Analyzing the company's financial results (PEG, P/CF, EV/EBITDA, DY)

This time we proceed analyzing Apple Inc. stock, starting with PEG, because it has a direct connection to P/E. Let's continue with the previous data, current price being 431.72, because in that case the comparison is more accurate.

PEG - price/earnings to growth

P/E ratio/Annual EPS Growth 

In the last post we calculated P/E of 9.67, shall continue with that.

9.67 (P/E) / 15.90 % (estimates to 2013 sales growth from YAHOO! Finance) x 100% =  0.61

• The PEG ratio that indicates an over or underpriced stock varies by industry and by company type, though a broad rule of thumb is that a PEG ratio below one is desirable.

P/CF - price / cash flow

The argument for using cash flow over earnings is that the former is not easily manipulated, while the same cannot be said for earnings, which, unlike cash flow, are affected by depreciation and other non-cash factors.

P/CF per share = 50 856 million (annual operating cash flow) / 939 million(shares outstanding)= 

                                                                                      = 54.2 

P/CF = 431.72 (current share) / 54.2 (cash flow per share) = 8

Sometimes free cash flow is used instead of operating cash flow to calculate the cash flow per share figure. 

• Investors need to remind themselves that there are a number of non-cash charges in the income statement that lower reported earnings. Recognizing the primacy of cash flow over earnings leads some analysts to prefer using the P/CF ratio rather than, or in addition to, the company's P/E ratio. Don't forget to compare this indicator to the company's competitors in the sector. That's because they could be very different depending on the sector. In Apple's case technology. The main competitors can also be found from Yahoo! Finance.

EV/EBITDA - enterprise multiple

A ratio used to determine the value of a company.

Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. 

EV = market cap. + debt + minority interest + preferred shares - cash and cash equivalents* =

397 410 million + 0 (has no debt) + 1.1 million + 5 million (No. preferred shares) x 431.72 (current share price) - 121 251 million (cash and cash equivalents) = 278 318.7 million (EV)

*cash and cash equivalents - An item on the balance sheet that reports the value of a company's assets that are cash or can be converted into cash immediately. Examples of cash and cash equivalents are bank accounts, marketable securities and Treasury bills.

EBITDA (earnings before interests, taxes, deprication and amortization) is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.

EBITDA = 156 508 million (revenue/turnover/ net sales) + 14 030 (income taxes) + 0 (no interests in any other companies) + 3 277 million (deprecation and amortization) - 13 421 (total operating expenses) = 160 394 million

EV/EBITDA = 278 318.7 million / 160 394 million = 1.74 


DY - dividend yield

A financial ratio that shows how much a company pays out in dividends each year relative to its share price.

DY = annual dividend per share / share price

Apple intends to pay out 2.65 dollar dividend per share quarterly aka four times in a year.

DY = 2.65 X 4 (annual dividends per share) / 431.72 (share price) = 0.025 = 2.5%

It means if you own Apple shares for 10 000 dollars, you'll get 62.5 dollars worth of dividends every quarter, which makes 250 dollars in a year.


What is going on with my portfolio?

• Long-term stocks : 

C +2.4%

F  -7%

PFE +12.2% 

Average +2.53%

• Short-term stocks :

Good thing i sold ITMN, because now it's -8%, compared to -2.6% according to my previous post.

SBUX +7.7% Though I like Starbuck's chart, I will sell, because otherwise it wouldn't be a 

short-term stock.

My takes : 

NDAQ - Nasdaq got many bad news and many opinions suggested that it will be falling in a short-term. Well, they were accurate, because it did fall 15% in one day. But I think it's just a dip. Also RSI* indicator fell to 23. Which means it's oversold and likely to rise.

CLF - it's a pretty huge risk, seeing it has been falling a lot in past 3 months. But I'm willing to take it for a small rise, because if the RSI hits 30 from 29 (currently), then it might hit up 5-10%.

*RSI (Relative strength index) - ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued. 

S&P 500 is +6.2% in year 2013 and from the beginning of this test (portfolio).

Short-term stocks have done better than the long-term according to present prices. But worse than S&P 500. Let's see what the next 2 weeks deliver.

                                                      

Analyzing the company's financial results (P/E, P/B, price/sales)

Every investor should've heard a name Warren Buffet at least once. But only few are familiar with his the tactics of choosing his investments. The world's richest man/investor has his own ways.
When all the bankers suggests to diversify the risk and buy different stocks from different sectors, Mr. Buffett figures, he should put all his eggs into one basket. Which means that he understands the company, he's investing into, very thorough. By reading company's financial statements, getting to know the board of directors and managers and of course, about the company's products. That's the way he has an average 20% yield in a year, for his 60 years in business. It seems easy, but I certainly believe, It's very difficult to do and even more difficult to learn.

But to start, I will try analyzing the one company that probably has been written about by every business newspaper - Apple Inc.

Apple has been having lots of difficulties in the last year and though many analysts have their opinions, I want to follow one of Buffett's rules - be independent. Here's the 2012 annual report. Lots of data, our job is to find the important parts : http://investor.apple.com/secfiling.cfm?filingID=1193125-12-444068

Apple 2012 financial data.

*will mark (million) in replacement for 1 000 000  in sake of better understanding.

P/E (price to earnings ratio)
Market Value per ShareEarnings per Share (EPS)
431.72 (current share price)  
Earnings per share 44.64 . 

P/E = 431.72 (current share price) / 44.64 (earnings per share) = 9.67

•  Normal P/E is 10-30, less is underrated and over is overrated. Which means, by P/E Apple's current share price is too low and should be higher. It indicates the present price and company result ratio. But it's very important to compare the P/E to other technology sector companies! 

*retained earnings - The percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business or to pay debt. Money coming from earnings of the company and invested back to business either for loans or development. Gives information about company's intentions for growth in the future.

P/B (price to book or price-equity ratio)



431.72 (current share price)  

Total assets 176 064 (million) 
Intangible assets (Acquired intangible assets + Goodwill) 5 359 (million)
Total liabilities 57 854 (million) 

176 064(million; total assets) - 5 359 (million; intangible assets) - 57 854 (million; total liabilities) 
                                                    / 938.75 (million; shares total) = 120.2 (Book value per share)

P/B = share price / book value per share = 431.72 / 120.2 = 3.6

•  This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately.If a company is trading for less than its book value (or has a P/B less than one), it normally tells investors one of two things: either the market believes the asset value is overstated, or the company is earning a very poor (even negative) return on its assets. 

        Normal P/B is 1 to 1.5. For long-term investment, below's underrated, above is overrated.

        


*intangible assets - An asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today's marketplace.

*liability - includes loans, accounts payable, mortgages, deferred revenues and accrued expenses. Liabilities are a vital aspect of a company's operations because they are used to finance operations and pay for large expansions.

Price / Sales

431.72 (current share price)  

12-month (2012) Revenue aka net sales 156 508 (million)
Shares total 938.75 (million)

Revenue (net sales) per share = 156 508 (million) / 938.75 (million) = 166.7 

PSR = 431.72 / 166.7 = 2.6

* price/sales - the price-to-sales ratio can vary substantially across industries; therefore, it's useful mainly when comparing similar companies. Because it doesn't take any expenses or debt into account, the ratio is somewhat limited in the story it tells.

Today's analysis conclusion

According to Yahoo! Finance's data, 
P/E = 9.79
P/B = 3.17
PSR = 2.46

Looks like self-made calculations might be more fresh and accurate. Simply because the data on 
internet sometimes could not be the right and might sometimes be a little out-of-date.
In next post we'll go deeper in anaylzing and take on next concepts.


What is going on with my portfolio?

• First, my long-term stocks :

C +11.2% 

F  -3%

PFE +8.7%

Average +5.63%

In comparison, S%P 500 has risen 10% in last 3 months (the time I've been writing this blog and starting this test between long-term and short-term stocks). I'm still behind the index, which shows a great lack of skill in choosing stocks. But important is developing yourself.

• My speculation stocks : 

ITMN -2.6% will sell, because price/sales is 23 and p/b 9.2 and p/e cannot be calculated when there's no profit. Also, nothing to wait for in the future.

SBUX +9.4% will hold - p/e 31.6, p/b 8.4, price/sales 8.2 - though these indicators are a little too high, I believe in this brand, because with economic growth people are willing to spend more and also it has a steady bullish trendline.

Average +3.4% 

S&P 500 has risen 10%

Still, the long-term stocks have been better. I will search for the new bunch of short-term stocks for the next time.

Are we moving towards the next crisis?

It has been almost six years from the last bubble explosion in the last quarter of 2007. There was 7 years between 2000 and 2007 boom. Investors have restored their faith in the economic growth. Including taxi drivers. The S&P 500 is at the same level as before.

• Interest rates - the amount charged by a lender (takes the loan) to borrower (gives the loan) for use of his assets.

The mother of all bubbles is speculation and leverage debt. The lower interest rates are, faster the economy improves, because people are more keen to lend money from banks, which is the main initiator of the rise from crisis.
Easy to notice, with every boom, interest rate grows, so banks could get more revenue. Because people are lending anyways. Currently the prime interest rate of US is 3.25% .
I only have one question. Why don't the banks already increase the interest rate? Perhaps, because people haven't been lending money yet. Maybe they have enough vacant money from selling all their assets from the financial crisis (the last crisis) so they don't have to lend. But same time, why not make some money on the stock market? "I want to beat the inflation." would be a good explanation.

• S&P 500 is at the same level as it was in 2000 and 2007 . It means the market capitalization of those 500 America's biggest companies (the amount of the money on the NYSE and Nasdaq stock market) has grown almost two times in the past 5 years. I don't think it makes any sense compared to the revenues of the companies.

• News and articles

First of all, many economists like Roubini for example have expressed concerns about market being too rapidly growing. Probably some cautious investors are taking their money out now. But this is a zero sum game. Someone has to put their money, in that case. Now...this someone is probably one of the so-called taxi drivers that enter the market too late.

http://finance.yahoo.com/blogs/daily-ticker/nouriel-roubini-bullish-now-mother-bubbles-begun-140143386.html - The Mother of All Bubbles has begun.

Also, I found an article from 22july 2007, 2 months before the recession. It truly demonstrates the optimism of analysts, though there are strong signs of instablity. 

http://finance.yahoo.com/blogs/daily-ticker/nouriel-roubini-bullish-now-mother-bubbles-begun-140143386.html

In conclusion out of Dow Jones Industrial Average 30 companies - 1 has no P/E (no profit), 25 has 0-20, two has 20-40 and also two has P/E of over 40. Also in 2007, the average S&P 500 P/E was close to 65. In the moment it's 17.2 . It means that the market has not yet overreacted.

Though the indexes have already reached the same level as before, I remain confident that the recession is not yet coming, but I believe it will take 6 months until we can see the the signs changing, P/E growing and taxi drivers talking about stock market. I would agree to Roubini's article. Short-term positive and long-term catastrophic.

In the end, a little note from Warren Buffet : "Be greedy when others are fearful and fearful when others are greedy."

Past few days have been busy, so I didn't have any time to update the blog. It's been as busy as the stock exchange in a past two weeks.

Everything looks up and in the moment it's the middle-age of economy's rising cycle. I hope it continues for another 3 years, but the S&P 500* (blue line) is concerning me. It has already reached the level of the last two economic booms. What if the 'economic cycle acceleration' theory is true? Basically couple years ago I was wondering about a possibility that the period between economic crisis and booms might get shorter. That's because : 90% of the world's wealth is owned by 10% of the population. Also, what is hard to measure, but true is that 10% of the population have much greater financial intelligence than the rest. So what happens? The smart rich people gain a lot of money every crisis by buying from bottom and selling in top. Also they do short selling* which basically means betting on the stock to decrease. Some people start to understand these patterns, but even more
(the 90% of fools) give away money.
In case of market's fool, It's like an investment firm. You don't take out money from the account in case you really don't need it. Because from every disposal, the government takes taxes. How much? Depends on the country. In Estonia, 20%. It's better to trade with 1000€ rather than 800€. Assuming you're gonna gain of course.
That's why these cycles might happen more rapidly in the decades coming. For example, take a look at the history. Technology bubble 1990, internet bubble 2000, financial bubble 2008. What next? Aftershock bubble 2015 maybe? It's should be noticed that the periods have decreased. Last one was in 8 years from the previous one. According to this, next one could be 2016. Because It's amazing how fast people's psychology changes. Today, a young woman gave me back my one euro coin that I had dropped. She could've kept it easily. Now that shows that the greed is gone for a moment there. But when people hear about the money made at the stock market by the smart people, they want in. Then the greed emerges again.

• Now, about my next indicator for analyzing stocks. This is a chart from 1994 to now. On that chart, there's S&P 500 (blue line) and BAC (red line) aka Bank of America. Same time the other banks have been rising along with the S&P 500, BAC has not. Which gives me a reason to buy, because many stocks have already made their fast climb. Why shouldn't BAC. Also USA would never let a huge bank like this go declare bankruptcy. So that will be another indicator I'll be testing by purchasing BAC.

What is going on with my portfolio?

• First, my long-term stocks : 

C +1.3%
F +6.1%
PFE +2.5%
Average +3.3%

In comparison, S&P 500 has risen 4% in 6 weeks. That's the time I've been writing this blog.
Looks like I should be doing a lot better if I want to beat the market. Keep learning and keep trying.
Good quote for this:
"Give me guys who are poor, smart, hungry - and no feelings. When you feel, you lose a few, but you keep on fighting." That's what I'm trying here.

• My speculation stocks : 

ITMN +6.2% Just like I said, the growth stopped. Could've sold it, but I was interested what was going to happen.
L +3.2% I will sell, because there's nothing to expect. It has been fluctuating between 39pt and 43pt for 6 months.
SBUX +1.2% Though the increase is slow, at least it's steady and Starbucks is a francise based on the number of customers, which is in the moment, increasing for sure.
ALXA -6.8% I sell, but will wait for an opportune moment for buying again. Simply I like the fundamentals (I mean news) of the company and the stock's movement.
KIM +2.3% Most certainly i will dump it, because it has made me nothing comparing to the market.
Average +1.2%
Week's S&P 500 +0.8%

Conclusion - the long-term shares have been better, but one week shows nothing yet.


*S&P 500 - An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. 

*short selling - The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.Selling short is the opposite of going long. That is, short sellers make money if the stock goes down in price.

Week 5

This time I'll tell you more about technical analysis, due to it being mostly left aside in my previous post. But first, I will talk about the announcement concerning the 'fiscal cliff'.

Here's the conclusion's simplest explanation of January 2nd announcement : 

http://www.forbes.com/sites/abrambrown/2013/01/02/fiscal-cliff-house-oks-compromise-deal-and-investors-can-briefly-rejoice/

• The market was absolutely bullish (positive) that day and has been bullish for the whole week, because for 98% of the Americans and small businesses don't have their taxes increased. Taxes only increase for the wealthiest families. All in all, the final result of the change is much less agile then the market projected (predicted). 

• Regarding this, I saw a great opportunity and bought shares of two stocks that I saw potential for growth and also, these two have been in my watch list for a week now : 

ITMN +6.1% which is a rapid increase for 2 days. had a triple bottom indicator and also a gentle growth trend that is not risky. Also shows an efficient MACD. Unfortunately It will change in a couple weeks. Why? Explanations are below the chart.

• The trend is trustworthy and not risky as long as it's below 45-degrees comparing to the horisontal. When the trend is getting too rapid and steep, there's a risk for the trend to change from bullish to bearish (from positive to negative). Examples : 

• The second reason the trend will change is MACD. As I explained in one of my precious posts, MACD works like this : when the blue MACD line is above the green signal line, it shows a bullish trend and vice versa. Now in case of  ITMN, there's a very small chance for the MACD line to stay above signal line for very long. Maybe 1-2 weeks. Then they cut into each other and when the MACD line moves below signal line, this is the sign for selling.

• The other stock I bought is SBUX (Starbucks) +3.8% in two days. The reason I bought it was also the 'fiscal cliff' positive outcome and second - rounding bottoms. The new indicator helps helps recognise the point where the trend changes. Though the SBUX changing looks much more fluctuating and bigger than in the example, it is not. Just look at the percentages (share price). Also It's important for the volume to grow simirarly to the example. 

• Let's get to my previous investments : 

ALXA +0.4 To be honest, I predicted at least 5% increase by now, but I think it still has potential and I'm holding it.

KIM +2.8% I've been holding it for a long time now and in case it won't reach 7% in a week, I'm dumping it. Frankly, there's a rally out there in the moment and in those moments it's important to search for a stock that keeps up with the rest of the market or that moves even faster then the rest of the market.

L +1.4% I will sell it next week because of the slow movement. The trend-change signal wasn't strong enough, either. Which means, there's a possibility for no change and no fast movements.

What will I do next ?

One of my blog's readers suggested a very good blog that helps you notice the stocks that are underrated my the market and that actually have very good fundamentals, which means a long-term growth. notablecalls.blogspot.com

• From that page, I found a retailer FRAN stock that certainly has strong fundamentals, also triple bottom indicator and good MACD. Moreover, it decreased 25%, because the market overreacted to the resignation of the CEO. Usually, when the hit is that huge, it is caused by weak results, but FRAN had good results.All in all, I'm buying and will hope a 10% increase in next two weeks, especially on bullish market.

What is the overreacting market ?
It means when first something bad or good happens to the company. For example, the quarters results are a disappointment or the news announce that a CEO resigns etc. Then secondly, the market takes it too seriously and start selling. The share price decreases too much. One way to analyse this, is to use P/E, which I introduced in my previous post. It shows, if the share price is too low or high for its results. For example, when the market overreacts because of little worse results than predicted and the price plummets, the P/E might be below 10. If you believe that this company's shares should cost more then the current price and it's just the market overreacting because of something that doesn't really affect  the results in the future, you should purchase it.


Now, I have been wanting to see, which way is better for investing - speculating* or long-term investments (over a year). In order to test that, I will make a long-term experiment. I will buy three stocks that are not very fluctuating and that are constantly decreasing/increasing. Same time I will continue to trade within couple weeks, which I have been doing here.
The three stocks are Ford, Citigroup and Pfizer. I'll keep you in the loop, how they are doing.
Guess, we'll see if the quote "The mother of all evil is speculation." is true.

*speculation - The act of trading in an asset, or conducting a financial transaction, that has a significant risk of losing most or all of the initial outlay, in expectation of a substantial gain. With speculation, the risk of loss is more than offset by the possibility of a huge gain; otherwise, there would be very little motivation to speculate.

Happy new year, I hope 2013 will be prosperous !