year records as of December 31,1990 perform in the next 7 years? A study of the predictability of long-term earnings and intrinsic value growth.”).

Very few companies with great past data do well in the future. Here are a couple of reasons which could change the scenario for your potential candidate.

1. The managers who you love and are running the company, change!

Take the case of APOLLO GROUP (APOL)… for no clear reason the CEO has moved on… There is an interesting discussion, at Phil Town’s blog about the same (http://www.philtown.typepad.com/phil_towns_blog/2006/03/your_homework_a.html)

2. New technology, new way of doing business leaves your golden goose far behind.

Newspapers a safe bet of the past are struggling with the Internet publishing phenomena. The viability of Garmin a leader in the GPS space faces a question mark, it must adjust to changes in access to content and to an attempt to take GPS out of the car and put it into mobile phone users’ pockets. (http://www.smartmoney.com/onedaywonder/index.cfm?story=20071001)

3. Mr. Market has a mood swing…

The list is endless….

Now, when you think about all of this you might realize that Rule #1 is a hard proposition; however, the underlying principle is very simple and clear. You need to be extremely careful with your money. You need to really understand the company where you’re putting your money, and you need to have a great level of confidence in the fact that the company is going to continue to do well.

So how does one do that?

I’m including below a longish quote from Buffet’s 1996 Letter to Shareholders, read carefully there are some amazing jewels within this quote.

“Let me add a few thoughts about your own investments. Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.

Should you choose, however, to construct your own portfolio, there are a few thoughts worth remembering. Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.

To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses – How to Value a Business, and How to Think About Market Prices.

Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a
stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”

Warren Buffet is talking about a number of things which you need to keep in mind:

1. Circle of Competence: Question yourself, do you really understand this business? If it’s a business which is complicated, move on. You really need to understand the business. It has to be in your circle of competence. Refer to Buffet’s quote above once again to understand what he means by Circle of competence. “What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence.”

Similarly he mentions “easily-understandable business” This is extremely personal, YOU NEED TO understand the business. For instance, I don’t understand the Biotech industry or the Textile industry, however I can understand software services, restaurants. Look for businesses which you understand. Maybe you love to play video games and understand the gaming industry who it’s leaders are etc. maybe that’s your thing. Buffet has often been criticized for not investing in technology companies, his reasons for not investing are simply because he doesn’t understand the businesses. There are thousands of listed companies to choose from, just make sure they are within your Circle of Competence. Learn all you can about the company, it’s products, it’s markets, it’s efficiency.

2. As Buffet says in his 1995 letter to Shareholders: In business, I look for economic castles protected by unbreachable “moats.”

Notice the wording here, “unbreachable moats”. Not “a Moat”, or a “good Moat”, he specifically says “UNBREACHABLE”. On another occasion he responded to a question on, what is the most important thing he looks for when evaluating a company. Without hesitation, he replied, “Sustainable competitive advantage.”

Unbreachable Moats

So how does one identify an unbreachable MOAT or a sustainable competitive advantage?

a) Often clues of an ubreachable MOAT are when a company’s product name changes the language you use, for e.g. in India Bottled water is called by the name “Bisleri”. This is one of the most famous bottled water products in India. Most often when you want bottled water at a store, people just say give me a Bisleri. Similarly, Coke changed the way people asked for a pop (soda) in the 1988 time frame.
b) There are other kinds of MOAT’s too, Barrier to Change being very expensive or put another way High Customer Switching Costs. For instance Microsoft has this advantage from the large installed base of it’s software worldwide. Almost any PC user would be able to read a copy of document prepared in Microsoft Word or Excel. Companies which have deployed Microsoft software, will find the cost of moving their entire platform to another product platform an expensive proposition and hence, they would continue with Microsoft’s software. It’s MOAT is largely protected by the Barrier to Change. Another similar example would be Paychex.

c) Toll Collectors – If you want to buy or sell something on-line you’re going to use E-Bay because that’s the location with all the buyers and all the sellers. Similarly Newspapers in some cities act as Toll bridges, if you’re trying to reach most of the people in the city.

d) Economies of Scale/Low Cost Provider – Wal-mart has enormous power over it’s suppliers to get rock bottom prices because they sell so much stuff. Nobody can touch their prices.

e) Secret (patents and trade secrets): IBM earns billions of dollars by virtue of the licensing it various patents. Companies such as Coco cola with it’s secret formula have a moat which most competitors find difficult if not impossible to breach.

f) Businesses which aren’t susceptible to Change – That’s one of the key things to look out for when identifying an unbreachable moat. A MOAT today might be gone tomorrow, patents are good but they can run out in time, however good characteristics of an unbreachable MOAT are businesses which have very little change.

This point is quite important and I’ll leave Buffet to explain this, as he said in the 1999 annual meeting:

Our own emphasis is on trying to find businesses that are predictable in a general way as to where they’ll be in 10 or 15 or 20 years. That means we look for businesses that in general aren’t going to be susceptible to very much change. We view change as more of a threat investment-wise than an opportunity. That’s quite contrary to the way most people are looking at equities right now. With a few exceptions, we do not get enthused about change as a way to make a lot of money. We’re looking for the absence of change to protect ways that are already making a lot of money and allow them to make even more in the future.

“When we look at a business and see lots of change coming, 9 times out of 10, we’re going to pass — whereas when we see something that is very likely to look the same 10-20 years from now, we feel much more confident about predicting it. Take Coca-Cola. It’s still selling a product very, very similar to one that was sold 110+ years ago. The fundamentals of distribution, talking to the consumer and all that sort of thing haven’t changed at all. Your analysis of Coca-Cola 50 years ago could pretty well serve as an analysis today.

“We’re more comfortable in that kind of business. It means we miss a lot of very big winners. But we wouldn’t know how to pick them out anyway. It also means we have very few big losers — and that’s quite helpful over time. We’re perfectly willing to trade away a big payoff for a certain payoff.”

Margin of Safety

One of the most important concepts to ensure Rule #1, is the concept of Margin of Safety. You may feel confident that you’ve got a company which has great numbers, an unbreachable Moat, however, determining the value of a company isn’t an exact science. You might use a DCF(Discounted Cash Flow) method or a PE based valuation, or a Sum of the Parts etc. However these give you a range in which the company is valued. As Buffet said in his 2000 letter to shareholders

Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business”

The Intelligent Investor knows that he needs to build in further protection to follow Rule #1 completely. It pays to make sure there’s a decent ‘margin of safety’ between your estimate of intrinsic value and the price you pay for a stock.

In closing, I’d like to refer to what Buffet said in his 1990 letter to shareholders:

“In the final chapter of The Intelligent Investor Ben Graham said: “Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety.” Forty-two years after reading that, I still think those are the right three words.”

Posted by: sanjayshetty | November 28, 2007

Understanding the numbers

For a tech geek like me, numbers have been a typical challenge. Understanding things such as “Profit doesn’t represent cash in the bank” or even more weird stuff like excess cash can be a problem, were things which were alien to me. For instance understanding that a company which can easily raise prices is extremely valuable, or that Operating income is a far better indicator of a company’s profitability and ultimately knowing that Cash is king, when you’re analyzing any company. Seems obvious when one reads about it, however reading a company’s financial statement can be like solving a jigsaw puzzle.

Getting a good grasp on the various numbers provided by a company via the Balance sheet, cash flow and Income Statement(Profit and Loss) is a challenge. I’ve been scouting around for a good article/site which will explain all of it at one go. However in the end landed up writing an article about the same. I’ve posted the article, as it’s quite longish, on Value Investing News ( http://www.valueinvestingnews.com/blog/sanjayshetty/understanding-numbers
). Understanding what each of these 3 statements + the footnotes present is one thing, analyzing them is another ball game altogether. Hopefully the article will provide a good starting point. There is also a free book available online which I’ve referred to out there. I hope to write many more longish articles, however, I’d be posting them on Value Investing News, whereas my blog out here, would have smaller length articles at least for now.

Hopefully the article will help in increasing your understanding of companies.

Posted by: sanjayshetty | November 8, 2007

The stock market

———————————————————————————————————-

Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for Rs. 10/-

The villagers seeing that there were many monkeys around, went out to the forest and started catching them.

The man bought thousands at Rs. 10/- and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at Rs. 15/- This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer rate increased to Rs. 20/- and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!

The man now announced that he would buy monkeys at Rs100! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers. Look at all these monkeys in the big cage that the man has collected. I will sell them to you at Rs75 and when the man returns from the city, you can sell it to him for Rs. 100/-

The villagers squeezed up with all their savings and bought all the monkeys.

Then they never saw the man nor his assistant, only monkeys everywhere!!!

Welcome to the ‘Stock’ Market!!!!!

And if you liked the above one, here’s one more for the festive season of Diwali 🙂
P.s I was forwarded both of these jokes via a random email from a friend, I hope you laugh and enjoy them as I have.

———————————————————————————————–

The Question: What am I doing wrong?

Okay, I’m tired of beating around the bush. I’m a beautiful (spectacularly beautiful) 25 year old girl. I’m articulate and classy.
I’m not from New York . I’m looking to get married to a guy who makes at least half a million a year. I know how that sounds, but keep in mind that a million a year is middle class in New York City, so I don’t think I’m overreaching at all.

Are there any guys who make 500K or more on this board? Any wives? Could you send me some tips? I dated a business man who makes average around 200 – 250. But that’s where I seem to hit a roadblock. 250,000 won’t get me to central park west. I know a woman in my yoga class who was married to an investment banker and lives in Tribeca, and she’s not as pretty as I am, nor is she a great genius. So what is she doing right? How do I get to her level?

Here are my questions specifically:

– Where do you single rich men hang out? Give me specifics- bars, restaurants, gyms

-What are you looking for in a mate? Be honest guys, you won’t hurt my feelings

-Is there an age range I should be targeting (I’m 25)?

– Why are some of the women living lavish lifestyles on the upper east side so plain? I’ve seen really ‘plain jane’ boring types who have nothing to offer married to incredibly wealthy guys. I’ve seen drop dead gorgeous girls in singles bars in the east village. What’s the story there?

– Jobs I should look out for? Everyone knows – lawyer, investment banker, doctor. How much do those guys really make? And where do they hang out? Where do the hedge fund guys hang out?

– How you decide marriage vs. just a girlfriend? I am looking for MARRIAGE ONLY

Please hold your insults – I’m putting myself out there in an honest way. Most beautiful women are superficial; at least I’m being up front about it. I wouldn’t be searching for these kind of guys if I wasn’t able to match them – in looks, culture, sophistication, and keeping a nice home and hearth.

it’s NOT ok to contact this poster with services or other commercial interests


THE ANSWER
Dear,
I read your posting with great interest and have thought meaningfully about your dilemma. I offer the following analysis of your predicament.
Firstly, I’m not wasting your time, I qualify as a guy who fits your bill; that is I make more than $500K per year. That said here’s how I see it.
Your offer, from the prospective of a guy like me, is plain and simple a crappy business deal. Here’s why. Cutting through all the B.S., what you suggest is a simple trade: you bring your looks to the party and I bring my money. Fine, simple. But here’s the rub, your looks will fade and my money will likely continue into perpetuity…in fact, it is very likely that my income increases but it is an absolute certainty that you won’t be getting any more beautiful! So, in economic terms you are a depreciating asset and I am an earning asset. Not only are you a depreciating asset, your depreciation accelerates! Let me explain, you’re 25 now and will likely stay pretty hot for the next 5 years, but less so each year. Then the fade begins in earnest. By 35 stick a fork in you! So in Wall Street terms, we would call you a trading position, not a buy and hold…hence the rub…marriage. It doesn’t make good business sense to “buy you” (which is what you’re asking) so I’d rather lease. In case you think I’m being cruel, I would say the following. If my money were to go away, so would you, so when your beauty fades I need an out. It’s as simple as that. So a deal that makes sense is dating, not marriage.

Separately, I was taught early in my career about efficient markets. So, I wonder why a girl as “articulate, classy and spectacularly beautiful”
as you has been unable to find your sugar daddy. I find it hard to believe that if you are as gorgeous as you say you are that the $500K hasn’t found you, if not only for a tryout.

By the way, you could always find a way to make your own money and then we wouldn’t need to have this difficult conversation.

With all that said, I must say you’re going about it the right way.
Classic “pump and dump.”
I hope this is helpful, and if you want to enter into some sort of lease, let me know.

———————————————————————————————————-

Posted by: sanjayshetty | October 30, 2007

Question the source, understand the true nature of the numbers

If you’re analyzing a company and the initial numbers seem to jump out at you, the next obvious thing to do, would be, to question the source. I read an interesting interview of Buffet, where one of the questions he was asked, was about CEO Compensation.(http://bankstocks.com/print.asp?id=9881373)

compensation is not rocket science. It’s very simple to determine what someone should be paid. We pay people based on what’s under their control that we care about, not on what they can’t control. If the price of oil rises to $60 from $30, oil company executives shouldn’t get paid more even though the companies’ earnings rise. If the executive can lower his company’s finding costs, that I’ll pay for. The guy is worth a lot. But the price of oil has nothing to do with it. If oil prices fall, but the company has the lowest finding costs, pay him like crazy.”

Buffet talks about CEO compensation, however, think about it… the same applies to when you’re analyzing a company’s financial data. If the company is making more money, question the source, is it because they have new orders for their products/services? Is it due to booking incorrectly, early on, monies which have yet to accrue or will not accrue in the current year (e.g. infamous case of Nortel Networks’ year 2000 fraud“), or is it cause they are not expensing an expense correctly in the current year and are spreading it over a ridiculous number of years? E.g. if a company incurs a huge IT expense and depreciates it over a period of say 15 years, one would question the decision, considering the rate at which IT solutions get extinct. (Doing this, might make it appear that earnings are quite ok.). Other examples are one time large increases in profit due to sale of an asset such as real estate, these things would need to be discounted to understand the true potential of the company.

Basically one needs to understand why numbers are, the way they are, for a company. That exploration often leads to reading the footnotes of the financial statement, or listening in on their conference calls etc. Which ever path, one follows it’s essential to understand the true cause. Question the source, always.

Investopedia has quite a number of interesting articles on these topics:

Free Cash Flow: Free, But Not Always Easy:
http://www.investopedia.com/articles/fundamental/03/091703.asp

How Some Companies Abuse Cash Flow:
http://www.investopedia.com/articles/basics/05/062405.asp

Cooking The Books 101
http://www.investopedia.com/articles/analyst/071502.asp

Common Clues Of Financial Statement Manipulation
http://www.investopedia.com/articles/07/statementmanipulation.asp

Footnotes: Start Reading The Fine Print
http://www.investopedia.com/articles/02/050102.asp

Added the following on 1st November 2007

Warning signs in earnings reports
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/articles/warnsign.htm

Off Balance Sheet Items?
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/articles/offbalancesheet.htm

Posted by: sanjayshetty | October 23, 2007

The numbers look good, what next?

So you’ve figured out the numbers and feel that the company is available at a discount to it’s intrinsic value. When numbers look good, it typically means the company could potentially have a good moat. However as you might or might not know, quite a few companies are good at manipulating those numbers to make things look good. A longer period view of the numbers helps here, such as over a period of 10 years. However, there are critical next steps one needs to take before taking the leap and buying the company’s stock.

Management

How truthful are they? Read the annual report of the company, listen in on the conference calls or read the transcripts. Look at whether the CEO is informing you about the challenges that lie ahead and what really happened in the past year, is he honest in mentioning things which worked or didn’t or is it just verbiage. Is the CEO owner driven? Or is he just interested in a huge salary for himself? You’ll find it surprising, often the company is losing money like crazy and the CEO is being compensated phenomenoally well. So make sure you pick up those annual reports and google the management team, especially the Chariman and CEO. 

Things to watch out for

Has the CEO/Management changed recently?

For some kinds of companies this may be the event to change their fortunes, and for you to walk away, e.g. when Steve Job’s left Apple, the great company somehow lost steam, it was only when Job’s got back into the driving seat that wonderful things started to happen.

Ref 1: Pay for Performance – http://www.faireconomy.org/research/PayforPerformance.html,
Ref 2: Conference Calls: http://www.seekingalpha.com/, http://opencompany.info/
Ref 3: Reading Conference Calls: http://philtown.typepad.com/phil_towns_blog/2005/12/how_to_read_a_q.html

Insider buying/Selling

One thing you need to check before the buy decision is whether Insiders are buying/selling their stock. If there are lots of them selling the stock it usually is not a good sign.(they know much more than you and if they feel the price is good enough to sell, then you better be careful.)  There are times when insider selling might not be a bad thing, the insiders might just be redeeming their stock options and making what’s due to them.
Ref 4: http://philtown.typepad.com/phil_towns_blog/2005/11/when_insider_se.html.
Ref 5: http://moneycentral.msn.com/investor/invsub/insider/trans.asp

Is the MOAT waning due to New Competition/New Technology

A company might be doing wonderful on the back of a wonderful drug which they have a patent for a x number of years or a technology which is unique today, however things change. E.g Garmin is considered the market leader for GPS devices, I quite like the company, it has great numbers, a good management/CEO. However, in recent times, more and more mobile phone’s are packing in feature after feature and especially GPS related features in to their mobiles. This makes me wonder if Garmin will be able to maintain it’s leader status and gaurd it’s MOAT. I feel in the long run the increasing competition might cause it to loose quite a bit of marketshare. I don’t know how long that will be, nor can I predict how popular the inbuilt GPS functionality mobiles will be popular, to pose a threat to Garmin. So it’s kind of a company which is in my I love it tray, but….  I’m not certain if I’m going to keep on loving it. A similar story, in the Indian market, Bisleri (a bottled water product from the Parle company which, has a phenomenal mind share(brand) and a first mover advantage. In India most often when a person asks for bottled water, he/she just says give me a Bisleri. However in recent times, the number of companies who have entered the market is kind of huge (Over 100 brands vying for the bottled water market). A good company today is no gaurantee of being good tomorrow, it definitely has a better chance, but when you’re thinking of buying one, you need to research to see if there is change in the air, either in terms of alternate technology, too much competition etc.

(Note: If this is the first time you’re looking at this program, refer to the earlier post first, to understand requirements to run the program.) 

I’ve seen considerable interest in the Excel sheet I provided earlier, quite a few downloads :-), I’m happy people are finding it useful. I received, some useful feedback: providing better status updates, possibly speeding up the program etc. and hence, I’ve updated the program further.

I’ve added some new features:
1. Adding companies to a separate WatchList sheet, in case their current price doesn’t match the value you feel you should pay for the company, however they have excellent CROIC and FCF Growth. Basically Mr. Market is overpricing them currently.  Such a company should be kept on a watchlist and thats the additional functionality I’ve included.
2. Speed: I’ve updated the program, such that my code doesn’t add any significant additional time to the data retrieval process (by tapping in to Excel Events). So the program now works much faster.
3. Status indicators: I’ve added several status messages, to make sure the user is aware of what company is currently been scanned, the total time taken for a scan etc. This helps in knowing what the Excel sheet is doing currently, and prevents it from looking hung.

With the additional speed improvement, comes a bigger caveat: Don’t scan all 500 at one go. The sites providing data observe large repetitive requests, often they block data provided to the particular requester(based on the source IP address etc.). As always scan in batches of 10-20. Basically, just because you now have a Ferrari, don’t drive like you’re on the racetrack everytime. Use the free sites data responsibly. FYI there are two free sites from where data is referred to: MorningStar for Financial Statements and MSN Money for current price. Go online and provide feedback to them saying how glad you are that they are providing 10 years of free data. They’re doing a wonderful service to help the individual investor.

In addition, this time around I’ve picked up the list of S&P 500 companies directly from their website.

As usual I’ve done a scan of all 500 companies of the S&P 500 using the Excel and you can see the Candidates and WatchList companies in the respective sheets.

Download FWallStreet_Model modified for S&P500 2003 version 1.1
(Note: Download and rename the file to .xls & view the earlier post for requirements for running the program.)

I look forward to your feedback on areas of improvement via comments to this post.

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