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Finding and Investing
in Wonderful Companies
Steve Cronin
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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
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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)
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Asset Allocation is 91% of your return
• Buying a basket of index funds is easier and will
likely provide better results for most people.
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Keep your expenses low:
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“Mr. Market” - Short and Long Term
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Waiting - Can You Delay Gratification?
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Time is the friend of the wonderful company:
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Value Investing Classic Books:
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Modern Value Investing:
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Circle of Competence:
Invest in what you actually understand
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Be a life long learner:
(Current checked out library books)
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Investors at Google – Youtube:
https://www.youtube.com/playlist?list=PLGGpady
h0wS53HdovgrEgRwEqHcWrJwgP
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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
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Fundamental vs Technical Analysis
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Fundamental vs Technical Analysis
• Fundamental Analysis tells you what to buy
• Technical Analysis tells you when to buy it
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“Wonderful Company” Quotes
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Warren isn’t talking about Stock Price here:
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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)
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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?
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What is an economic moat?
• Wonderful companies have an “Economic Moat”
• Ask yourself: How could this company fail?
What could go wrong?
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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
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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)
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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
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Awful Companies Yield an Awful Chart
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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
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How The Economic Machine Works by Ray Dalio
https://www.youtube.com/watch?v
=PHe0bXAIuk0
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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
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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
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Other Investment Resources:
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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
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Online Brokers:
• Any of these online brokers provide good service
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Any Questions?
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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
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KLIC – What Do They Do, and Why is it important?
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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
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KLIC - Net Income and Free Cash Flow
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KLIC – “Net Worth” and Financials
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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
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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.
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KLIC – 2Q-2016 Results:
• Seems extremely undervalued, and is likely to do well in 2017 and 2018
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Navigator Holdings:
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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
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Navigator Holdings:
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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
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Navigator Holdings:
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Navigator Holdings:
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Navigator Holdings:
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Navigator Holdings:
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Navigator Holdings:
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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!
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Navigator Holdings Lessons Learned:
Danger Zone!
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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:
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T Rowe Price Group
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T Rowe Price Group
Is it really Wonderful?
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Amgen Inc.
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Amgen Inc.
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Missed Opportunity!:
Ulta Salon and Cosmetics
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Ulta Salon and Cosmetics:
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. . . From 166 to 261 per share . . .
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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
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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