Indications that there may be some potential additional valueNYSE:BHG BHG's current price level of $13.45 Entry. Indications that there may be some potential for additional value creation if the stock continues to perform well over time. Bullish on BHG as long as its current price remains above its 52-week low and it has not recently fallen below its 200-day moving average price level or below its 50-day moving average price level. Additionally I'm considering holding shares of BHG for the long term, I believe they will continue to perform well over time based on their current performance and prospects for future growth potential.
Price target $51.5
Valueinvesting
Bull Market Booming: Top Tips to Maximize Your Investment Gains!It appears that a bull market has taken hold in the US market, as evidenced by the remarkable rise of the S&P 500 index, surging over 20% from its October lows. Adding to this favorable outlook, the Federal Reserve has finally implemented a much-anticipated pause in the cycle of interest rate hikes.
With the shift in market sentiment from bearish to bullish, investors are eagerly looking for avenues to leverage this upward trend and make the most of the prevailing conditions.
Today, we will delve into the various factors that indicate the arrival of a bull market, along with strategies and invaluable tips to help you seize the opportunities presented by this favorable market scenario.
What Lies Behind All This Optimism?
The current wave of optimism in the market and the emergence of a new bull market can be attributed to several significant factors that are often overlooked or avoided in discussions. One key reason behind this optimism is the remarkable earnings results reported by companies.
Investors are celebrating the fact that companies are no longer delivering mediocre performance. Instead, they are exceeding expectations and showcasing strong growth. This shift in mindset from accepting average results to embracing a "glass-half-full" outlook is driven by the realization that companies are meeting and even surpassing the high growth expectations set for them.
This surge in optimism is fueled by the confidence that companies have proven their ability to generate substantial earnings and capitalize on market opportunities. Investors are therefore responding by driving up the market and contributing to the overall bullish sentiment.
It is important to acknowledge and consider this fundamental aspect when discussing the reasons behind the current optimism and the substantial year-to-date increases observed in the market. The impressive performance of companies and their ability to meet or exceed growth expectations have played a vital role in shaping the current bullish market sentiment.
S&P 500 daily chart
The positive forward guidance provided by CEOs further reinforces the current optimism in the market, as it signals their increased confidence in navigating challenges, particularly those posed by inflation. A notable example of this trend can be seen in Nvidia's Q1 earnings report, which highlighted the company's upwardly revised guidance. This adjustment reflects the strong demand for AI technologies that power applications at major industry players such as Google, Microsoft, and OpenAI, the creator of ChatGPT.
Nvidia's projected revenue of $11 billion for Q2 significantly surpassed the estimates put forth by Wall Street analysts. This impressive figure serves as tangible evidence that the AI craze is more than just hype. The surge in demand for graphics processing units (GPUs) from both established tech giants and startups as they develop their AI platforms has been a key driver behind Nvidia's remarkable performance. As a result, the company's shares experienced a staggering 26% surge, propelling Nvidia's market value to an extraordinary $1 trillion.
This achievement places Nvidia among the elite group of publicly traded US companies that have reached this milestone, joining the ranks of industry giants such as Apple, Microsoft, Google parent Alphabet, and Amazon. The significance of Nvidia's market value milestone further solidifies the notion that the demand for AI technologies is substantial and here to stay, providing a strong foundation for the ongoing bull market in the US market.
Tesla stock daily chart
Tesla has also emerged as a significant player worth noting in the current market landscape. The company has experienced a remarkable turnaround, with its stock value surging by an impressive 70% over a six-month period, including a notable 53% increase in the past month alone. This is a noteworthy development, considering that Tesla had suffered a substantial loss of around two-thirds of its value in 2022.
The strategic and timely price cuts implemented by Tesla, although initially perplexing to some, are now proving to provide the company with a potential market share advantage. These price adjustments have contributed to the renewed interest and confidence in Tesla, ultimately fueling its recent resurgence.
As the Q1 reporting cycle has concluded, the results reveal a strong performance for tech stocks in the latter half of the year. This surge can be attributed to the prevailing optimism surrounding the Federal Reserve's approach to nearing the end of its rate hike cycle. The anticipation of higher interest rates, coupled with concerns of slower economic growth and softer labor market conditions, has contributed to a decline in inflation. Surprisingly, the adverse effects that were initially expected to impact households and businesses have been less severe than initially predicted.
Furthermore, with the concerns surrounding the US debt ceiling alleviated and the mitigation of inflation risks, the overall market sentiment has undergone a transformation from bearish to bullish. This shift in sentiment is likely to continue, with stocks, particularly mega-cap tech companies like Tesla, expected to maintain strong returns throughout the remainder of the year.
Overall, Tesla's impressive turnaround and the positive performance of tech stocks exemplify the overall market's optimistic outlook, driven by a combination of factors such as Federal Reserve actions, inflation dynamics, and improved market conditions.
Top Bull Market Stocks to Consider Buying Now: Tesla (TSLA)
This is not financial advice.
Indeed, Tesla's influence extends beyond its position as a dominant player in the electric vehicle (EV) market. The company's offerings go beyond vehicles and encompass solar and energy storage solutions. Tesla's plans to establish a factory in Shanghai for manufacturing Megapack batteries further solidify its position as a leader in the renewable energy sector. These batteries play a crucial role in storing renewable energy, alleviating strain on the grid during peak hours, and promoting a more sustainable energy ecosystem.
While Tesla's growth will be primarily driven by its vehicle production, the company's positive outlook is reinforced by upcoming price cuts and the launch of new products such as the highly anticipated Cybertruck and Semi. These product expansions contribute to the company's overall growth potential and indicate its commitment to innovation and diversification within the EV market.
Despite some mixed recent financial results, investing in Tesla during the current bullish market phase is seen by many as a reasonable bet on the company's potential to become the world's largest automaker. Tesla's strong market presence, technological advancements, and commitment to sustainability have garnered significant investor confidence and positioned the company for continued success in the evolving automotive and renewable energy sectors.
Alphabet (GOOGL)
Alphabet stock daily chart
Google, with a staggering market capitalization of $1.6 trillion, stands as one of the most prominent names in the business world. It secures its place among the top five most valuable companies globally and boasts a widely recognized and esteemed brand.
Google remains at the forefront of groundbreaking advancements in various technological spheres, including mobile technology, cloud services, data analytics, artificial intelligence (AI), and virtual reality. These innovative developments continue to drive the company's success and shape its competitive edge. Notably, a significant portion of Google's revenue stems from its dominance in internet advertising, a lucrative sector that contributes substantially to its financial performance.
The active integration of AI within Google's operations serves as a strong catalyst for the growth of its shares. As AI technology becomes increasingly prevalent, it expands the addressable market for Google, creating new avenues for growth and revenue generation. The global corporate AI market, in which Google actively participates, is projected to experience a remarkable annual growth rate of 34.1% until 2030. This highlights the immense potential and opportunities that lie ahead for Google as it leverages AI capabilities to propel its business forward.
With its continuous pursuit of technological innovation and a diversified revenue stream, Google remains a formidable force in the industry, poised for sustained growth and influence in the years to come.
Intel (INTC)
Intel stock Monthly chart
The increasing adoption of artificial intelligence (AI) technology has created a surge in demand for chips, leading to notable market movements for prominent AI chip manufacturers. Both Advanced Micro Devices (AMD) and NVIDIA have experienced significant share price increases since the start of 2023, capitalizing on the growing enthusiasm surrounding AI advancements.
In light of this trend, chipmaker Intel is also seeking to position itself as a key player in the AI chip market. Intel has been engaged in negotiations for a strategic initial public offering (IPO) investment with Arm, a renowned British chipmaker. This move follows NVIDIA's previous unsuccessful attempt to acquire Arm.
By exploring this potential partnership, Intel aims to solidify its position in the AI chip sector and leverage Arm's expertise and technology to enhance its own capabilities. The negotiations highlight the fierce competition among chipmakers to secure a prominent position in the rapidly expanding AI market.
As the race for AI chip dominance intensifies, these developments demonstrate the strategic moves undertaken by major players in the industry to stay ahead in the evolving landscape of AI technology. The outcome of these negotiations will undoubtedly have implications for the future trajectory of the AI chip market and the competitive dynamics among key players such as AMD, NVIDIA, and Intel.
Strategies For Investing In A Bull Market
If we are indeed in the early stages of a new bull market, it's crucial to have strategies in place to make the most of rising stock prices. Here are four strategies to consider:
1 ) Diversification and Asset Allocation: Review your asset allocation to ensure you have sufficient exposure to stocks to benefit from the bull market. Consider rebalancing your portfolio by reducing your allocation to bonds and cash while increasing your allocation to equities. However, exercise caution and remain aware that market conditions can change rapidly. Don't assume that stocks will only go up from here. Maintain a well-balanced portfolio that includes a mix of stocks, bonds, and cash. If you're uncertain about the ideal mix, the Rule of 110 suggests subtracting your age from 110 to determine the percentage of your portfolio to allocate to stocks.
2 ) Focus on Growth Stocks and Sectors: In a bull market, growth stocks and sectors tend to perform well. Look for innovative companies that leverage technology to create efficiencies or address global challenges. Industries experiencing rapid growth in 2023 include CBD product manufacturing, 3D printing, solar power, and artificial intelligence. Remember that growth stocks offer higher return potential but also come with increased risk compared to more established companies.
3 ) Consider Value Investing: Value stocks are equities that appear undervalued relative to their intrinsic value. They may be trading at lower prices due to investor overreactions or a market environment that favors faster-growing assets. In a strong bull market, value stocks may lag as investors favor growth assets. However, for patient, long-term investors, this presents a buying opportunity. Value stocks often shine during bear markets and may offer dividend payments. Utilize the bull market to increase your holdings of value stocks, which can act as a buffer during the next bear market while providing dividend income.
4 ) Dollar-Cost Averaging: Implement a strategy known as dollar-cost averaging (DCA), where you invest a fixed amount on a regular schedule, regardless of market fluctuations. For example, invest $400 on the same day each month instead of trying to strategically time the market. DCA helps manage the volatility often seen in the early stages of a bull market. By investing consistently, you buy more shares when prices are low and fewer shares when prices are high. This approach lowers your average cost basis over time and minimizes the impact of short-term market fluctuations.
Remember that these strategies should be tailored to your individual financial goals, risk tolerance, and time horizon. It's advisable to consult with a financial advisor who can provide personalized guidance before making any significant investment decisions.
Risks To Be Aware Of In A Bull Market
While bull markets can present favorable opportunities, it's crucial to be aware of potential risks and pitfalls. Here are three significant risks to consider:
1 ) Overconfidence and Speculation: During a bull market, there is a tendency for investors to become overconfident and take on higher levels of risk. This can lead to speculative investing, where investors chase after high-risk, high-reward opportunities. However, when the bull market eventually ends, these speculative investments may experience substantial losses. It's important to maintain a balanced approach to investing and avoid excessive risk-taking, as downturns can permanently impact the outlook for smaller, less established companies.
2 ) Market Bubble: Bull markets can sometimes give rise to market bubbles, where stock prices become significantly detached from their underlying value. This occurs when investors, driven by excessive optimism, push prices to unsustainable levels. While market bubbles can provide opportunities for gains in the short term, they also carry the risk of a sudden correction or crash. Once the bubble bursts, panic can set in, causing a rapid decline in stock prices and the onset of a new bear market. It's essential to remain cautious and be aware of signs of excessive market exuberance.
3 ) Impact of Interest Rates and Inflation: The interplay between interest rates, inflation, and economic conditions can influence the trajectory of a bull market. Changes in interest rates by central banks, such as the Federal Reserve, can impact borrowing costs and corporate profitability. Additionally, shifts in inflation levels can affect consumer spending power and overall economic growth. Uncertainties regarding future interest rate hikes or spikes in inflation can introduce volatility and potentially dampen or reverse a bull market. It's important to monitor economic indicators and the actions of central banks to gauge their potential impact on market conditions.
It's worth noting that predicting the specific outcomes of these factors in the coming months or years is challenging. The key is to remain vigilant, maintain a diversified portfolio, and consider the long-term perspective when making investment decisions. Consulting with a financial advisor can provide valuable guidance in navigating the risks associated with a bull market.
Tips For Benefitiing From A Bull Market
To successfully navigate a bull market and maximize your investment potential, it's important to consider the following strategies:
1 ) Stay Disciplined: Maintaining discipline is crucial in avoiding excessive risk-taking and speculative behavior. Define your investing parameters and process, and stick to them. Establish clear criteria for the types of investments you're willing to make and the level of risk you're comfortable with. Evaluate any exceptions carefully and have a clear exit plan for more speculative assets. By staying disciplined, you can mitigate the risks associated with overaggressive investing and ensure a more measured approach to capitalizing on the bull market.
2 ) Think Long-Term: Adopting a long-term perspective is key to protecting your investments from short-term market fluctuations and potential downturns. While it can be tempting to make impulsive decisions based on short-term market movements, it's important to focus on your long-term financial goals. Allocate a portion of your portfolio to cash reserves to cover emergencies or major purchases, so you don't need to tap into your investment accounts during market volatility. This long-term outlook allows you to weather market cycles and take advantage of opportunities that may arise, while also providing stability and peace of mind.
3 ) Rebalance Regularly: Bull markets can lead to overexposure to stocks as their value appreciates. Regularly rebalancing your portfolio helps maintain your desired asset allocation. For example, if your target allocation is 70% equities and 30% bonds and cash, and stocks have outperformed, your allocation may shift to 75% stocks and 25% bonds and cash. By periodically selling stocks and purchasing bonds, you can restore your desired asset allocation and lock in some profits from the bull market. Rebalancing also helps manage risk by ensuring that your portfolio remains aligned with your risk tolerance and investment objectives.
4 ) Seek Professional Advice: Each individual's financial situation is unique, and it's important to consider your circumstances when implementing investment strategies. Regularly review your investment plan and consult with a financial professional to ensure it remains aligned with your goals and risk tolerance. A financial advisor can provide personalized guidance based on your specific situation, help you navigate market trends, and offer insights on potential investment opportunities. They can also assist in assessing the performance of your portfolio and making adjustments as needed.
By following these strategies, you can position yourself to make informed investment decisions, manage risk, and capitalize on the opportunities presented by a bull market. However, it's important to remember that investing involves inherent risks, and past performance is not indicative of future results. Stay informed, monitor market conditions, and be prepared to adjust your strategies as needed.
Conclusion:
As the bull market gains momentum, it is essential for investors to be well-prepared and make informed decisions. Employing various strategies such as diversification and asset allocation, emphasizing growth stocks and sectors, considering value investing, and implementing dollar-cost averaging can significantly enhance one's ability to navigate the market effectively. Nevertheless, it is crucial to remain cautious of potential risks, including overconfidence, market bubbles, and the influence of interest rates and inflation. To maximize gains during the bull market while minimizing potential risks, it is vital to maintain discipline, adopt a long-term perspective, regularly rebalance portfolios, and seek professional advice. It is important to note that individual circumstances vary, thus investment strategies should be tailored to align with personal financial goals and risk tolerance.
The Art of Seeking Beta: Where Average Investors Beat the ProfsNasdaq 100 Index ( NASDAQ:NDX ), S&P Midcap ( SP:MID )
Since Jack Bogle created the first stock index fund in 1974, he has shown that passive investing in low-cost index mutual funds could beat active fund managers after cost.
These days, there are countless of stock indexes and thousands of index funds to choose from. Picking the right market index, which I term “Seeking Beta”, is quite challenging.
An average investor without stock-picking skill could still achieve impressive results. Which index he chooses would reflect his belief system and his overall assessment of the stock market. Investment returns could be vastly different.
I put together three hypothetical examples to illustrate the Art of Seeking Beta.
US investor Adam
• Had $10,000 in cash one year ago, and invested in a Nasdaq 100 index fund;
• Today his portfolio would have a market value of $11,574;
• One-year return is +15.74%, excluding transaction fees.
Chinese investor Bill
• Had 67,000 yuan in cash one year ago, and invested in a China SSE index fund;
• Today his portfolio would have a market value of 66,919 yuan;
• One-year return is -0.12%, excluding transaction fees.
Chinese investor Catherine
• Had 67,000 yuan in cash one year ago;
• She converted the fund into USD at an exchange rate of 6.70;
• She immediately invested the $10,000 proceed in a Nasdaq 100 index fund;
• Her portfolio would have a market value of $11,574 now;
• Today, she converts the USD back to yuan at an exchange rate of 7.10;
• Catherine now has 82,175 yuan;
• One-year return in yuan is +22.65%, excluding transaction fees.
For comparison, US hedge funds generated an average weighted return of 4.1% in the fourth quarter of 2022, up from -0.6% in the third quarter and -6.8% in the quarter before, according to Citco's data.
Adam could easily beat an average hedge fund. Catherine could rank among the Top-20 US hedge funds and the Top-5 Chinese hedge funds.
This case illustrates how non-professional investors could achieve impressive results with common sense decision making:
• One year ago, China’s economy was halted to a standstill amid strict Zero-Covid policy. It was not unreasonable for an investor to pick US over Chinese stock markets.
• The Fed started raising rates in March while China central bank cut rates; Interest rate parity dictates that Chinese Yuan would depreciate against the Dollar;
• For a retail investor, you only need to know that converting yuan deposit into dollar deposit would generate more interest income;
• Each Chinese citizen is allowed to exchange for $50,000 a year; A couple with $100,000 could do some serious investing in the US market.
• US stock market indexes seldom go down two years in a row; thus, after the Nasdaq experienced a 30% drawdown, investors could expect a rebound.
Implications in Today’s Market
You may say that looking back is 20/20 vision. But we can’t time travel back to repeat Catherine’s investing. What about looking ahead? Luckily, we are not blind-folded. Here is my observation:
The S&P 500 has risen 12.2% year-to-date. However, this growth is primarily due to the AI-fueled bubble by five mega-stocks: NASDAQ:NVDA (+174%), NASDAQ:AAPL (+47%), NASDAQ:AMZN (+46%), NASDAQ:GOOG (+42%), NASDAQ:MSFT (+39%).
After taking out these top-5 trillion-dollar companies, the remaining “S&P 495” has a meager return of under 3% YTD. The S&P Mid-Cap Index, which is the S&P 500 minus the top-100 stocks, has a year-to-date return of 2.74%.
If a fund manager comes up with a new S&P 495 ETF, I would seriously look into it. Meanwhile, for the art of seeking beta, S&P Midcap is not a bad choice.
Happy Trading.
Disclaimers
*The opinion above is my own. This is not a trading advice.
BA Boeing Flying Above Ichimoku Clouds. Hara-Kiri for the bears I've been invested in this from $130 it is 10% of my total investing and trading capital. The bad news is over for Boeing the stock is still trading cheap compared to the growth this company will have as the US - China Arms and Space Race heats up. Plus the future growth of the aerospace and defense industries in general. Target is for BA to test it's all time high of around $400 .
2nd Quarter Fair Value Estimate for the S&P 500Calculated using the present value of growth opportunities. Factoring in 8.5% CAGR for the S&P 500 from 2024 earnings.
Looks like a short opportunity may be incoming.
Paypal - too cheap? PayPal's stock looks undervalued, trading at 6-year lows and a forward P/E ratio of 12.3, despite a strong Q1 performance with respectable transaction revenues, total payment volume, and growth in value-added services.
Operating expenses are well-managed, contributing to substantial growth in operating income and earnings per share, while consensus estimates suggest mid-to-high teens EPS compound annual growth rate.
Market concerns, such as PayPal's Q2 revenue guidance and increased competition, are offset by the Moderate Buy consensus rating, suggesting a 60.7% upside potential.
The involvement of activist investor Elliott Management and the potential sale of the cross-border payment unit, Xoom, signal strategic changes that could enhance PayPal's performance.
PayPal still rides the wave of the growth in e-commerce, with 12% payment volume increase in Q1 2023, and a rise in peer-to-peer transfers, demonstrating resilience in a challenging macroeconomic environment.
The fundamentals of this company have become detached from the share price, making this a long term buy and hold with hugely asymmetrical risk/return profile.
Shorter term, the move back to the highly developed Point of Control would represent over 20% growth, which I see as a high probability outcome within weeks.
Berkshire Hathaway Inc. New WCA - Classic Rectangle PatternHello and thank you for taking the time to read my post. Today, we analyze Berkshire Hathaway Inc. New's chart on the weekly scale, focusing on a classic price pattern called the "Rectangle Pattern." Berkshire Hathaway Inc. New is a diversified financial services conglomerate, traded on the NYSE under the tickers BRK.A (Class A shares) and BRK.B (Class B shares).
Classic Rectangle Pattern:
The classic rectangle pattern is a chart pattern formed when the price of an asset moves between two parallel horizontal lines, representing support and resistance levels, over a period of time. In essence, it reflects a consolidation phase where the market is undecided about the direction of the trend.
Analysis:
In the case of Berkshire Hathaway Inc. New, we observe a 322-day rectangle with several touching points. The upper boundary is at 320$, and the lower boundary is at 264$. The price chart has just broken out of the rectangle and is re-testing the old resistance as support, which makes an entry interesting. All this happens while we are above the 200 EMA, which supports a bullish environment and an idea on the long side.
Additional Analysis:
The recent breakout from the rectangle pattern and the re-test of the old resistance as new support suggest a potential upward trend continuation. As we are above the 200 EMA, the bullish environment is further supported, making long positions more attractive. The price target is at 376$, which represents a potential ~17.5% price increase. On the way to the price target, we can expect to encounter resistance at 360$.
Conclusion:
The Berkshire Hathaway Inc. New weekly chart showcases a classic Rectangle Pattern, reflecting a consolidation phase in the market. The recent breakout and re-test of old resistance as support, combined with the price being above the 200 EMA, signal a potential continuation of the bullish trend. With a price target of 376$ and intermediate resistance at 360$, traders should remain vigilant and consider proper risk management strategies when entering long positions.
Company: Berkshire Hathaway Inc. New
Ticker: BRK.A (Class A shares) / BRK.B (Class B shares)
Exchange: NYSE
Sector: Diversified Financial Services
Please note that this analysis is not financial advice. Always do your own due diligence when investing or trading.
Best regards,
Karim Subhieh
Price/Earnings: amazing interpretation #2In my previous post , we started to analyze the most popular financial ratio in the world – Price / Earnings or P/E (particularly one of the options for interpreting it). I said that P/E can be defined as the amount of money that must be paid once in order to receive 1 monetary unit of diluted net income per year. For American companies, it will be in US dollars, for Indian companies it will be in rupees, etc.
In this post, I would like to analyze another interpretation of this financial ratio, which will allow you to look at P/E differently. To do this, let's look at the formula for calculating P/E again:
P/E = Capitalization / Diluted earnings
Now let's add some refinements to the formula:
P/E = Current capitalization / Diluted earnings for the last year (*)
(*) In my case, by year I mean the last 12 months.
Next, let's see what the Current capitalization and Diluted earnings for the last year are expressed in, for example, in an American company:
- Current capitalization is in $;
- Diluted earnings for the last year are in $/year.
As a result, we can write the following formula:
P/E = Current capitalization / Diluted earnings for the last year = $ / $ / year = N years (*)
(*) According to the basic rules of math, $ will be reduced by $, and we will be left with only the number of years.
It's very unusual, isn't it? It turns out that P/E can also be the number of years!
Yes, indeed, we can say that P/E is the number of years that a shareholder (investor) will need to wait in order to recoup their investments at the current price from the earnings flow, provided that the level of profit does not change .
Of course, the condition of an unchangeable level of profit is very unrealistic. It is rare to find a company that shows the same profit from year to year. Nevertheless, we have nothing more real than the current capitalization of the company and its latest profit. Everything else is just predictions and probable estimates.
It is also important to understand that during the purchase of shares, the investor fixates one of the P/E components - the price (P). Therefore, they only need to keep an eye on the earnings (E) and calculate their own P/E without paying attention to the current capitalization.
If the level of earnings increases since the purchase of shares, the investor's personal P/E will decrease, and, consequently, the number of years to wait for recoupment.
Another thing is when the earnings level, on the contrary, decreases – then an investor will face an increase in their P/E level and, consequently, an increase in the payback period of their own investments. In this case, of course, you have to think about the prospects of such an investment.
You can also argue that not all 100% of earnings are spent paying dividends, and therefore you can’t use the level of earnings to calculate the payback period of an investment. Yes, indeed: it is rare for a company to give all of its earnings to dividends. However, the lack of a proper dividend level is not a reason to change anything in the formula or this interpretation at all, because retained earnings are the main fundamental driver of a company's capitalization growth. And whatever the investor misses out on in terms of dividends, they can get it in the form of an increase in the value of the shares they bought.
Now, let's discuss how to interpret the obtained P/E value. Intuitively, the lower it is, the better. For example, if an investor bought shares at P/E = 100, it means that they will have to wait 100 years for their investment to pay off. That seems like a risky investment, doesn't it? Of course, one can hope for future earnings growth and, consequently, for a decrease in their personal P/E value. But what if it doesn’t happen?
Let me give you an example. For instance, you have bought a country house, and so now you have to get to work via country roads. You have an inexpensive off-road vehicle to do this task. It does its job well and takes you to work via a road that has nothing but potholes. Thus, you get the necessary positive effect this inexpensive thing provides. However, later you learn that they will build a high-speed highway in place of the rural road. And that is exactly what you have dreamed of! After hearing the news, you buy a Ferrari. Now, you will be able to get to work in 5 minutes instead of 30 minutes (and in such a nice car!) However, you have to leave your new sports car in the yard to wait until the road is built. A month later, the news came out that, due to the structure of the road, the highway would be built in a completely different location. A year later your off-road vehicle breaks down. Oh well, now you have to get into your Ferrari and swerve around the potholes. It is not hard to guess what is going to happen to your expensive car after a while. This way, your high expectations for the future road project turned out to be a disaster for your investment in the expensive car.
It works the same way with stock investments. If you only consider the company's future earnings forecast, you run the risk of being left alone with just the forecast instead of the earnings. Thus, P/E can serve as a measure of your risk. The higher the P/E value at the time you buy a stock, the more risk you take. But what is the acceptable level of P/E ?
Oddly enough, I think the answer to this question depends on your age. When you are just beginning your journey, life gives you an absolutely priceless resource, known as time. You can try, take risks, make mistakes, and then try again. That's what children do as they explore the world around them. Or when young people try out different jobs to find exactly what they like. You can use your time in the stock market in the same manner - by looking at companies with a P/E that suits your age.
The younger you are, the higher P/E level you can afford when selecting companies. Conversely, in my opinion, the older you are, the lower P/E level you can afford. To put it simply, you just don’t have as much time to wait for a return on your investment.
So, my point is, the stock market perception of a 20-year-old investor should differ from the perception of a 50-year-old investor. If the former can afford to invest with a high payback period, it may be too risky for the latter.
Now let's try to translate this reasoning into a specific algorithm.
First, let's see how many companies we are able to find in different P/E ranges. As an example, let's take the companies that are traded on the NYSE (April 2023).
As you can see from the table, the larger the P/E range, the more companies we can consider. The investor's task comes down to figuring out what P/E range is relevant to them in their current age. To do this, we need data on life expectancy in different countries. As an example, let's take the World Bank Group's 2020 data for several countries: Japan, India, China, Russia, Germany, Spain, the United States, and Brazil.
To understand which range of P/E values to choose, you need to subtract your current age from your life expectancy:
Life Expectancy - Your Current Age
I recommend focusing on the country where you expect to live most of your life.
Thus, for a 25-year-old male from the United States, the difference would be:
74,50 - 25 = 49,50
Which corresponds with a P/E range of 0 to 50.
For a 60-year-old woman from Japan, the difference would be:
87,74 - 60 = 27,74
Which corresponds with a P/E range of 0 to 30.
For a 70-year-old man from Russia, the difference would be:
66,49 - 70 = -3,51
In the case of a negative difference, the P/E range of 0 to 10 should be used.
It doesn’t matter which country's stocks you invest in if you expect to live most of your life in Japan, Russia, or the United States. P/E indicates time, and time flows the same for any company and for you.
So, this algorithm will allow you to easily calculate your acceptable range of P/E values. However, I want to caution you against making investment decisions based on this ratio alone. A low P/E value does not guarantee that you are free of risks . For example, sometimes the P/E level can drop significantly due to a decline in P (capitalization) because of extraordinary events, whose impact can only be seen in a future income statement (where we would learn the actual value of E - earnings).
Nevertheless, the P/E value is a good indicator of the payback period of your investment, which answers the question: when should you consider buying a company's stock? When the P/E value is in an acceptable range of values for you. But the P/E level doesn’t tell you what company to consider and what price to take. I will tell you about this in the next posts. See you soon!
Price / Earnings: Interpretation #1In one of my first posts , I talked about the main idea of my investment strategy: buy great “things” during the sales season . This rule can be applied to any object of the material world: real estate, cars, clothes, food and, of course, shares of public companies.
However, a seemingly simple idea requires the ability to understand both the quality of “things” and their value. Suppose we have solved the issue with quality (*).
(*) A very bold assumption, I realize that. However, the following posts will cover this topic in more detail. Be a little patient.
So, we know the signs of a high-quality thing and are able to define it skilfully enough. But what about its cost?
"Easy-peasy!" you will say, "For example, I know that the Mercedes-Benz plant produces high-quality cars, so I should just find out the prices for a certain model in different car dealerships and choose the cheapest one."
"Great plan!" I will say. But what about shares of public companies? Even if you find a fundamentally strong company, how do you know if it is expensive or cheap?
Let's imagine that the company is also a machine. A machine that makes profit. It needs to be fed with resources, things are happening in there, some cogs are turning, and as a result we get earnings. This is its main goal and purpose.
Each machine has its own name, such as Apple or McDonald's. It has its own resources and mechanisms, but it produces one product – earnings.
Now let’s suppose that the capitalization of the company is the value of such a machine. Let's see how much Apple and McDonald's cost today:
Apple - $2.538 trillion
McDonald's - $202.552 billion
We see that Apple is more than 10 times more expensive than McDonald's. But is it really so from an investor's point of view?
The paradox is that we can't say for sure that Apple is 10 times more expensive than McDonald's until we divide each company's value by its earnings. Why exactly? Let's count and it will become clear:
Apple's diluted net income - $99.803 billion a year
McDonald's diluted net income - $6.177 billion a year
Now read this phrase slowly, and if necessary, several times: “The value is what we pay now. Earnings are what we get all the time” .
To understand how many dollars we need to pay now for the production of 1 dollar of profit a year, we need to divide the value of the company (its capitalization) by its annual profit. We get:
Apple - $25.43
McDonald’s - $32.79
It turns out that in order to get $ 1 earnings a year, for Apple we need to pay $25.43, and for McDonald's - $32.79. Wow!
Currently, I believe that Apple appears cheaper than McDonald's.
To remember this information better, imagine two machines that produce one-dollar bills at the same rate (once a year). In the case of an Apple machine, you pay $25.43 to issue this bill, and in the case of a McDonald’s machine, you pay $32.70. Which one will you choose?
So, if we remove the $ symbol from these numbers, we get the world's most famous financial ratio Price/Earnings or P/E . It shows how much we, as investors, need to pay for the production of 1 unit of annual profit. And pay only once.
There are two formulas for calculating this financial ratio:
1. P/E = Price of 1 share / Diluted EPS
2. P/E = Capitalization / Diluted Net Income
Whatever formula you use, the result will be the same. By the way, I mainly use the Diluted Net Income instead of the regular one in my calculations. So do not be confused if you see a formula with a Net Income – you can calculate it this way as well.
So, in the current publication, I have analyzed one of the interpretations of this financial ratio. But, in fact, there is another interpretation that I really like. It will help you realize which P/E level to choose for yourself. But more on that in the next post. See you!
What can financial ratios tell us?In the previous post we learned what financial ratios are. These are ratios of various indicators from financial statements that help us draw conclusions about the fundamental strength of a company and its investment attractiveness. In the same post, I listed the financial ratios that I use in my strategy, with formulas for their calculations.
Now let's take apart each of them and try to understand what they can tell us.
- Diluted EPS . Some time ago I have already told about the essence of this indicator. I would like to add that this is the most influential indicator on the stock market. Financial analysts of investment companies literally compete in forecasts, what will be EPS in forthcoming reports of the company. If they agree that EPS will be positive, but what actually happens is that it is negative, the stock price may fall quite dramatically. Conversely, if EPS comes out above expectations - the stock is likely to rise strongly during the coverage period.
- Price to Diluted EPS ratio . This is perhaps the best-known financial ratio for evaluating a company's investment appeal. It gives you an idea of how many years your investment in a stock will pay off if the current EPS is maintained. I have a particular take on this ratio, so I plan to devote a separate publication to it.
- Gross margin, % . This is the size of the markup to the cost of the company's product (service) or, in other words, margin . It is impossible to say that small margin is bad, and large - good. Different companies may have different margins. Some sell millions of products by small margins and some sell thousands by large margins. And both of those companies may have the same gross margins. However, my preference is for those companies whose margins grow over time. This means that either the prices of the company's products (services) are going up, or the company is cutting production costs.
- Operating expense ratio . This ratio is a great indicator of management's ability to manage a company's expenses. If the revenue increases and this ratio decreases, it means that the management is skillfully optimizing the operating expenses. If it is the other way around, shareholders should wonder how well management is handling current affairs.
- ROE, % is a ratio reflecting the efficiency of a company's equity performance. If a company earned 5% of its equity, i.e. ROE = 5%, and the bank deposit rate = 7%, then shareholders have a reasonable question: why invest equity in business development, if it can be placed in a bank deposit and get more, without expending extra effort? In other words, ROE, % reflects the return on invested equity. If it is growing, it is definitely a positive factor for the company and the shareholders.
- Days payable . This financial ratio is an excellent indicator of the solvency of the company. We can say that it is the number of days it will take the company to pay all debts to suppliers from its revenue. If the number of days is relatively small, it means that the company has no delays in paying for supplies and therefore no money problems. I consider less than 30 days to be acceptable, but over 90 days is critical.
- Days sales outstanding . I already mentioned in my previous posts that when a company is having a bad sales situation, it may even sell its products on credit. Such debts accumulate in accounts receivable. Obviously, large accounts receivable are a risk for the company, because the debts may simply not be paid back. For ease of control over this indicator, they invented such a financial ratio as "Days sales outstanding". We can say that this is the number of days it will take the company to earn revenue equivalent to the accounts receivable. It's one thing if the receivables are 365 daily revenue and another if it's only 10 daily revenue. Like the previous ratio: less than 30 days is acceptable to me, but over 90 days is critical.
- Inventory to revenue ratio . This is the amount of inventory in relation to revenue. Since inventory includes not only raw materials but also unsold products, this ratio can indicate sales problems. The more inventory a company has in relation to revenue, the worse it is. A ratio below 0.25 is acceptable to me; a ratio above 0.5 indicates that there are problems with sales.
- Current ratio . This is the ratio of current assets to current liabilities. Remember, we said that current assets are easier and faster to sell than non-current, so they are also called quick assets. In the event of a crisis and lack of profit in the company, quick assets can be an excellent help to make payments on debts and settlements with suppliers. After all, they can be sold quickly enough to pay off these liabilities. To understand the size of this "safety cushion", the current ratio is calculated. The larger it is, the better. For me, a suitable current ratio is 2 or higher. But below 1 it does not suit me.
- Interest coverage . We already know that loans play an important role in a company's operations. However, I am convinced that this role should not be the main one. If a company spends all of its profits to pay interest on loans, it is working for the bank, not for the shareholders. To find out how tangible interest on loans is for the company, the "Interest coverage" ratio was invented. According to the income statement, interest on loans is paid out of operating income. So if we divide the operating income by this interest, we get this ratio. It shows us how many times more the company earns than it spends on debt service. To me, the acceptable coverage ratio should be above 6, and below 3 is weak.
- Debt to revenue ratio . This is a useful ratio that shows the overall picture of the company's debt situation. It can be interpreted the following way: it shows how much revenue should be earned in order to close all the debts. A debt to revenue ratio of less than 0.5 is positive. It means that half (or even less) of the annual revenue will be enough to close the debt. A debt to revenue ratio higher than 1 is considered a serious problem since the company does not even have enough annual revenue to pay off all of its debts.
So, the financial ratios greatly simplify the process of fundamental analysis, because they allow you to quickly draw conclusions about the financial condition of the company, without looking up and down at its statements. You just look at ratios of key indicators and draw conclusions.
In the next post, I will tell you about the king of all financial ratios - the Price to Diluted EPS ratio, or simply P/E. See you soon!
Financial ratios: digesting them togetherI hope that after studying the series of posts about company financial statements, you stopped being afraid of them. I suggest we build on that success and dive into the fascinating world of financial ratios. What is it?
Let's look at the following example. Let's say you open up a company's balance sheet and see that the amount of debt is $100 million. Do you think this is a lot or a little? To me, it's definitely a big deal. But can we say the company has a huge debt based only on how we feel about it? I don't think so.
However, if you find that a company that generates $10 billion in annual revenue has $100 million in debt (i.e. only 1% of revenue), what would you say then? That's objectively small, isn't it?
It turns out that without correlating one indicator with another, we cannot draw any objective conclusion. This correlation is called the Financial Ratio .
The recipe for a normal financial ratio is simple: we take one or two indicators from the financial statements, add some market data, put it all into a formula that includes a division operation - we obtain the financial ratio.
In TradingView you can find a lot of financial ratios in the section Financials -> Statistics .
However, I only use a few financial ratios which give me an idea about the financial situation of the company and its value:
What can you notice when looking at this table?
- Profit and revenue are frequent components of financial ratios because they are universal units of measurement for other reporting components. Just as length can be measured in feet and weight in pounds, a company's debts can be measured in revenues.
- Some financial ratios are ratios, some are percentages, and some are days.
- There are no financial ratios in the table whose data source is the Cash Flow Statement. The fact is that cash flows are rarely used in financial ratios because they can change drastically from quarter to quarter. This is especially true for financial and investment cash flow. That's why I recommend analyzing cash flows separately.
In my next post, I'll break down each financial ratio from this table in detail and explain why I use them specifically. See you soon!
Europe is treading a fine line between growth and inflationEuropean equities have ushered in 2023 with a strong rebound, up 7.72%1. Exchange-traded fund (ETF) flows into the European region have risen by US$13bn, in sharp contrast to the US that has seen US$9bn of outflows year-to-date (YTD)as of 27 February 2023.
The confluence of China re-opening its economy and prudent management of resources during the energy crisis, alongside better valuations, helped European equities flourish. Essentially, the worst impact from the energy crisis that was priced in for Europe did not end up materialising, thereby improving sentiment.
Resilient Q4 2022 earnings season but outlook remains cautious
Europe is seeing better earnings growth for Q4 2022, up 8.81%3. The deep value parts of the market – financials, energy, utilities, consumer staples, and healthcare – continue to contribute to positive earnings growth. At the same time, China’s reopening has benefitted cyclical sectors across consumer discretionary and communications which posted the strongest earnings growth up 49% and 38% respectively4.
At 8% of sales, Europe has the second-highest exposure to China after Asia-Pacific (ex-Japan). It therefore would make sense to position for a better China macro-outlook in the sectors with the highest revenue exposure to China – semiconductors, materials, consumer durables, energy, and automobiles. We also know Chinese consumers saved one-third of their income last year, depositing 17.8 trillion yuan ($2.6 trillion) into banks, and investors are pinning their hopes on those savings finding their way into Europe’s luxury goods market.
Another factor favouring European equities has been European buyback activity which has increased to a record level, with a net buyback spend reaching around 220bn thereby creating an additional yield of around 2%5. This has helped Europe’s total yield (that is, buyback + dividends) outpace that of the US for the first time in 30 years.
Headwinds persist from further tightening by European Central Bank (ECB)
Euro-area Purchasing Manager’s Indices (PMI) continued their rebound in February reaching a nine-month high of 51, helped by easing headwinds from the energy crisis and resilient consumer spending amidst fading inflation. Headline inflation in the Euro-area for January dipped to 8.6%, showing further evidence that price pressures are easing6. However, core inflation in the Euro-area rose to 5.6%5 from 5.2% in December, highlighting that underlying price pressures continue to remain sticky. The more resilient economic data of late is likely to keep the ECB on a more hawkish monetary path. As monetary policy works with approximately a 10 - 12 month lag, we are yet to see the full impact of the recent spate of tightening.
Euro-area M1 growth is down to 0.6%, marking the second weakest reading on record pointing to weaker growth ahead. Furthermore, the Q1 results of the ECB Bank Lending Survey showed Euro-area credit conditions tightening at the fastest pace since 2009. In the Euro-area, moves in M1 growth tends to lead economic momentum by six months. This suggests that tighter monetary policy is leading to reduced credit availability for the real economy.
Tailwinds from looser fiscal policy to aid the Euro-area recovery
Prior to the Ukraine war, the Euro-area was characterised by relatively tight fiscal policy. However, the shock of the energy crisis drove a shift in fiscal policy. Governments are loosening their fiscal purse strings again, offering significant support to both consumers and businesses amidst the recent energy shock. Government expenditure, as a share of GDP, surged to almost 60% as COVID-19 hit (from just over 45% prior to the virus) and it is now rising again higher than before the pandemic7. The Eurozone budget deficit is now widening and heading towards 4% of GDP. Eurozone government expenditure as a share of GDP in 2022, through Q3, was 3% higher than the average from 2017 to 2019, with revenues up less than 1%. The think tank, Bruegel, estimates that EU economies have set aside €680bn to date to protect consumers from the energy crisis, which comes in addition to the EU Recovery Funds (€750bn from 2021 to 2027) which are now flowing. This is close to 10% of GDP, which excludes the cost of COVID-19 support.
The European economy remains caught between tailwinds – loose fiscal policy, easing energy prices, strong labour market, the re-opening of the Chinese economy – and headwinds of a weakening credit cycle in response to tighter monetary policy. Amidst this macro backdrop we expect investors to be more selective as the existing tailwinds should help Europe endure a milder than expected recession.
Topping Pattern Example (Head and Shoulders)Hunstman is a chemical manufacturer whose earnings have plummeted over 85% compared to the first half of 2022. The chart is a prime example of a large head & shoulders pattern. Analysts expect its earning to remain depressed and the chart shows signs of Distribution over the past 2 years.
Cash flow vibrationsIn the previous post we started to analyze the Cash flow statement. From it, we learned about the existence of three cash flows - operating cash flow, financial cash flow, and investment cash flow. Like three rivers, they fill the company's "lake of cash" (that is, they go with a "+" sign).
However, there are three other rivers that flow out of our lake, preventing it from expanding indefinitely. What are their names? They have absolutely identical names: operating cash flow, financial cash flow, and investment cash flow (and they go with a "-" sign). Why so? Because all of the company's outgoing payments can also be divided into these three rivers:
Operating payments include the purchase of raw materials, the payment of wages - everything related to the production and support of the product.
Financial payments include repayment of debt and interest on it, payment of dividends, or buyback of shares from shareholders.
Investment payments include the purchase of non-current assets (say, the purchase of additional buildings or shares in another company).
If the inflows from the three rivers on the left are greater than the outflows into the rivers on the right, then our lake will increase in volume, meaning that the company's cash balances will grow.
If the outflows into the three rivers on the right are greater than the inflows from the rivers on the left, the lake will become shallow and eventually dry up.
So, the cash flow statement shows how much our lake has increased or decreased over the period (quarter or year). This report can be presented as four entries:
Each value of A, B, and C is the difference between what came into our lake from the river and what flowed out of the lake by the river of the same name. That is, the value can be either positive or negative.
How can we interpret the meanings of the different flows? Let's break down each of them.
Operating cash flow . In a fundamentally strong company, it is the most stable and powerful river. The implication is that it should be the main source of "water" for our lake. Negative operating cash flow is an indicator of serious problems with the business because it means it is not generating money.
Investment cash flow . This is the most unpredictable river, as sometimes it can be very powerful and sometimes it can flow like a thin trickle. This is due to the fact that the purchase or sale of non-current assets (recall that these may be buildings, equipment, shares in other companies) does not occur as regularly as operational activities. A sudden negative investment flow tells us about some big purchase. Shareholders do not always view such events positively, as they may consider it an unwise expenditure or a threat to dividend payments. Therefore, they may start to sell their shares, which causes their price to drop. If a big purchase is perceived as an opportunity to reach the next level and capture more market share, then we may see exactly the opposite effect - an increase in share price.
Financial cash flow . A negative value of this cash flow can be seen as a very positive signal because it means that the company is either actively reducing its debt to creditors, or using the money to pay dividends, or spending the money to buy its own stock (*), or maybe all of these together.
(*) Here you may ask, why would a company buy its own stock? Management sometimes does this when they are confident in the success of their business and want to support the growth of their stock. The company becomes a major buyer of its own stock for some time so that it begins to grow. The process itself is called share buyback .
Positive financial cash flow, on the other hand, signals either an increase in debt or the sale of its own stock. As far as debt is concerned, you can't say that loans are bad for business. But there has to be a measure. But the sale by a company of its own shares is already an alarming signal to the current shareholders. It means that the company doesn't have enough money coming out of operating cash flow.
There is another type of cash flow that is not a separate "river," but is used as information about how much cash the company has left to meet its obligations to creditors and shareholders. This is Free cash flow .
It is simple to calculate: just subtract one of the components of the investment cash flow from the operating cash flow. This component is called Capital expenditures (often abbreviated as CAPEX). Capital expenditures include outgoing payments that go toward the purchase of non-current assets , such as land, buildings, equipment, etc.
(Free cash flow = Operating cash flow - Capital expenditures)
Free cash flow can be characterized as the "living" money that a company has created over a period, which can be used to repay loans, pay dividends, and buyback stocks from shareholders. If free cash flow is very weak or even negative, it is a reason for creditors, shareholders and investors to think about how the company is doing business.
This concludes my discussion of the cash flow statement topic. Next time, let's talk about the magic ratios that you can get from a company's financial statements. They greatly facilitate the process of fundamental analysis and are widely used by investors around the world. We will talk about the so-called Financial Ratios . See you soon!
XRP the Standard - KING of Altcoins 🕚Hi Traders, Investors and Speculators of the Charts 📈📉
If you've been following me for the past year, you'll be well aware that I am notoriously bullish on XRP. Now before you think "omg not another #xrparmy post..." - let me reassure you that this is not because of the cult-following that surrounds XRP. Infact, I'd like to explore a few other fundamental reasons on why I remain bullish on XRP. Not because of the price (although it is a bargain atm), but because of the future potential value, as taught by Warren Buffet considering Value Investing.
When it comes to investing, we can all take a page from Warren Buffet's book - invest for the future potential value and ignore the price now. Warren Buffet made his fortune by spotting great opportunities early, and talking a leap of faith. XRPUSDT is one of those altcoins that show great promise - but maybe not right now. Founded by Ripple in 2012, XRP has a massive advantage over other altcoins - time . With time comes progress, innovation and most importantly : the establishment of a network. Ripple is the only crypto-presence at the World Economic Forum, you will find their CEO (Brad Garlinghouse) on the website of the WEF . That's a great pluspoint in terms of fundamentals.
XRP wallets officially hit 4,6 Million yesterday. This proves that more liquidity is entering the market, which is a bullish sign .
In a previous post, I discussed the fundamental impact of Harvard declaring that XRP and XLM will be the future of payments (yes, this really happened):
The latest news on the SEC case vs XRP can be found here:
XRPUSDT is also HIGHLY OVERDUE for a close ABOVE the monthly resistance zone. Check out this idea from September 2022:
Final Thoughts 💭
Can you think of any other altcoins that received so much hate over YEARS from the media... and even a lawsuit form the SEC? If you've been in this space prior 2018, you'll know that XRP was the underdog of crypto. Sure, mistakes were made, but the space was new and there were no rules. To be completely logical, most companies would rip off people if they get the chance. If you're looking for a morality coin to invest in, let me know when you find one. The price related foul play in XRP's early days doesn't change the current fundamentals for XRP as mentioned above.
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Cash flow statement or Three great riversToday we're going to start taking apart the third and final report that the company publishes each quarter and year - it's Cash flow statement.
Remember, when we studied the balance sheet , we learned that one of the company's assets is cash in accounts. This is a very important asset because if the company doesn't have money in the account, it can't buy raw materials, pay employees' salaries, etc.
What, in general, is a "company" in the eyes of an accountant? These are assets that have been purchased on credit or with equity, for the purpose of earning a net income for its shareholders or investing that income in further growth.
That is, the source of cash in a company's account may be profits . But why do I say "may be"? The point is that it's possible to have a situation where profits are positive on the income statement, but there is no money physically in the account. To make sense of this, let's remember the workshop I use in all the examples. Suppose our master sold all of his boots on credit. That is, he was promised payment, but later. He ended up with a receivable in assets and, most interestingly, generated revenue. The accountant will calculate the revenue for these sales, despite the fact that the shop hasn't actually received the money yet. Then the accountant will deduct the expenses from the revenue, and the result will be a profit. But there is zero money in the account. So what should our master do? The orders are coming in, but there is nothing to pay for the raw materials. In such circumstances, while the master is waiting for the repayment of debts from customers, he himself borrows from the bank to top up his current account with money.
Now let us make his situation more complicated. Let us assume that the money borrowed he still does not have enough, and the bank does not give more. The only thing left is to sell some of his property, that is, some of his assets. Remember, when we took apart the assets of the workshop , the master had shares in an oil company. This is something he could sell without hurting the production process. Then there is enough money in the checking account to produce boots uninterrupted.
Of course, this is a wildly exaggerated example, since more often than not, profits are money, after all, and not the virtual records of an accountant. Nevertheless, I gave this example to make it clear that cash in the account and profit are related, but still different concepts.
So what does the cash flow statement show? Let's engage our imagination again. Imagine a lake with three rivers flowing into it on the left and three rivers flowing out on the right. That is, on one side the lake feeds on water, and on the other side it gives it away. So the asset called "cash" on the balance sheet is the lake. And the amount of cash is the amount of water in that lake. Let's now name the three rivers that feed our lake.
Let's call the first river the operating cash flow . When we receive the money from product sales, the lake is filled with water from the first river.
The second river on the left is called the financial cash flow . This is when we receive financing from outside, or, to put it simply, we borrow. Since this is money received into the company's account, it also fills our lake.
The third river let's call investment cash flow . This is the flow of money we get from the sale of the company's non-current assets. In the example with the master, these were assets in the form of oil company stock. Their sale led to the replenishment of our notional money lake.
So we have a lake of money, which is filled thanks to three flows: operational, financial, and investment. That sounds great, but our lake is not only getting bigger, but it's also getting smaller through the three outgoing flows. I'll tell you about that in my next post. See you soon!
What should I look at in the Income Statement?The famous value investor, Mohnish Pabrai , said in one of his lectures that when he visited Warren Buffett, he noticed a huge handbook with the financial statements of thousands of public companies. It's a very dull reading, isn't it? Indeed, if you focus on every statement item - you'll waste a lot of time and sooner or later fall asleep. However, if you look at the large volumes of information from the perspective of an intelligent investor, you can find great interest in the process. It is wise to identify for yourself the most important statement items and monitor them in retrospect (from quarter to quarter).
In previous posts, we've broken down the major items on the Income statement and the EPS metric:
Part 1: The Income statement: the place where profit lives
Part 2: My precious-s-s-s EPS
Let's now highlight the items that interest me first. These are:
- Total revenue
The growth of revenue shows that the company is doing a good job of marketing the product, it is in high demand, and the business is increasing its scale.
- Gross profit
This profit is identical to the concept of margin. Therefore, an increase in gross profit indicates an increase in the margin of the business, i.e. its profitability.
- Operating expenses
This item is a good demonstration of how the management team is dealing with cost reductions. If operating expenses are relatively low and decreasing while revenue is increasing, that's terrific work by management, and you can give it top marks.
- Interest expense
Interest on debts should not consume a company's profits, otherwise, it will not work for the shareholders, but for the banks. Therefore, this item should also be closely monitored.
- Net income
It's simple here. If a company does not make a profit for its shareholders, they will dump its shares*.
*Now, of course, you can dispute with me and give the example of, let's say, Tesla shares. There was a time when they were rising, even when the company was making losses. Indeed, Elon Musk's charisma and grand plans did the trick - investors bought the company's stock at any price. You could say that our partner Mr. Market was truly crazy at the time. I'm sure you can find quite a few such examples. All such cases exist because investors believe in future profits and don't see current ones. However, it is important to remember that sooner or later Mr. Market sobers up, the hype around the company goes away, and its losses stay with you.
- EPS Diluted
You could say it's the money the company earns per common share.
So, I'm finishing up a series of posts related to the Income statement. This statement shows how much the company earns and how much it spends over a period (quarter or year). We've also identified the items that you should definitely watch out for in this report.
That's all for today. In the next post, we will break down the last of the three financial statements of a public company - the Cash Flow Statement.
Goodbye and see you later!
📉 Stoch Markets: Is the worst really over? 🚀⁉️📝 I will try to analyze the market as a whole, with reference to the Russell 3000 index , which is broader than the S&P 500 .
(Russell 3000 is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S. stock market. It measures the performance of the 3,000 largest publicly held companies incorporated in America as measured by total market capitalization, and represents approximately 97% of the American public equity market).
📈 On the top chart we have the Russell 3000 .
📉 On the bottom chart, we have the Russell 2000 Growth divided by the Russell 2000 Value .
(The Russell 2000 Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index).
The intention here is to see how the companies classified in the 'Growth Investing' category are performing, using the 'Value Investing' companies as a parameter.
🤔 As a rule, it is to be expected that when traders and investors are more prone to risk, they invest more money in 'growth investing' companies than in 'value investing' companies.
1) Analyzing divergences
1.1) 2006-2008
In the period from 2006 to 2008 we had a divergence: the Russell 3000 had lower funds, while the Growth companies had higher funds. The apex was found precisely in the blue diagonal channel, on 12/30/2008. Note that Russell's bottom was only found on 03/10/2009, 3 months later. There is a clear anticipation in the contribution of 'Growth' companies.
1.2) 2014-2016
Russell tests the support of the green line several times, the last one being on 02/11/2016.
Meanwhile, Growth companies remain on the rise, however reaching the blue diagonal channel again on 02/02/2017, 1 year later.
In this case there was an outflow of 'Growth' companies, at least until reaching the blue diagonal channel. After that the increase continues.
1.3) 2018-2020
In this period we have a classic book divergence.
The Russell peaks downwards on 21/12/2018, and later on 23/03/2020, featuring lower bottoms.
Meanwhile, 'Growth' companies continue to 'respect' the green close with ever higher funds, reaching a low peak on the same date.
1.4) 2022-?
Considering the bad macro-economic scenario, with the high cost of money and inflation, it would be surprising that the 'Growth' companies had a better performance than the 'Value' ones. Despite this pessimistic bias, if this indicator breaks above this green diagonal line and stays there, I will reconsider this opinion. If not, I think it is more likely that it will hit the blue diagonal channel again to form the final divergence.
🟢 For comparison purposes, considering a more global aspect and not just the small companies of the Russell 2000, the same analysis could be done on the ratio between the RAG and RAV indices (Russel 3000 Growth/Russel 3000 Value):
2006-2008
2014-2016
2018-2020
2022-?
🔵 What's important to note is that these key moments happened in December and March.
My precious-s-s-s EPSIn the previous post , we began looking at the Income statement that the company publishes for each quarter and year. The report contains important information about different types of profits : gross profit, operating income, pretax income, and net income. Net income can serve both as a source of further investment in the business and as a source of dividend payments to shareholders (of course, if a majority of shareholders vote to pay dividends).
Now let's break down the types of stock on which dividends can be paid. There are only two: preferred stock and common stock . We know from my earlier post that a stock gives you the right to vote at a general meeting of shareholders, the right to receive dividends if the majority voted for them, and the right to part of the bankrupt company's assets if something is left after paying all debts to creditors.
So, this is all about common stock. But sometimes a company, along with its common stock, also issues so-called preferred stock.
What advantages do they have over common stock?
- They give priority rights to receive dividends. That is, if shareholders have decided to pay dividends, the owners of preferred shares must receive dividends, but the owners of common shares may be deprived because of the same decision of the shareholders.
- The company may provide for a fixed amount of dividend on preferred shares. That is, if the decision was made to pay a dividend, preferred stockholders will receive the fixed dividend that the company established when it issued the shares.
- If the company goes bankrupt, the assets that remain after the debts are paid are distributed to the preferred shareholders first, and then to the common shareholders.
In exchange for these privileges, the owners of such shares do not have the right to vote at the general meeting of shareholders. It should be said that preferred shares are not often issued, but they do exist in some companies. The specific rights of shareholders of preferred shares are prescribed in the founding documents of the company.
Now back to the income statement. Earlier we looked at the concept of net income. Since most investments are made in common stock, it would be useful to know what net income would remain if dividends were paid on preferred stock (I remind you: this depends on the decision of the majority of common stockholders). To do this, the income statement has the following line item:
- Net income available to common stockholders (Net income available to common stockholders = Net income - Dividends on preferred stock)
When it is calculated, the amount of dividends on preferred stock is subtracted from net income. This is the profit that can be used to pay dividends on common stock. However, shareholders may decide not to pay dividends and use the profits to further develop and grow the company. If they do so, they are acting as true investors.
I recall the investing formula from my earlier post : give something now to get more in the future . And so it is here. Instead of deciding to spend profits on dividends now, shareholders may decide to invest profits in the business and get more dividends in the future.
Earnings per share or EPS is used to understand how much net income there is per share. EPS is calculated very simply. As you can guess, all you have to do is divide the net income for the common stock by its number:
- EPS ( Earnings per share = Net income for common stock / Number of common shares issued).
There is an even more accurate measure that I use in my analysis, which is EPS Diluted or Diluted earnings per share :
- EPS Diluted ( Diluted earnings per share = Net income for common stock / (Number of common shares issued + Issuer stock options, etc.)).
What does "diluted" earnings mean, and when does it occur?
For example, to incentivize management to work efficiently, company executives may be offered bonuses not in monetary terms, but in shares that the company will issue in the future. In such a case, the staff would be interested in the stock price increase and would put more effort into achieving profit growth. These additional issues are called Employee stock options (or ESO ). Because the amount of these stock bonuses is known in advance, we can calculate diluted earnings per share. To do so, we divide the profit not by the current number of common shares already issued, but by the current number plus possible additional issues. Thus, this indicator shows a more accurate earnings-per-share figure, taking into account all dilutive factors.
The value of EPS or EPS Diluted is so significant for investors that if it does not meet their expectations or, on the contrary, exceeds them, the market may experience significant fluctuations in the share price. Therefore, it is always important to keep an eye on the EPS value.
In TradingView the EPS indicator as well as its forecasted value can be seen by clicking on the E button next to the timeline.
We will continue to discuss this topic in the next publication. See you soon!
Screen Setup for Fundamental AnalysisRecently I experimented with TradingView's "fundamental metrics" feature by mixing and matching up the financial information indicators. Finally, created a dedicated layout called "Fundamental analysis" and I like it a lot. Realizing that this feature is receiving less attention than it should be getting, I've decided to share my setup with everyone who's reading this to see.
Setup :
I've split my screen into two sides with (i) symbol, (ii) interval, and (iii) time all synced up.
Left screen : Trend analysis on financial performance (the income statement)
Right screen : Trend analysis on financial position (the balance sheet), along with changes in cash positions (statement statement of cash flows)
They're all just high level breakdowns. We are not trying to come up with companies' intrinsic values by just staring at bundles of colorful rainbow lines.
For each quadrant, I've placed the key Financial Statement Line Items (FSLIs), and key ratios (i.e. activity, liquidity, solvency, or profitability ratios) that are relevant to my decision making process. This is not a standard template because every value investor is different in terms of what they want to see at first sight when presented with companies' financial statements.
TradingView had by default put labels with numbers on them, I removed all of those because I'm just interested in looking at the trends. If I need the exact information, I'll either dig up the SEC filings or go get copies of analysts' reports. But before ever doing that, I want to get a quick mental snapshot of the company's financials.
Example : A quick walkthrough of TSLA (by just looking at the layout as shown in the example) over 5 years; As of latest quarter:
(A) Financial performance wise:
- EBIT and EBITDA had increased, all thanks to ramp up of revenue, and helped by decreasing of COS and OPEX.
- as a common shareholder, it's great to see basic EPS increasing, but beware of dilutive effects
(B) Financial position wise:
- from perspective of a shareholder, it's great to see debt decreasing over time; shown by decreasing in net debt, corresponded by decreasing of D/E.
- with increase in interest cover ratio, it tells that TSLA is starting to make enough money to have enough EBIT to cover their finance costs; good
- overall liquidity wise, there had been decrease in quick ratio. This is explainable due to increase of inventory as shown by the gray line. This is okay, as long as inventory turnover is stable going forward (inventory activity ratios can be added if wanted, but I just plotted total inventory; normally I just want to know whether companies hold inventories or not).
Advantage of this setup :
- I can go through my TradingView watchlists and spend just 5 to 10 seconds on each company to get brief insights of their fundamentals.
Disadvantage of this setup :
- The scale is a problem. By default, they are auto-fitted. Due to nature of different FSLIs and ratios, you cannot resize them to obtain a meaningful universal scale. Be careful when deciding to work with comparatives with this setup. Example: if you look at basic and diluted EPS, it seems like the dilutive effect is immaterial because the lines are are stacked up. But if you look at the scales, they're completely different!
The income statement: the place where profit livesToday we are going to look at the second of the three main reports that a company publishes during the earnings season, the income statement. Just like the balance sheet, it is published every quarter and year. This is how we can find out how much a company earns and how much it spends. The difference between revenues and expenses is called profit . I would like to highlight this term "profit" again, because there is a very strong correlation between the dynamics of the stock price and the profitability of the company.
Let's take a look at the stock price charts of companies that are profitable and those that are unprofitable.
3 charts of unprofitable companies :
3 charts of profitable companies :
As we can see, stocks of unprofitable companies have a hard enough time growing, while profitable companies, on the contrary, are getting fundamental support to grow their stocks. We know from the previous post that a company's Equity grows due to Retained Earnings. And if Equity grows, so do Assets. Recall: Assets are equal to the sum of a company's Equity and Liabilities. Thus, growing Assets, like a winch attached to a strong tree, pull our machine (= stock price) higher and higher. This is, of course, a simplified example, but it still helps to realize that a company's financial performance directly affects its value.
Now let's look at how earnings are calculated in the income statement. The general principle is this: if we subtract all expenses from revenue, we get profit . Revenue is calculated quite simply - it is the sum of all goods and services sold over a period (a quarter or a year). But expenses are different, so in the income statement we will see one item called "Total revenue" and many items of expenses. These expenses are deducted from revenue gradually (top-down). That is, we don't add up all the expenses and then subtract the total expenses from the revenue - no. We deduct each expense item individually. So at each step of this subtraction, we get different kinds of profit : gross profit, operating income, pretax income, net income. So let's look at the report itself.
- Total revenue
This is, as we've already determined, the sum of all goods and services sold for the period. Or you could put it another way: this is all the money the company received from sales over a period of time. Let me say right off the bat that all of the numbers in this report are counted for a specific period. In the quarterly report, the period, respectively, is 1 quarter, and in the annual report, it is 1 year.
Remember my comparison of the balance sheet with the photo ? When we analyze the balance sheet, we see a photo (data snapshot) on the last day of the reporting period, but not so in the income statement. There we see the accumulated amounts for a specific period (i.e. from the beginning of the reporting quarter to the end of that quarter or from the beginning of the reporting year to the end of that year).
- Cost of goods sold
Since materials and other components are used to make products, accountants calculate the amount of costs directly related to the production of products and place them in this item. For example, the cost of raw materials for making shoes would fall into this item, but the cost of salaries for the accountant who works for that company would not. You could say that these costs are costs that are directly related to the quantity of goods produced.
- Gross profit (Gross profit = Total revenue - Cost of goods sold)
If we subtract the cost of goods sold from the total revenue, we get gross profit.
- Operating expenses (Operating expenses are costs that are not part of the cost of production)
Operating expenses include fixed costs that have little or no relation to the amount of output. These may include rental payments, staff salaries, office support costs, advertising costs, and so on.
- Operating income (Operating income = Gross profit - Operating expenses)
If we subtract operating expenses from gross profit, we get operating income. Or you can calculate it this way: Operating income = Total revenue - Cost of goods sold - Operating expenses.
- Non-operating income (this item includes all income and expenses that are not related to regular business operations)
It is interesting, that despite its name, non-operating income and operating income can have negative values. For this to happen, it is sufficient that the corresponding expenses exceed the income. This is a clear demonstration of how businessmen revere profit and income, but avoid the word "loss" in every possible way. Apparently, a negative operating income sounds better. Below is a look at two popular components of non-operating income.
- Interest expense
This is the interest the company pays on loans.
- Unusual income/expense
This item includes unusual income minus unusual expenses. "Unusual" means not repeated in the course of regular activities. Let's say you put up a statue of the company's founder - that's an unusual expense. And if it was already there, and it was sold, that's unusual income.
- Pretax income (Pretax income = Operating income + Non-operating income)
If we add or subtract (depending on whether it is negative or positive) non-operating income to operating income, we get pretax income.
- Income tax
Income tax reduces our profit by the tax rate.
- Net income (Net income = Pretax income - Income tax)
Here we get to the income from which expenses are no longer deducted. That is why it is called "net". It is the bottom line of any company's performance over a period. Net income can be positive or negative. If it's positive, it's good news for investors, because it can go either to pay dividends or to further develop the company and increase profits.
This concludes part one of my series of posts on the Income statement. In the next parts, we'll break down how net income is distributed to holders of different types of stock: preferred and common. See you soon!
Breakout for a 2,200%-plus return?This is Carclo, an industrial share listed on the London Stock Exchange’s Alternative Investment Market. It looks like it is breaking out from a 68-month decline that, if the past is any guide, could return huge multiples on any investment at this stage.
Some of this company’s subsidiaries have been trading almost 100 years, but this century it has been a hugely volatile share. It began with the general market decline after the dotcom bubble at the turn of the millennium. A major slide in price was triggered in June 2000, bringing it down almost 90% from peak to trough across 33 months.
It took 26 months for the share to rebound to the 50% Fib (this share loves a Fibonacci level) and, after hitting resistance there, retraced to the .382 Fib where it bobbled along for the best part of a year. By August 2007 it had risen 650% from the bottom.
But then came a double top and another major decline, hitting resistance at the 50% Fib in September 2008 and setting eight months’ worth of relative equal highs from there. (A very nice trading range, that.)
Price reversed again at the .236 Fib and this was where the fun started. Across the next four years, Carclo rose 1,000%, trough to peak.
Since that January 2013 peak, another double top almost 10 years ago to the day, Carclo has been in seemingly terminal decline. There can’t be many bulls left to sell and you get the sense capitulation is around the corner.
Although there was a slight recovery in price from November 2014 to June 2017 (31 months), it met resistance at the .236 Fib and rolled over again. The peak-to-trough decline, at the nadir of the Covid lockdowns in 2020, was 99.19%.
But this is no junk share. It has had its problems with its pension liabilities and with debt but it has arranged new banking facilities with its lenders that give it good headroom. Net assets are almost £30m against a market cap of <£10m.
But the key thing is how *every single time* this share has opened on the monthly above the trendline after a multi-month decline, it has sparked a tremendous rally in price over the medium term. It opened above again yesterday. I’m eyeing as my first TP the 50% Fib on the most recent decline, where there are five months of relative equal highs to mitigate.
From there, a return to the .618 Fib on the broader, 67-month downtrend would also draw price to the monthly swing low and ICT fair-value gap from June 2013, which also remains unmitigated. And if you believe in cups and handles and head-and-shoulders patterns, there’s every reason to believe a C&H and inverse H&S could form very soon.
Hitting the .618 Fib at 317p would constitute a near 2,200% return for anyone investing today. Better still, given the current zeitgeist of war and ageing populations, Carclo’s specialisms (e.g. heavy-duty cabling for the aviation industry and technical plastics for the medical sector) could create a new era of enormous value for the business. Who’s to say it wouldn’t rocket beyond old support-and-resistance levels to make new ATHs?
After all, this share has made big, big moves before.
BUT DYOR. GLA.
At the beginning was the EquityWith this post, I am concluding the analysis of the company's balance sheet. You can read the previous parts here:
Part 1 - Balance sheet: taking the first steps
Part 2 - Assets I prioritize
Part 3 - A sense of debt
Now we know that every company has assets on one side of the balance sheet and liabilities and equity on the other side. If you add liabilities and equity together you get the sum of assets. And vice versa, if you subtract all of the company's liabilities from the assets, you get what? That's right, you get Equity . Let's discuss this important component of the balance sheet.
When a company is first established, it must have initial equity. This is the money with which any business starts. It is used for the first expenses of the new company. In the case of our workshop , the equity was the master's savings, with which he bought the garage, equipment, raw materials and other assets to start his business. As sales progressed, the workshop received the revenue and reimbursed expenses. Whatever was left over was used to boost the company's profit. So, our master invested his capital in the business to increase it through profits.
Making a profit is the main purpose for which the company's assets work, loans are raised, and equity is invested.
Let's see which balance sheet items are in the Equity group:
- Common stock (The sum of nominal values of common stock issued). Remember, when our master decided to turn his company into a stock company , he issued 1 million shares at a price of $1,000 per share. So $1,000 per share is the par value of the stock. And the sum of the nominal values of the stocks issued would be $1 billion.
- Retained earnings . It is clear from the name of this item that it contains profits that have not been distributed. We will find out where it can be allocated in the next post, when we start analyzing the income statement.
- Accumulated other comprehensive income (Profit or loss on open investments). The profit or loss of a company can be not only from its core business, but also, for example, from the rise or fall in the value of other companies' shares that it bought. In our example, the workshop has oil company shares. The financial result from the revaluation of these shares is recorded in this item.
So, the equity is necessary for the company to invest it in the business and make a profit. Then the retained earnings themselves become equity, which is reinvested to make even more profits. It's a continuous cycle of the company's life that bets on equity growth.
Which balance sheet items are of interest to me in the Equity group? Of course, I am interested in the profit-related items: retained earnings and profit or loss on open investments. The sum of nominal share values is a static indicator, so it can hardly tell us anything.
However, it is better to use information from the income statement rather than the balance sheet to analyze earnings, because only this report allows us to see the entire structure of a company's income and expenses.
So we conclude the general analysis of a company's balance sheet. To fully understand why it is needed, let's engage our imagination once again. Do you remember the example with the hotel ? We imagined that a joint stock company is a hotel with identical rooms, where you, as an investor, can buy a certain number of rooms (one room = one share). Think about what you would want to look at first before buying? Personally, I'd rather see photos of the rooms.
So, the balance sheet can be compared to such photos that we get from the hotel at quarterly and annual intervals. Of course, in such a case, the hotel will try to use special effects as much as possible in order to improve investors' impression of the photos released. However, if we track and compare photos over multiple periods, we can still understand: is our hotel evolving, or have we been watching the same couch in a standard room for 10 years in a row.
We can say that the balance sheet is a "photo" of the company's assets, debts and equity at the balance sheet date. And the balance sheet items I've chosen are what I look at first in this photo.
In the next series of posts, we will break down an equally important report, the income statement, and explore the essence of earnings. See you soon!
