TWO MINUTE DRILL AND FACTS

 

 


INTRODUCTION

Already you have found out whether you are dealing with a slow grower, a stalwart, a fast grower, a turnaround, an asset play, or a cyclical. The P/E ratio has given you a rough idea of whether the stock, as currently priced, is undervalued or overvalued, or relative to its immediate prospects.

With the possible exception of the asset play (where you can sit back and wait for the value of real estate or the oil reserves or the TV station to recognized by the others), something dynamic has to happen to keep earnings moving along. The more certain you are about what that something is, the better you will be able to follow the script.

Once you are able to tell the story of stock to your family, your friends or even a child could understand it, then you have a proper grasp of the situation.

If it is a slow growing company you’re thinking about, then presumably you’re in it for the dividend. Therefore, the important element of the script would be: “this company has increased earnings every year for the last ten, it offers an attractive yield; it never reduced it suspended a dividend, and in fact it’s raised the dividend during good times and bad, including the last three recessions. It’s a telephone utility and the new cellular operation may add a substantial kicker to the growth rate.”

If it’s a cyclical company you’re thinking about, then your script revolves around business conditions, inventories, and prices. “There has been a three year business slump in the auto industry, but this year things have turned around.

If it’s an asset play, then what are the assets, hoe much are they worth?  “The stock sells for $8, but the videocassette division alone is worth $4 a share and the real estate in worth $7. That’s a bargain in itself, and I am getting the rest of the company for a minus $3. Insiders are buying, and the company has steady earnings, and there is no debt to speak of.”

If it’s a turnaround, then has the company gone about improving its fortunes, and is the plan working so far? “General Mills has great progress in curing its diworseification. It’s gone from eleven basic businesses to two.

If it’s stalwart, then the key issue are the P/E ratio, whether the stock already has had a dramatic run-up in price in recent months, and what, if anything is happening to accelerate the growth rate.

The more you know the better; I often devote several hours to developing a script, through that’s not always necessary. Let me give you two examples, one a situation that I checked out properly and the other where there was something I forgot to ask. The first was La Quinta, which has been fifteen bagger and the second was Bildner’s a fifteen bagger in reverse. 

 

Conclusion

That’s the one reason I prefer hotel and restaurant stocks to technology stocks- the minute you invest in an exciting new technology, a more exciting and newer technology is bought out of somebody else’s lab. But the prototypes of would be hotel and restaurant chains have to show up someplace-you simply can’t build 100 of them overnight, and if they are in a different part of the country, they wouldn’t affect you anyway. Does the idea work elsewhere? I should have worried about a shortage of skilled managers, its limited financial resources, and its ability to survive those initial mistakes. It’s never too late not to invest in an unproven enterprise.


GETTING THE FACTS

 

If you use the broker as an advisor, then ask the broker to give you the two-minute speech on recommended stocks. You’ll probably have to prompt the broker with some of the question I have listed here and typical dialogue that now goes-

Broker:  “We are recommending Zayre. It’s a special situation.”

You: Do you really think it’s good?

Broker: “We really think it’s good.”

You:  “Great. I’ll buy it.”

Would you transformed into something like this:

Broker: We are recommending La Quinta Motor Inns. It just made our buy list.

You: How would you classify this stock? Cyclical, fast grower, slow grower, or what?

Broker: Definitely a fast grower.

You: How fast? What is the recent growth in earnings?

Broker: Offhand, I don’t know. I can check into it.

You: I’d appreciate that. And while you’re at it, could you get me the P/E ratio relative to historic levels.

Broker: Sure

You: What is it about La Quinta that makes it a good buy now? Where is the market? Are the existing La Quintas making a profit? Where’s the expansion coming from? What is the debt situation? How will they finance growth without selling lots of new shares and diluting the earnings? Are insiders buying?

Broker: I think a lot of that will be covered in our analyst’s report.

You: Send me a copy. I’ll read it and get back to you. Meanwhile, I’d also like a chart of the stock price versus the earnings for the last five years. I want to know about dividends, if any and whether they’ve always been paid. While you are at it, find out what percentage of the share is owned by institutions. Also, how long has firms’ analyst been covering this stock?

Broker: Is that all.

You: I’ll let you know after I read the report. Then maybe I’ll call the company.

Broker: Don’t delay too long. It’s a great time to buy.

 

 CALLING THE COMPANY

Professionals call the companies all the time, yet amateurs never think of it. If you have specific questions, the investor relations office is a good place to get the answers. That’s one more thing the broker can do: get you the phone number. Many companies would welcome a chance to exchange views with the owner of 100 shares from Topeka. If it’s a small outfit, you may find yourself talking to president.

In the unlikely event that investor relations gives you the cold shoulder, you can tell them that you own 20,000 shares and are trying to decide whether to double your position. Then casually mention that your shares are held in “Street Name.” That ought to warm things up. Actually I am not recommending this, but fibbing is something that some people would think of, and the odd you’re being caught in here are nil. The company has to take your word for the 20,000 shares, because shares held in street name are lumped together by the brokerage firms and stored in an undifferentiated mass.

Before you call the company, it is advisable to prepare your questions, and you need not lead off with “Why is the stock price going down?” Asking why the stock is going down immediately brands you as a neophyte and undeserving of serious response. In most cases a company has no idea why the stock is going down. But earnings are good topic. What are the further plans to reduce debt? What are the positives this year? And what are the negatives?

If I make 100 calls, I find 10 surprising situations, or if I make 1,000 calls, then 100. Don’t worry. If you don’t own 1,000 companies, you don’t have to call 1,000.

 

CAN YOU BELIEVE IT?  

For the most part, companies are honest and forthright in their conversations with investors. They all realize that the truth is going to come out sooner rather than later in next quarterly report, so there’s nothing to be gained by covering things up the way they sometimes do in Washington. So when you call investor relations, you can have full confidence that the facts you will be hearing are correct.


When looking at the same sky, people in mature industries see clouds where people in immature industries see pie.



VISITING HEADQUARTERS

One of the greatest joys of being a shareholder is visiting the headquarters of the companies you own. They are delighted to give tour to the owners of 20,000 shares. Rich earnings and a cheap headquarters is a great combination.

Visiting headquarters also gives you chance to meet one or more of the front-office representatives. Another way to meet one is to attend the annual meetings, not so much for the formal session, but for the informal gatherings. Depending on how serious you want to get about this, the annual meeting is your best chance to develop useful contacts.

 

Next blog is coming about Some Famous Numbers.

Thank you again for your Patience.

Keep supporting as always.

 

Congratulation you take one more step towards your financial freedom.

This summary from Book-“One Up On Wall Street”

 

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