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Sharing & Evaluating Stocks
#1
Question 
ronn38 asked the following question in the thread on LMT located here. No one replied to it and it piqued my interest so I thought I'd break it out in a separate thread and see if we can get some discussion on it.

(10-14-2013, 12:52 PM)ronn38 Wrote: Of course, no challenge or "line in the sand" is meant here, but rather how are we thinking different about these opportunities (and how might our thinking help each other better assess "value)?"

And I'll add my answer here.

Ron, I think a big help would be sharing what you are seeing here, pro and con. Perhaps enough data points would turn on a light bulb for someone. Not everyone's looking for the same characteristics.

Using the LMT example where you first posted this, I used the S&P stock sheet and get an average P/E of 12.7 for the last 10 years. According to the stats on TDA's 'Fundamentals' page (and I don't know where the data comes from), LMT has only grown revenues and EPS at less than a 5% clip for the last 5 years. However, the dividend has grown over 22% annually for those same 5 years.

I don't know what F.A.S.T.Graphs says since I'm not a subscriber. Using Mr. Carnevale's logic, a 15 P/E may have been an appropriate benchmark.

Over the last 5 years we've also faced a recession, the winding down of 2 wars, and a debt ceiling/budget/sequestration see-saw on capitol hill. That really added clouds to that company's future profitability.

So what did we miss? I imagine a lot. I thought it was a value at around 100 but it just kept going up. I'm just throwing these out there as points that readily come to mind and don't want to limit it to just an LMT discussion.

I hope others add their opinions in answer to Ron's more general question.
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“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan


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#2
Great topic, DW -- glad you caught it.

Valuation is such a tricky topic. For me, it is critical to be reminded that there is no "right" valuation -- if there were, there would be no trades and no market.

I'm certainly no expert on valuation. I have a rudimentary understanding of the relevant ratios and balance sheet items. But I've gotten pretty comfortable "crowdsourcing" my buy decisions. And sharing ideas and opinions here should only enhance that.

For me, I apply different standards to different companies. There are a core group of companies that fall into the "dead simple" bucket. These are companies that make simple products that are in high demand and purchased frequently. They make the things in centralized factories, and ship it out -- they do not have hundreds or thousands of locations and unlimited overhead. They generate tons of cash quarter after quarter, pay dividends like clockwork, and raise them every year. These are companies like KO, PEP, MO, PM, PG, CL, and the such. I like having these are the core of my portfolio, and I am comfortable buying these great companies at reasonable valuations. I don't need a huge margin of safety on these because I am confident that over the long holding term I have, they will perform well. For these I keep an eye on historical yield and historical P/E, and I get interested when they drift to the sweet end of their historical ranges. This happens when the market as a whole swoons, or when they turn in a bad quarter or two and the talking heads go crazy, or some other one-off event. And when the next financial crisis hits, these are the ones that I will load up on.

The next ring out from the center for me includes stocks like MCD, WMT, TGT, WAG, COP, PSX, T. I treat these pretty much the same way as the "dead simple" stocks above, but I am a little more hesitant to pull the trigger and I need a little more of a sweet spot to buy. These are still very strong businesses, but they are less idiot-proof than the core companies above.

Then there are more rings out beyond those, where companies like tech (IBM, AAPL, INTC, CSCO, QCOM), financials (WFC, AFL), and cyclicals live (F, DE). The farther out from the core I get, the more I need to be convinced that I am buying a bargain, as opposed to just a fair price. I’d likely not buy F at today’s prices, but when it was trading at just two or three times earnings, I was comfortable picking up some shares. For these companies, being priced at the good end of the historical range is not enough. I need to be confident that the market is really mis-pricing the company and that its future is not nearly as bad as the price would suggest.

Then really out on the fringes are things like the mREITs (NLY) and longer-shot turnaround plays (FTR). For me, these are really just calculated risks to juice my returns some.

For all of these categories, though, I am comfortable doing a small to medium amount of my own diligence, and then read all I can about the company from as many trusted sources as I can. I form an opinion as to valuation, watch the stock for a while, and make a decision.

There are times when the process is easy and there are bargains aplenty (summers of 2011 and 2012 come to mind), and there are times like now where it is much less straightforward. I am buying less these days, but there are still plenty of opportunities. Nobody can know the future. I expect, and hope, for periods of volatility where there are general price declines. For long term investors, that is when you set up your future.

Ok, I think I have meandered off topic here, but I enjoyed writing it. I’ll quit now and maybe chime in again with something more relevant as the thread progresses.
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#3
Great response Kerim. I think much the same way.

One of my biggest problems is looking more at the fringes for ways to juice my returns rather than concentrating on the inner rings for the old reliables.

I think I have a good mix in my portfolio, but I can tend to get distracted by the shiny objects on the side of the road.
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#4
(02-16-2014, 02:17 PM)EricL Wrote: One of my biggest problems is looking more at the fringes for ways to juice my returns rather than concentrating on the inner rings for the old reliables.

I think I have a good mix in my portfolio, but I can tend to get distracted by the shiny objects on the side of the road.

This is a challenge for me as well. I've recently been making an effort to get back to the "center ring" and to make sure that I do not neglect continuing to accumulate those core stocks.

But it is easier to get caught up on the "shiny objects" outside of that ring when prices and multiples are up, as is generally the case now. When all of the core stocks feel expensive, it is natural to look elsewhere.
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#5
(02-16-2014, 03:07 PM)Kerim Wrote: But it is easier to get caught up on the "shiny objects" outside of that ring when prices and multiples are up, as is generally the case now. When all of the core stocks feel expensive, it is natural to look elsewhere.

While tempting to look elsewhere, I do not wish to over trade and when the core is expensive I've found it best to keep my powder dry.

Good luck to all.
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#6
That is probably my biggest flaw. I love to trade. These days the trades develope over a much longer period, usually going at least six months. But my trading account is barely recognizable from year to year. For 2013 I would have done much better with most any buy and hold strategy. But that is hindpsight, and my trading was part o an overall defensive strategy. Playing defense most always gives lower returns, when offense was the proper play to have had in place.
Alex
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#7
(02-17-2014, 08:05 AM)hendi_alex Wrote: That is probably my biggest flaw. I love to trade. These days the trades develope over a much longer period, usually going at least six months. But my trading account is barely recognizable from year to year. For 2013 I would have done much better with most any buy and hold strategy. But that is hindpsight, and my trading was part o an overall defensive strategy. Playing defense most always gives lower returns, when offense was the proper play to have had in place.

Yes I love to trade as well. I just keep a separate account for trading, as do you it seems. My trading account underperformed in 2013 but did better than the indices in 2012.

My long term accounts also underperformed in 2013, but this was mostly due to my large allocation to bonds.


Kerim: Great post!!
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#8
I do not particularly love to trade. I do run about 3-5% of the portfolio in AAPL options, which gives me plenty of excitement Smile
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#9
Quote:I don't know what F.A.S.T.Graphs says since I'm not a subscriber. Using Mr. Carnevale's logic, a 15 P/E may have been an appropriate benchmark.

I can help with FAST Graphs.

The payout ratio has steadily climbed since 2007. P/E ratio is now above the 15 year normal value.

   


   
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#10
I like the concept of organizing a portfolio in ever increasing concentric circles = The core, the mid-core, and then the fringe stocks that really help "juice the income". I also like the concept of a separate account for frequent trading, although I doubt if I would adopt that. I'm trying to simplify, not complicate. While executing a trade is kind of like placing your money down on the roulette table ( very exciting), I try to minimize the action. I subscribe to that theory that I have read on the SA website likening your portfolio to a bar of soap...the more handled, the smaller it becomes. Example: I've been reading about INTC tonight and now thinking that it's time to sell my relatively small position, but then another author posts another article that says the sky is not falling ( for INTC). Then I remember that sometimes the best action is no action. So I've just gone full circle, and have enjoyed the ride. Thanks for reading. -Chris
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