Ken Kavula and Mark Robertson will present an overview of investment analysis and portfolio design and management during this session in Lansing on Saturday, February 16, 2013.
For more details: http://www.manifestinvesting.com/events/110-manifest-investing-better-portfolios-february-16-2013
We were a little stunned to see Value Line drop the 3-5 year low price forecast on Microsoft (MSFT) from $50 to $40 — resulting in a significant “dent” in the low total return forecast for the company. The 3-5 year forecast for revenues was relatively unchanged.
Materially Stronger: Amazon (AMZN), CSG Systems (CSGS), Netflix (NFLX)
Materially Weaker: Baidu (BIDU), Microsoft (MSFT), Pandora Media (P)
Market Barometers
The Value Line low total return (VLLTR) forecast held steady at 7.3%, unchanged from one week ago.
The S&P 500 (SPY) continues to hover near overbought conditions — we continue to consider the index vulnerable to correction.
Watching last night’s Grammy Awards, I was once again reminded of many things. From Faith Hill’s “Don’t Hurry … But Don’t Wait” to the magic of Michael Jackson and his pile of awards. But for some reason, I was reminded distinctly of Mother Theresa. Did you know that Mother Theresa won the inaugural Templeton Award? In this feature from August 2008, we honored the legacy of lifetime achievement in investing by one Sir John Templeton.
Sir John Templeton (1912-2008) started his Wall Street career in 1937 and went on to create some of the world’s largest and most successful international investment funds. He was called by Money magazine “arguably the greatest global stock picker of the century.”Sir John Templeton gave us a legacy of long-term investing wisdom. Sadly, he passed away during July (2008) at the age of 95. A Rhodes Scholar, his adventures spanned the globe — seeking opportunity independent of domicile. His religion and philanthropy were very important to him. Did you know that Mother Theresa received the inaugural Templeton award, valued at $2 million? The monetary award is what it is because Sir John always wanted his faith-based awards to be worth more than the Nobel Prize. Inspired by MANIFEST subscriber Frank Bower, let’s take a look at some of Templeton’s guiding principles.
Over the years, Sir John Templeton published a number of articles and made speeches about his investing principles. This list was culled by John Christy from memories of working with Templeton for Forbes. Let’s visit these themes in our own words and methods.
For more: One World. One Dream.
“I’m the stock watcher for Microsoft (MSFT) and would like to e-mail a copy of my EAGLE to other members before our meeting, but haven’t been able to copy and paste it. Is it possible? Keep in mind I’m quite technology challenged.” 🙂
Let’s take this opportunity to walk through a few things … and along the way, hopefully you’ll get some materials that you can use with your fellow investment club partners.
EAGLE stands for Equity Analysis Guide to Long-Term Expectations. Or Equity Analysis Guide, in short — reflecting a summary of the most important influences, drivers and factors when studying a company in the effort to build a considered forecast. Taken collectively, it’s all about our approach to stock analysis — using a 5-year continuously scrolling time horizon. And it manifests itself in a variety of different places and applications scattered throughout the site.
We’ll cover the first here, the Company Report — this is the analysis results based on a consensus forecast of the rhino herd. We monitor analyst consensus estimates for sales, profitability and P/E ratios (in the framework of a five year time horizon) and derive a return forecast based on that consensus.
In the case of MSFT, here’s a snapshot of the Company Report right now:
If you’re relatively new to this, we like Value Line (www.valueline.com) a lot — and we think it’s a worthy part of any investor’s arsenal.
In this case, you can become more familiar with Value Line as a trusted resource by taking a look at the company report for Microsoft (MSFT) — because it’s available for FREE as part of the Dow 30 here: http://www.valueline.com/Dow30/index.aspx
Scroll down and pull up the report on MSFT. We think that a vast majority of the time, the Value Line low total return forecast (VLLTR, shown here) should RESEMBLE the results of your study. Keep in mind that this is the Value Line analyst’s 3-5 year return forecast (based on the price forecast range … and leaning towards the low end of the forecast range.) Trust us on this one. Actual returns 3-5 years from now are more likely to resemble the low total return forecast than the average or the high. (We can prove it.)
As shown here, the 3-5 year low total return forecast is 16%. Your study results should RESEMBLE (not necessarily match) this.
And for what it’s worth, correcting for the change in stock price since this report was issued (AND the change in forecast range) … the current VLLTR for MSFT is 21.7%.
Both of these forecasts will likely be updated with tomorrow’s release of Issue 13 … Value Line updates every company every thirteen weeks or quarterly. So do we for all companies with more frequent updates for the most widely-followed companies by our subscribers and/or any material news or forecast modifications between quarterly updates.
Business Model Analysis: Sales Growth Forecast
Based on this quick analysis of top-line conditions, and barring any major shifts in the 3-5 year forecast for MSFT tomorrow morning from Value Line, we’d expect the long-term sales growth forecast to moderate, albeit slightly, to 8% … as shown here.
Welcome To The Sandbox
That’s right. We provide you with a playground where you can conduct sensitivity analyses of the milestone assumptions and judgments during your stock study.
Sensitivity analysis? Relax. That’s just some jargon you can throw around at the next neighborhood party or the next time you slump into the chair at the hair salon. It’s just a fancy way of saying “what if?” At Manifest Investing, you can go to MyStudies and perform your own tinkering with the major parameters. We pull in the major numbers and any box with a green icon in the corner can be modified.
For example, pulling current EPS probably results in a pull of operating earnings that are not conditioned to correct for one-time events, etc. like they do for us at Value Line. In this case, when we launched the sand box, the current EPS was $1.82. A more representative current EPS can be delved from the attached Value Line quarterly data. (We switched it to $2.80 based on EPS thru 3/31/2013)
Keen-eyed observers will also pick up on a “weird” trailing 12-month sales figure for some companies. The reason for this is we’re continuously INTERPOLATING based on the analyst consensus estimates — basically constantly trying to think of revenues based on the trend line in the business model analysis. It’s one of our methods of CONTINUOUSLY updating the stocks we follow … adjusting as the days roll by AND/OR correcting for adjustments to the analyst consensus forecasts.
Modifications:
(1) EPS to $2.80
(2) Sales to $77 billion — merely rounding off.
(3) Sale growth forecast to 8% based on the previous business model trend.
(4) Payout ratio to 35% — pulling current published payout ratios are often “erratic” — and 45% was probably a little high for MSFT.
The result is an annualized return forecast closer to 20% or the high teens.
It’s been a while since we did one of these, but there’s an Excel version of the Equity Analysis Guide for those who want to dabble with other stocks, etc. or simply prefer this to the MyStudies module.
Here’s what it looks like for Microsoft (MSFT):
FYI … both Morningstar (from $770 to $600) and S&P have reduced their fair value estimates on Apple (AAPL) in recent days. Analyst consensus estimates for sales and EPS for years ending 9/30/2013 and 9/30/2014 also reduced. The impact on our return forecast will take it from 24% to 18-19% — still undervalued, just not as much. Point-and-figure (PnF) sentiment on www.stockcharts.com has turned “Prelim Bullish”.
Thriving on the Backs of Our Shell-Bound Colleagues
This is a modified version of a post from the March 2001 issue of Better Investing magazine. As our Groundhog celebration continues — and even as it winds down — we’re reminded of a heritage of long-term investing success, steeped in patience, discipline and yes, rituals.
Punxsutawney, PA. (Population: 6,782)– February 2, 2001
On this day, a small town just northeast of Pittsburgh finds its way to the hearts and minds of people worldwide. The principal inhabitant of Gobbler’s Knob, Punxsutawney Phil, plays host to the likes of presidents, news anchors and talk show hosts. In the chilly morning breeze, thousands gather to see whether Phil will observe his shadow — immediately following his stretching exercises, breakfast and morning coffee. For the record, he’s seen his shadow some 90 percent of the time over the last 100 years or so. I doubt that there’s much correlation between his shadow and wintry durations — but the masses gather anyhow.
Saturday Morning
Rituals occupy an important place in our lives. One of the endearing features of monthly investment club meetings is that they encourage a discipline of regularity. Invest regularly. Monthly meetings reinforce. They make it difficult to ignore the prodding that we should regularly contemplate and explore our investment efforts.
When I first started investing, one of my rituals was to make the sojourn to my local bookstore every Saturday morning. The itinerary included a stop for a cup of coffee and a saunter next door for that weekend’s edition of Barron’s. Like all newbies, I watched CNBC and checked my stock prices far too frequently.
Too frequently? How much is “enough?”
On the Backs of Roaring Tortoises
It’s a good question. In fact, it’s a great question. It was presented to me by a reporter from Forbes not so long ago. It stirred the memory of a question to Ed Finn, publisher and editor of Barron’s, delivered from the floor of Congress 1999, after Mr. Finn had concluded his keynote remarks. (Those memories were recently rekindled while listening to Mr. Finn’s keynote remarks at last week’s MoneyShow in Orlando)
“How do we reconcile the apparent reality that investment clubs achieve strong performance levels despite the fact that most of them only meet for an hour every month or so?” Mr. Finn suggested that the investment professionals might want to think about that — and consider becoming a little less active in their execution of transactions.
The Forbes reporter’s question tiptoed up to the question again. “Once you develop a solid comprehension of the modern investment club approach to investing, and your portfolio is in place, how much time would you say you dedicate to the management of your personal assets?”
I thought about it. There’s an element of “hobby” and certainly entertainment to the things that we do as investors. Clearly, some of us spend more time than others exploring and learning. But this question had a deeper nature to it. How much was essential? I thought about it some more and said, “8-10 hours per year.” That may stagger some of you. But I’m convinced that my impressions are correct in this regard. My thoughts drift to conversations with national event attendees. These discussions are a distinct privilege. “You’ve done well, very well — for decades — what’s it take?”
With a twinkle and a smile, several answer the question with stories of cruises and their best days on the golf course. With a wink, others confide that much like Punxsutawney Phil, they drag out their portfolio once a year to see whether the sun is still shining. With regard to my personal holdings, it’s no exaggeration whatsoever. Following a recent investment conference presentation, I was discussing a mutual holding with an attendee and was pleasantly surprised to learn of a large increase in price that had occurred in the last month or so.
Eight, maybe 10 hours per year? It’s more than possible. For many, it’s an absolute reality. Many practitioners spend a couple hours every quarter — checking in on how the management of the companies that they own are performing. Are they pursuing opportunity? Are they doing so profitably? Is the sun shining? How’s their shadow?
Our obsession with tortoises in this issue has a basis in a time-honored heritage. Listen for the roar. Invest regularly, in leadership enterprises, at good prices. Don’t hurry, but don’t wait, either.
Join us at Manifest Investing and Expecting Alpha as we build resources that make sense for your Saturday morning sojourns. We hope our community resources will become a favorite destination for your 8-10 hours per year and beyond. At Manifest Investing, we’re committed to remaining focused on what really matters: the growth, profitability and valuation characteristics of your holdings and potential holdings — and any threats or opportunities to both. We’ll do our best to sound the bell of opportunity or the clarion of a threat. And we know that our collective community will be vigilant and do its best to watch for shadows.
You can’t have a shadow without some sunshine.
Consensus Selections for Groundhog VII (2013)
Every year we celebrate our national holiday at Manifest Investing, Groundhog Day, with a review of the results achieved by our band of groundhog stock pickers over the last year. Now in its seventh year, we continue the celebration by launching a brand new set of contest entries.
This year, we’re going with Eddy Elfenbein’s $1,000,000 format with the only exception that participants can select anywhere from 5-20 investments. If you want to get really concentrated, go for five … feel better with a little diversification, choose closer to 20 — and everywhere in between. And like Eddy, we’re locking in the entries. No transactions will be made between Groundhog Days.
The selections were a little more distributed this year, with the most frequently-selected stock being Qualcomm (QCOM). Other high frequency selections included: Apple (AAPL), Bio-Reference Labs (BRLI), Coach (COH) and FactSet Research (FDS).
The public tracking dashboard is:
http://www.manifestinvesting.com/dashboards/public/heavy-hogs-2013
Best performers from Heavy Hogs 2012:
Weakest Performers from Heavy Hogs 2012:
Gerri Willis of Fox Business News asked about the Beardstown Ladies during an interview this week. Yes, they’re still in existence and prospering. They’ve added new partners. The media still mangles the facts about that mistake. The mistake was largely Disney’s — a federal judge agrees with me. The Ladies committed a human error. Their performance was better than is perpetually broadcasted. You can ask Price-Waterhouse about that. But more importantly, they continue to grow, explore and reach out to remove mystery and fear from investing — enabling a new generation to discover successful long-term investing. We shared some details in this message from Thanksgiving 2010 …
Thanksgiving is a time for reflection, gratitude and hope and in this case, a rekindling of a very special spirit nestled in the cornfields of Illinois …
It was a beautiful autumn day in the heartland. I attended a couple of investment club meetings … the first in Mt. Carroll, Illinois — near my home town — and the second in the heart of Illinois in place called Beardstown.
I admired the scenery as the combines and heavy equipment toiled to bring in a robust harvest this year and the highway miles rolled by. I have many friends who are farmers. They work hard. It’s nice to see rewards harvested and smiles even if that farm equipment backed up traffic while migrating from one field to the next. The day included reminders of time-honored traditions and legacies while harboring a surprise or two.
The Beardstown Ladies have been using options for their club portfolio. They’ve been doing it for a while now.
I’ll let that one sink in.
The Beardstown Ladies have been an inspiration to a generation of investors. I count them among my friends and heroes.
Did you know that they have a room in a museum dedicated to their investment club?
Still ruminating on that options thing? We’ll come back to that.
It’s true. During my visit to Beardstown, I discovered that the city was once the epicenter of Illinois, larger than Chicago. Beardstown is strategically located on the Illinois river and was a center of commerce back in the 1800s. Abraham Lincoln launched his presidential campaign in Beardstown.
The traditional town square in the center of town hosted one of the Lincoln-Douglas debates.
And down the hall from the Beardstown Ladies room in the museum … is the court room where Lincoln practiced law. It’s the scene of one of the most famous legal arguments. The case is known as the almanac trial. Lincoln was defending the son of some good samaritans from his youth. (They had literally taken young Abe in when he was essentially homeless.) Their son was on trial for murder and Lincoln (think Perry Mason) tripped up the key witness by pointing out that the “full moon used under testimony” was no where to be found in a Farmer’s Almanac.
Yes, the Beardstown Ladies are using options. But that’s not the best surprise.
The club is getting larger and attracting some younger people to participate.
The Ladies meet in the basement of the town hall shown — a former Carnegie Library, typical of those sprinkled throughout the Midwest.
The words still resonate. I had discovered long-term investing back in the mid-1990s … formed a family and friends investment club, but frankly it probably was hanging in the balance.
And then I attended a luncheon featuring the Beardstown Ladies, Betty Sinnock and Doris Edwards. You can do this. We’ll show you how.
It’s a theme we hope to live and extend at Manifest Investing.
The first of Carnegie’s public libraries displays the motto, “Let there be light” at the entrance.
His first library in the United States was built in 1889 in Braddock, Pennsylvania, home to one of the Carnegie Steel Company’s mills. Initially, Carnegie limited his support to a small number of towns in which he had an interest. From the 1890s on, his foundation funded a dramatic increase in number of libraries. This coincided with the rise of women’s clubs in the post-Civil War period, which were most responsible for organizing efforts to establish libraries, including long-term fundraising and lobbying within their communities to support operations and collections.
The genesis of the Beardstown Ladies was the Business and Professional Women’s association.
A few miles to the north in Mt. Carroll, I had the opportunity to spend some time in the shadow of yet another Carnegie Library … on another Midwestern town square. The Nest Egg investors sport a portfolio that I’d not only be proud to own, I basically do. Their collection of community favorites and promising companies mirrors our most widely-followed stocks.
That’s not a surprise.
The surprise is they’re expanding and welcoming new ladies to the club. On this day, they welcomed our family (including my Mom and Dad) to their gathering. The leadership of ladies like Mary Ann Hutchison and Wilma Colehour is making a difference. Interest is growing with a younger generation and we’re hopeful that these seeds germinate and continue to thrive.
We look forward to watching future harvests and celebrating nurtured nest eggs.
This is just one more nest egg that can point to the Beardstown Phenomenon as a powerful influence and inspiration.
I’m still working on our nest egg. But the Beardstown Ladies have made a significant difference for me and my family as we’ve sent two children to college and launched a business. As we bow our heads on Thanksgiving, I will be thinking of many blessings. I want all of the Ladies to know that they’re pretty high on the list and I told them that as we gathered.
We talked about a few stocks. I watched them thoroughly discuss (and sell) a very long-term holding.
They asked me for some thoughts and I shared the significance and relevance that we’ve discovered with the Value Line low total return forecast.
And then … one of the ladies whispered, “What do you think of options being used by investment clubs?”
I slumped into my chair extruding a “fake sigh.” Most of them seemed to be either “giggling” or looking at their shoes. 🙂
“You mean to tell me the Beardstown Ladies are using options for the club?”
“Yep. We’ve been doing it for a while.”
“Really?”
“Homer, our broker in Peoria, has been teaching and helping us with it. What do you think?”
“One, I think you’re in good hands. Two, I think it’s a great idea. The foundation of investment clubs is learning-by-doing. Explore. Discover. Fail. Succeed. Together. Some of my other heroes have been urging me to better understand conservative options strategies like covered calls and protective puts for the last few years. I’m learning right along with you.”
We’ll launch a new demonstration in January — taking our [BareNaked Million] — and deploying options strategies in full view. We’ll call it [Covered Million] and hope to demonstrate some incremental success using some of the conservative options strategies we’ve become more aware of.
Exploring. Learning. Discovering together. I’m sometimes asked if I believe investment clubs are “dead.” These two clubs provide strong evidence to the contrary and we don’t need an almanac to check sunrise or sunset to see it. Youthful exuberance inspiring the next harvest … it combines with the knowledge that every harvest sunset is also a harvest sunrise. It’s just a matter of perspective.
Happy Thanksgiving, everybody.
Impact of Apple Swoon. It’s not all due to Apple, but this comparison of an equally-weighted S&P 500 (RSP) vs. cap-weighted S&P 500 (SPY) shows a pretty significant drift over the last few months. This provides some reinforcement for our argument for a Value Line 1700 proxy using equally-weighted components.
S&P 500 Challenge. One month into this year’s edition of Eddy Elfenbein’s Crossing Wall Street Buy List (2013) and our participation with the Walking Main Street portfolio … and we’re both thumping the S&P 500 index.
Expecting Alpha 