Jason Boudrias's List: Investing-Tips and Info

• So what is Warren Buffett strategy?

   
  Warren Buffett said many times that the companies he likes are:
   
  
  1. Simple businesses that he understands
    2. that have predictable and proven earnings and
    3. with economic moat
    4. those can be bought at a reasonable price.

• Predictability of Businesses

   
  In our database there are 2403 stocks that have been traded from Jan. 2, 1998 to Aug. 31, 2008. We have the complete 10-year financial data and trading prices of these companies for this period. We rank the predictability of these companies based on the consistency of their revenue per share and EBITDA (earning before interest, tax, depreciation and amortization) per share over the past ten fiscal years, and study the correlation between the stock performances and the predictability of the business.
• We ranked the predictability of the 2403 companies. Any companies that ever had operating loss in any fiscal year during the past 10 years are considered unpredictable.
• Among the 2403 companies, there were only 570 that are predictable according to our definition.
• Introduction of Predictability Rank
• Predictability Rank   5-Star   4.5-Star   4-Star  3.5-Star   3-Star  2.5-Star   2-Star  1-Star (non-predictable)   Average among all     % out of all 2403 stocks   3.3%   2.9%   3.7%   3.3%   3.3%   3.7%   3.3%   76.3%   100%     % that are in loss (10y)   3%   10%   8%   9%   11%   18%   16%   45%   37%     Average gain (10y)   364.6%   330.9%   278.0%   235.1%   243.5%   227.8%   154.8%   100.0%   138.1%     Median gain (10y)   238.5%   193.5%   171.0%   159.0%   132.5%   113.5%   87.0%   13.0%   39.0%     Maximum Gainer   2228.0%   2547.0%   2452.0%   2852.0%   2432.0%   1892.0%   1807.0%   11483.0%   11483.0%     Max Loser   -82.0%   -53.0%   -67.0%   -100.0%   -83.0%   -100.0%   -78.0%   -100.0%   -100.0%     Annualized Average Gain   15.4%   14.6%   13.2%   12.0%   12.2%   11.7%   9.1%   6.7%   8.4%     Annualized Median Gain   12.1%   10.6%   9.8%   9.3%   8.2%   7.3%   6.0%   1.1%   3.1
• Only 3.3% out of the 2403 stocks are ranked 5-Star. In the back testing for 1998-2008, only 3% of the 5-Star stocks are still in loss. Their annualized median gain was 12.1%, which is 9% a year above the average of all stocks.
• Not-Ranked: There are more than 10,000 stocks trading on the major exchanges. We only ranked 2403 of them; all others are not ranked. They are not ranked mainly because most of them do not have more than 10 years of history, or we do not have 10-year financial data if they do.

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• Higher-beta stocks tend to be more volatile and therefore riskier, but provide the potential for higher returns. Lower-beta stocks pose less risk but generally offer lower returns.

• Looking at the value of PEG of companies is similar to looking at the P/E ratio: A lower PEG means the stock is more undervalued.
• Networking Company:
  
   
   
  • P/E ratio (50) divided by the annual earnings growth rate (20) = PEG ratio of 2.5
   
   Beer Company:
  
   
  • P/E ratio (15) divided by the annual earnings growth rate (10) = PEG ratio of 1.5
   
   The PEG ratio shows us that, when compare to the beer company, the always-popular tech company doesn't have the growth rate to justify its higher P/E, and its stock price appears overvalued.
  
• The Bottom Line
  Subjecting the traditional P/E ratio to the impact of future earnings growth produces the more informative PEG ratio. The PEG ratio provides more insight about a stock's current valuation. By providing a forward-looking perspective, the PEG is a valuable evaluative tool for investors attempting to discern a stock's future prospects.

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• Stocks with low P/E ratios are more likely to be undervalued compared with stocks with higher P/E ratios.
• One of the most practical ways of investing in low P/E stocks is to focus on what hedge funds are buying. Hedge funds usually hire experienced investment professionals and devote significant resources in researching stocks and the market. That’s why they often have an edge over ordinary investors.
• In this article, we are going to take a look at the low P/E US stocks that hedge funds are bullish on. All companies have at least $10 billion market cap and P/E ratios lower than 10. The market data is sourced from Finviz. These stocks are held by the most number of hedge funds tracked by Insider Monkey.

• GM

  General Motors Company

  5.16

  71

• COP

  ConocoPhillips

  9.3

  32

• BK

  The Bank of New York

  9.47

  32

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• Stock repurchases are often used as a tax-efficient method to put cash into shareholders' hands, rather than paying dividends. Sometimes, companies do this when they feel that their stock is undervalued on the open market. Other times, companies do this to provide a "bonus" to incentive compensation plans for employees. Rather than receive cash, recipients receive an asset that might appreciate in value faster than cash saved in a bank account. Another motive for stock repurchase is to protect the company against a takeover threat.

• After all, the goal of a firm's management is to maximize return for shareholders, and a buyback generally increases shareholder value.
• Nevertheless, there are still sound motives that drive companies to repurchase shares. For example, management many feel the market has discounted its share price too steeply.
• First of all, share buybacks reduce the number of shares outstanding.
• The buyback also helps to improve the company’s price-earnings ratio (P/E).
• In other words, fewer shares + same earnings = higher EPS!

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• First, stocks that pay higher dividends have historically outperformed stocks that pay lower dividends.
• $1,000 invested in the S&P 500 in 1957 was worth $176,000 by 2006. The same $1,000 invested in the top 10 S&P companies with the highest dividend yields (more on this below) was worth $1.3 million.
• Second, companies that pay more in dividends typically tend to experience higher earnings growth in the future.
• A study by researchers Rob Arnott and Cliff Asness divided stocks into 10 groups by dividend yield and found that the highest-yielding 10% had the highest earnings growth over the next decade.

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• Where the P/E falls down
• As an example, Warren Buffett instead judges performance using "owner earnings", which he argues reflects the true cash flow generation of a company. This is defined as net income plus non-cash charges of depreciation and amortization less capital expenditures and any additional working capital that might be needed (effectively “free cash flow”).

• The basic EPS figure is the total earnings per share based on the number of shares outstanding at the time. The diluted EPS figure reveals the earnings per-share a business would have generated if all stock options, warrants, convertibles, and other potential sources of dilution that were currently exercisable were invoked and the additional shares printed resulting in an increase in the total shares outstanding.

• MarketWatch

• • One point for offering products or services that benefit from habitual behaviour:
• • One point for freedom from business cycles.
• One point for the ability to profit from secular trends, or two points for the ability to profit from two or more secular trends:
• One point for industry prominence—two points for industry dominance:

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• For instance, a mutual fund that gained 1% each and every month over the past 36 months would have a standard deviation of zero, because its monthly returns didn't change from one month to the next. But here's where it gets tricky: A mutual fund that lost 1% each and every month would also have a standard deviation of zero. Why? Because, again, its returns didn't vary. Meanwhile, a fund that gained 5% one month, 25% the next, and that lost 7% the next would have a much higher standard deviation; its returns have been more varied.
• Let's translate. Say a fund has a standard deviation of four and an average return of 10% per year. Most of the time (or, more precisely, 68% of the time), we can expect the fund's future returns to range between 6% and 14%—or its 10% average plus or minus its standard deviation of four. Almost all of the time (95% of the time), its returns will fall between 2% and 18%, or within two standard deviations of its mean.

•  In this article you will learn how to pinpoint the hottest sectors leading the market higher (or lower in a bear market) and how to find stocks within those sectors that will potentially maximize returns.
• We can also view the charts of sector ETFs.

• • Some investors read a high P/E as an overpriced stock
    A low PE could mean the this is a sleeper the market has overlooked. Known as value stocks, many investors made their fortunes spotting these before the rest of the market - Buffet, would say - buy when everyone else is fearful, be fearful when everyone else is buying.
• The P/E looks at the relationship between the stock price and the company’s earnings.

• You calculate the P/E by taking the share price and dividing it by the company’s EPS.  

     P/E = Stock Price / EPS   

   For example, a company with a share price of $40 and an EPS of 8 would have a P/E of 5 ($40 / 8 = 5).  

   What does P/E tell you? The P/E gives you an idea of what the market is willing to pay for the company’s earnings.

• Some investors read a high P/E as an overpriced stock and that may be the case, however it can also indicate the market has high hopes for this stock’s future and has bid up the price.  

   Conversely, a low P/E may indicate a “vote of no confidence” by the market or it could mean this is a sleeper that the market has overlooked. Known as value stocks, many investors made their fortunes spotting these “diamonds in the rough” before the rest of the market discovered their true worth. 
• • EPS = Earnings Per Share
    
    For example, companies A and B both earn $100, but company A has 10 shares outstanding, while company B has 50 shares outstanding. Which company’s stock do you want to own?
    
    It makes more sense to look at earnings per share (EPS) for use as a comparison tool. You calculate earnings per share by taking the net earnings and divide by the outstanding shares.
    
    EPS = Net Earnings / Outstanding Shares
    Using our example above, Company A had earnings of $100 and 10 shares outstanding, which equals an EPS of 10 ($100 / 10 = 10). Company B had earnings of $100 and 50 shares outstanding, which equals an EPS of 2 ($100 / 50 = 2).

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• The rest of this example will be done in the case where we have a sample size of 5 pirates, therefore we will be using the standard deviation equation for a sample of a population.

    

  Here are the amounts of gold coins the 5 pirates have:

    

  4, 2, 5, 8, 6.

    

  Now, let's calculate the standard deviation:

    

  1. Calculate the mean:

   

  

   

  

   

  

   

  

    

  2. Calculate for each value in the sample:

   

  

   

  

   

  

   

  

   

  

      

  3. Calculate :

   

  

   

  

   

  

    

  4. Calculate the standard deviation:

   

  

   

  

   

  

   

  The standard deviation for the amounts of gold coins the pirates have is 2.24 gold coins.

• For example, if manager A generates a return of 15% while manager B generates a return of 12%, it would appear that manager A is a better performer. However, if manager A, who produced the 15% return, took much larger risks than manager B, it may actually be the case that manager B has a better risk-adjusted return.
  
  To continue with the example, say that the risk free-rate is 5%, and manager A's portfolio has a standard deviation of 8%, while manager B's portfolio has a standard deviation of 5%. The Sharpe ratio for manager A would be 1.25 while manager B's ratio would be 1.4, which is better than manager A. Based on these calculations, manager B was able to generate a higher return on a risk-adjusted basis.
• To give you some insight, a ratio of 1 or better is considered good, 2 and better is very good, and 3 and better is considered excellent.
• The idea of the ratio is to see how much additional return you are receiving for the additional volatility of holding the risky asset over a risk-free asset - the higher the better.

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• From A (superior past performance) to E (poor past performance) the FundGrade rating  system employs an advanced, risk-adjusted approach to rank the performance of each  qualifying investment fund.
• A fund’s performance is evaluated not only in terms  of returns but also in terms of amount of risk taken to generate these returns.