Inve

stin

g F

un

dam

enta

ls

$ 1

Finding and Investing

in Wonderful Companies

Steve Cronin

Inve

stin

g F

un

dam

enta

ls

$ 2

Agenda:

• Introduction:

• https://www.linkedin.com/in/stevenwcronin

• Diversify and Allocation your resources carefully

• “Mr. Market” and Human Behavior

• Learn about the world and yourself

• What is a wonderful company

• Online Websites, Tools, and Apps for investing

• Question and Answers after slide 31

• Analysis of a few potentially wonderful companies

• Demonstration of Visual Basic Script

Inve

stin

g F

un

dam

enta

ls

$ 3

Diversification protects you from yourself:

Diversify Across:

• Asset Types

(Stocks, Bonds, Real Estate, etc)

• Company Size

(High, Mid-Cap, Small Cap)

• Region(USA, Europe, Asia, Developing)

Inve

stin

g F

un

dam

enta

ls

$ 4

Asset Allocation is 91% of your return

• Buying a basket of index funds is easier and will

likely provide better results for most people.

Inve

stin

g F

un

dam

enta

ls

$ 5

Keep your expenses low:

Inve

stin

g F

un

dam

enta

ls

$ 6

Inve

stin

g F

un

dam

enta

ls

$ 7

“Mr. Market” - Short and Long Term

Inve

stin

g F

un

dam

enta

ls

$ 8

Waiting - Can You Delay Gratification?

Inve

stin

g F

un

dam

enta

ls

$ 9

Time is the friend of the wonderful company:

Inve

stin

g F

un

dam

enta

ls

$ 10

Value Investing Classic Books:

Inve

stin

g F

un

dam

enta

ls

$ 11

Modern Value Investing:

Inve

stin

g F

un

dam

enta

ls

$

Circle of Competence:

Invest in what you actually understand

Inve

stin

g F

un

dam

enta

ls

$ 13

Be a life long learner:

(Current checked out library books)

Inve

stin

g F

un

dam

enta

ls

$ 14

Investors at Google – Youtube:

https://www.youtube.com/playlist?list=PLGGpady

h0wS53HdovgrEgRwEqHcWrJwgP

Inve

stin

g F

un

dam

enta

ls

$ 15

Earnings Are Reported 4 out of 365 Days per Year

• Earnings are only reported 4 hrs out of 365 days per year

• Earnings results are studied less than 1% of the time

Inve

stin

g F

un

dam

enta

ls

$ 16

Fundamental vs Technical Analysis

Inve

stin

g F

un

dam

enta

ls

$ 17

Fundamental vs Technical Analysis

• Fundamental Analysis tells you what to buy

• Technical Analysis tells you when to buy it

Inve

stin

g F

un

dam

enta

ls

$ 18

“Wonderful Company” Quotes

Inve

stin

g F

un

dam

enta

ls

$ 19

Warren isn’t talking about Stock Price here:

Inve

stin

g F

un

dam

enta

ls

$ 20

What is a Wonderful Company?

• Has a demonstrated record of profitability:

For the past 5 - 10 years does Company XYZ have:

Net Income = Total Revenue – Total Expenses

Net Margin = Net Income / Total Revenue > 10%

Return on Equity = Net Income / Total Shareholder Equity > 10%

Free Cash Flow / Sales % = Free Cash Flow / Total Revenue > 10%

• Has a durable competitive advantage with good management

(Read and think about the company)

• Why is this company important to the world and it’s customers?

• Has the ability to reinvest capital into the business

(This makes growth possible)

• Has avoided becoming overleveraged

(Manageable level of debt, or ideally no debt)

Inve

stin

g F

un

dam

enta

ls

$ 21

What is a Wonderful Company?

• Wonderful companies have clear strengths, lots of opportunities, and

strong processes for managing threats and potential weaknesses

• Ask yourself: How could this company fail? What could go wrong?

Inve

stin

g F

un

dam

enta

ls

$ 22

What is an economic moat?

• Wonderful companies have an “Economic Moat”

• Ask yourself: How could this company fail?

What could go wrong?

Inve

stin

g F

un

dam

enta

ls

$ 23

What about Dividend Stocks?• Shareholder friendly uses of capital:

Reinvest capital back into the business, buy back shares, pay a dividend

• Wonderful Companies often pay a dividend but not necessarily

(Berkshire Hathaway is a good example of a wonderful company that

doesn’t pay a dividend yet.)

• Many dividend paying stocks are wonderful!

(However since they are paying a dividend they may have a limited

ability to reinvest capital back into the business)

• Important factors for Divdend:

• Dividend Yield (> 4% ideally)

• Payout Ratio (less than 50% ideally)

• Dividend Yield > 10% and Payout Ratio > 100%

could be signaling a disrupted business

• Dividends can always be cut by the company

Inve

stin

g F

un

dam

enta

ls

$ 24

What is an Awful Company ?

• Consistently Loses Money

(Net Margin, ROE, Cash Flow << 5% or Negative)

• Has declining business prospects and business model

• ROIC is << 5% or negative; no sign of real market opportunity

• Debt levels are increasing, Total Shareholder Equity declining

(Debt/Equity increasing)

Inve

stin

g F

un

dam

enta

ls

$ 25

Awful & Mediocre Company Examples:

• Eastman Kodak

(Disrupted by their own Innovation, Digital Cameras)

• Peabody Energy Corporation

(Natural Gas and renewables/solar make coal dead money)

• Many companies are simply mediocre

• Lots of competition who can do the same thing for less $

• Profitable Occasionally

• No ability to predictably turn Cap Ex into more cash flow

• Unable to reinvent themselves (read Innovators Dilemma)

• Read Clayton Christensen’s “Innovator” books to understand

Inve

stin

g F

un

dam

enta

ls

$ 26

Awful Companies Yield an Awful Chart

Inve

stin

g F

un

dam

enta

ls

$ 27

When do you sell a once Wonderful Company?

• Long term profitability now in secular decline

(Net Margin, ROE, Cash Flow << 10% or negative)

• Durable competitive advantage has disappeared

(Business Model has been Disrupted)

• No longer has the ability to reinvest capital into the business

(Profitable growth not possible)

• Debt levels are unmanageably high

(Quick / Current Ratio < 1, Debt/Equity increasing)

• Technical Analysis Charts can be a Guide

Inve

stin

g F

un

dam

enta

ls

$ 28

How The Economic Machine Works by Ray Dalio

https://www.youtube.com/watch?v

=PHe0bXAIuk0

Inve

stin

g F

un

dam

enta

ls

$ 29

Independent Stock Research:

• Independent Research

• Lots of data, easy to visualize trends

• Estimates the current intrinsic value of a stock

• Morningstar offers lots of free information

• Morningstar Premium Service is worth it I think

• AAII Stock Screeners can be a source of good ideas

• S&P Capital IQ reports are free on E*Trade and Scottrade

Inve

stin

g F

un

dam

enta

ls

$ 30

Find Ideas from Gurus and Communities:

• Gurufocus has best one page view of a stock I’ve ever seen

• Gurufocus allows you to see what the “Gurus” are doing

• The Motley Fool has lots of content for many stocks from many people

• The Motley Fool also provides a good view of company performance

Inve

stin

g F

un

dam

enta

ls

$ 31

Other Investment Resources:

Inve

stin

g F

un

dam

enta

ls

$ 32

Tracking Results:

• You can link nearly any account to MINT and SIGFIG

• MINT allows you to keep track of ALL of your accounts in one place

• SIGFIG allows you to keep track of ALL of your investments

automatically and in real time each day

Inve

stin

g F

un

dam

enta

ls

$ 33

Online Brokers:

• Any of these online brokers provide good service

Inve

stin

g F

un

dam

enta

ls

$ 34

Any Questions?

Inve

stin

g F

un

dam

enta

ls

$ 35

Disclaimer:

• I do own all of these stocks currently except ULTA

• I could be completely wrong in my analysis

• Even if my thinking and analysis are correct

“Mr. Market” could disagree and you could lose

money investing in them for several years

Inve

stin

g F

un

dam

enta

ls

$ 36

KLIC – What Do They Do, and Why is it important?

Inve

stin

g F

un

dam

enta

ls

$ 37

KLIC - Profitability

Net Income = Total Revenue – Total Expenses

Net Margin = Net Income / Total Revenue > 10%

Return on Equity = Net Income / Total Shareholder Equity > 10%

Free Cash Flow / Sales % = Free Cash Flow / Total Revenue > 10%

Profitability 2011 2012 2013 2014 2015 Avg

Net Margin % 15.4 20.3 11.1 11.1 9.4 13.5

Return on Equity % 32.2 28.8 8.7 8.4 6.5 16.9

Free Cash Flow/Sales % 23.2 20.3 14.5 12.7 14.5 17.0

Inve

stin

g F

un

dam

enta

ls

$ 38

KLIC - Net Income and Free Cash Flow

Inve

stin

g F

un

dam

enta

ls

$ 39

KLIC – “Net Worth” and Financials

Inve

stin

g F

un

dam

enta

ls

$ 40

KLIC – The Future

• Largest market share among ball bonding eq. makers

• Will there be more integrated circuits in the future?

• General trend toward more electronics in everything

• Billions of people still don’t have smart phones

• Internet of Things about to scale up

• New products being developed with customers

• Conference call indicates soft patch likely over

• Semiconductor industry notoriously cyclical

• References:

• https://en.wikipedia.org/wiki/Ball_bonding

• http://seekingalpha.com/article/3971200-kulicke-

soffa-industries-klic-ceo-jonathan-chou-f2q-2016-

results-earnings-call-transcript?part=single

Inve

stin

g F

un

dam

enta

ls

$ 41

KLIC – Valuation

• No Debt

• $7.33 per share in Cash

• At $12.63/share you get the entire business for $5.30 per share

• P/E (past 10 yrs) = $5.30 / .888 = 6.0 (S&P 500 = 25)

• P/B = 1.1 (S&P 500 = 2.8)

• Recently bought back 10% of shares

• Developing new products and technology with customers

• Seems undervalued currently, and extremely undervalued

given reasonable assumptions about the future.

Inve

stin

g F

un

dam

enta

ls

$ 42

KLIC – 2Q-2016 Results:

• Seems extremely undervalued, and is likely to do well in 2017 and 2018

Inve

stin

g F

un

dam

enta

ls

$ 43

Navigator Holdings:

Inve

stin

g F

un

dam

enta

ls

$ 44

Navigator Holdings:

• What do they do --> Ship Liquefied Gas around the world

• Largest Fleet, major price different between world regions

• Demand for transport

• References:

• http://www.gurufocus.com/gurutrades/NVGS

• https://navigatorgas.datadial.info/wp-

content/uploads/2015/12/Capital-Link-Conference-Mar-

21-2016.pdf

Inve

stin

g F

un

dam

enta

ls

$ 45

Navigator Holdings:

Inve

stin

g F

un

dam

enta

ls

$ 46

NVGS – Valuation

• Debt is being used to buy ships

• P/E (past 5 yrs) = $14.5 / 1.12 = 12.9 (S&P 500 = 25)

• Earnings per share per ship is consistently $.06 / share / ship

• P/E (future 5 yrs) = $14.5 / 2.51 = 5.8 (4 new ships per year)

• P/B = .94 (S&P 500 = 2.7)

• Comment from CEO => “I wish we had more ships now”

• Seems undervalued currently due to energy sector sell off

but actually benefits from lower energy pricing

Inve

stin

g F

un

dam

enta

ls

$ 47

Navigator Holdings:

Inve

stin

g F

un

dam

enta

ls

$ 48

Navigator Holdings:

Inve

stin

g F

un

dam

enta

ls

$ 49

Navigator Holdings:

Inve

stin

g F

un

dam

enta

ls

$ 50

Navigator Holdings:

Inve

stin

g F

un

dam

enta

ls

$ 51

Navigator Holdings:

Inve

stin

g F

un

dam

enta

ls

$ 52

Navigator Holdings Lessons Learned:

• What do they do --> Ship Liquefied Gas around the world

• Largest Fleet, major price difference between world regions

• Demand for transport

• Fundamental assumptions can change really quickly!

• Will there still be enough of a price difference in 3-5 years

between regions to make shipping economic?

Danger Zone!

Inve

stin

g F

un

dam

enta

ls

$ 53

Navigator Holdings Lessons Learned:

Danger Zone!

Inve

stin

g F

un

dam

enta

ls

$ 54

Navigator Holdings – Impact of missing the boat for now:

• Diversification can save you from yourself

• You can be really wrong on one stock on one particular day, and still do

pretty well as long as you manage your risk

( < 5% per stock)

• 5 Day Outperformance is still possible in spite of an ugly drop

5 Day Performance:

Inve

stin

g F

un

dam

enta

ls

$ 55

T Rowe Price Group

Inve

stin

g F

un

dam

enta

ls

$ 56

T Rowe Price Group

Is it really Wonderful?

Inve

stin

g F

un

dam

enta

ls

$ 57

Amgen Inc.

Inve

stin

g F

un

dam

enta

ls

$ 58

Amgen Inc.

Inve

stin

g F

un

dam

enta

ls

$ 59

Missed Opportunity!:

Ulta Salon and Cosmetics

Inve

stin

g F

un

dam

enta

ls

$ 60

Ulta Salon and Cosmetics:

Inve

stin

g F

un

dam

enta

ls

$

. . . From 166 to 261 per share . . .

Inve

stin

g F

un

dam

enta

ls

$ 62

Which company do you think is wonderful?

• Apple - AAPL

• Google - GOOG

• Amazon – AMZN

• Tesla – TSLA

• Berkshire Hathaway - BRK.B

• Union Pacific – UNP

• Wells Fargo – WFC

• Precision Cast Parts – PCP

• ITC Holdings – ITC

• Cameron - CAM

• VHT

• S&P 500

Inve

stin

g F

un

dam

enta

ls

$ 63

Visual Basic Script Demonstration:

• Dim browobj

• SS = InputBox("Enter the stock symbols you are interested in separated by commas:", _

• "Analyze Which Stocks?")

• If SS = "" Then

• Wscript.Quit

• Else

•

• End If

• STOCKS = SPLIT(SS, ",")

• NUMBER_OF_STOCKS = (UBound(STOCKS))

• ' Wscript.Echo "You are interested in " & NUMBER_OF_STOCKS+1 & " stocks. " & vbCrLf & vbCrLf & (NUMBER_OF_STOCKS+1)*16 & " web pages

will be opened in total." & vbCrLf & vbCrLf & "I hope your computer can handle it!! ;)"

• 'intAnswer = _

• ' Msgbox("You are interested in " & NUMBER_OF_STOCKS+1 & " stocks. " & vbCrLf & vbCrLf & (NUMBER_OF_STOCKS+1)*17 & " web pages will

be opened in total." & vbCrLf & vbCrLf & vbCrLf & vbCrLf & "Are you sure your computer can handle it??" , _

• ' vbYesNo , "Can your computer handle it??")

• intAnswer = vbYes

• If intAnswer = vbYes Then

•

• For i = 0 To NUMBER_OF_STOCKS

• ' Wscript.Echo STOCKS(i)

• WScript.Sleep 5

• CURRENT_STRING = STOCKS(i)

• WScript.Sleep 5

• FIRST = Left(CURRENT_STRING, 1)

• WScript.Sleep 450

• Set browobj = CreateObject("WScript.Shell")

https://github.com/stevenwcronin/Stock_Analysis