Look it's all too hard isn't it....PE Ratios PEG Ratios, Beta, Market Cap.
"If the cab driver says Dodgy Mining Dot Com is a winner that's good enough for me....lets get stuck in an get some"..........
HHmmmmmmmm.
Now it's all very well me putting good links and books up here where you can read all the text
book stuff. But I know that for about 50% of you 5 lines into anything with maths or accounts and your brain cells go
"Hey you might as well talk to the butt cos we ain't firing".
So right hand side of the page is for the smartarses who do numbers The left hand side of
the page is to save all you artists, poets and literary folk, who make the world a much better place, from
getting ripped of by Dodgy Mining Dot Com and their cab driver mate.
PE Ratios
FOR
SALE LAWNMOWING BUSINESS....$1,500,000
OK let's say I have a lawn mowing business with $5000 worth of
van and mower that earns me $1000 per week or $50,000 per year. How much would you buy it for...................well a business
broker would say around a years profit is about right so it is worth around $50,000 all up. You are willing to pay 1 times
the years earnings so my lawn mowing business has a PE ratio of 1.
Now the average PE ratio of the top 200 U.S stocks is currently
over 30.
Yes that means that when your managed fund buys a basket of U.S
stocks for your super fund they are buying the lawn mowing business at 30x $50,000 and that is a cool................$1,500,000.
What's more that $50,000 profit is after some flash U.S ex Enron accountant
has capitalized some costs and added in half of next years revenue as well and leased back the mower. You have now paid 1.5
mill for a lawn mowing round that only really Made $400 per week, doesn't really own the mower and you gotta mow 200 lawns
for free next year because that revenue has already been counted.
SCARY ISN'T IT.
So why are these businesses worth so much? Well it is worth what
the next shrewd investor or sucker is willing to pay. If you can on sell the business or share in it for more money you are
a shrewd investor, if you don't, ooops you were a sucker. At the moment people are willing to pay 30 times but for long periods
in history they have been willing to pay less than 10 times.
My own somewhat cynical view is that the current share
market is a good place to trade....to buy and sell for profit.........but that buying lawn mowing businesses for $1.5 mill
is not good investing.
SO SHOW ME THE VALUE.
Market Cap...... You have $50,000 to buy shares. What are you actually buying? You are buying a small bit of a company.
Mining Co A and Mining Co B both have shares at 2.0c. Both are cheap?...WRONG. You have to look at the number of shares outstanding. A has 30milion and B has 300million. The shares
are the same but you could buy all of Co A for $600,000 but Co B for $6 million. So your $50K gets you a big slice of the
cake with A and a tiny slice of the cake with B. Now if Co A and Co B both find Gold worth $30 million what happens. Co A's
shares will go up to $1.02 but Co B's shares will go up to only 12c.
Profit....the more profit we make this year the more the business is worth...... simple.
Growth.....Lawn mowing businesses A made $50,000 this year $100,000 2 years ago and $70000 lat year.......Business
B made the same $50,000 this year but $30,000 2 years ago $40,000 last year. So which one would you choose? Business
A is contracting so next years profit should be under $40000, however business B is expanding so we expect $60000 next
year. B has GROWTH so we want B...we will pay more for B even though this years profit is the same as A. So we need to look
at earnings together with earnings growth. Most hedge funds and instos have earnings growth formulas that decide what the
will buy and sell. This years profit is important but next years and after is more important
Assets. A business that owns its own premises mowers and vans outright is stable less risky than the guy
who has it all on lease. You are getting something real for your money. Look at the quality of the assets. Assets are just
not bricks and plant, patents copyrights or intellectual property are the assets of Century 21
Cash a cashed up guy can do deals get discounts and buy less prudent competitors when they get into difficulties.
This is exactly the same for giant corporations like Microsoft who are well known for simply buying competitors before they
get big enough to pose competition. Cashed up companies don't have to keep issuing new shares at a discount.
Debt Prudent borrowing to expand can boost profit growth but more debt = more risk
Yield....Profitable stocks pay a dividend so you invest your money and get regular payments. Now we can put
our money in the bank and get interest 100% safe so we want a higher yield in return for giving our money to a company. So
lets take a company paying 10% divvy. We would pay more for a safe utility stock than a risky midcap because we
are more certain of getting our money. If we can only get 3% from a safe bank deposit account then 10% is attractive
so we will invest in the stock...however if interest rates rise and we can get 10% safely from the bank we will sell the stock
and put the money in the bank or only buy the stock at a lower price that gives us 15% return.
THE PERFECT STOCK
The perfect stock has a low PE ratio, high past and future growth in earnings
hence a low PEG ratio. It has stable revenue low risk. It will have quality assets at sensible valuations not pie in the sky.
It will have plenty of cash and free cash flow. Some debt to maximise growth but not too much. It pays a good dividend in
a time when interest rates are low.
Untitled Document
Madcow's Traders Bookshop. All the books you can read on
WHERE TO GET INFORMATION
You can piece together all the information you need
by grinding through the companies announcements and reports.
However that is too time consuming if you want to compare a whole
lot of stocks. ASPECT EQIUTY REVIEW has formed a database on all the ASX stocks. Not only can you look up
individual stocks but Aspect has their own value risk and growth formulas. They offer search facilities so you can scan stocks
according to numerous criteria.
For example look for all stocks capitalised over $100 mill with PE less
than 10, dividend yield greater than 5%, and more than 10% growth. Aspect will do that and any combination you want. Search
to find companies who have more cash than their capitalisation...get cash 60c in the $1.
ASPECT is formidable tool and they only charge a relatively low subscription.
