Other advices
Picking a Broker.
This strategy will recommend going with a discount broker such
as Scottrade or Ameritrade, but there are many others. They have several
pricing plans as well, and in order to make an intelligent choice, the investor
needs to assess how he or she will invest. If he or she plans to increase his
positions several times a month, some brokerages have per-month pricing plans,
while other may charge $7 or $8 per trade.
Buying and Selling Strategies.
Gradually Building A Portfolio.
It's necessary to understand that not all the money you have
should be dumped into investments on the first day. The reason is that at first
any investor will make mistakes, and losses are sometimes inevitable. Invest in
a stock or two gradually, and keep some money in your brokerage account to put
into others. Besides, if you have all your money tied up in positions, then you
can't buy exciting value stocks that you have recently found. It's good to keep
in mind that if you miss one great opportunity, there are so many stocks that
there are many other great opportunities.
Dollar Cost Averaging
In addition, you will be unable to do dollar cost averaging
when you keep all your money in positions. Dollar cost averaging refers to
increasing your positions in your investments that have gone down in price. In
order to be able to perform this type of investing it is necessary to be
absolutely sure in your companies because this involves putting more money in
when the stock price goes down. This way you are able to increase your returns
by averaging down the entry price of the overall position. However, this cannot
work if the investor is unsure of his investments because this can lead to
increasing losses.
Set Specific Targets
This strategy will assert that an investor should estimate how
much he or she would like to pay for a stock, the set a limit order for that
amount so that when that price hits, the broker will automatically buy the
necessary shares. Therefore the investor does not have to sit in front of the
computer day in and day out tracking the stock. Let your broker do all the
work.
It is also necessary to set an exit strategy. This strategy
proposes setting a re-evaluation point and an exit point before even investing
in the stock. This means both directions. Know how low the stock will have to
go for you to re-evaluate, as well as how high. For price increases, set an
evaluation and target price for the stock. Estimate what price the stock has to
be when you think it should be re-evaluated. If you think it's a great company,
keep it and it will keep going up. But if you think it's time to sell, do it
gradually. Sell only a part of your shares rather than all of them. The idea is
the same as Dollar Cost Averaging, but works backwards. By making gradual
sells, the investor can still get a piece of further price increases when the
price reaches his target point. The same goes for price drops. Know at what
price you should re-evaluate your investment and consider cutting your losses,
and a price point at which you should sell to stop your losses. Sometimes it's
hard to admit a mistake, but doing so can save you from losing a lot more.
Emotion and Fluctuation In The Market.
It's necessary to understand that the market will not stop
fluctuating when you have money in it. In fact, it will probably seem to
fluctuate more when you have money in it. It's necessary to keep a cool head
and remember the reasons that you own the company and the reasons that would
cause you to sell. If none of those reasons have been reached, leave it alone.
The market will fluctuate, but it's important to remember that «Time helps
great companies and destroys mediocre ones.»47
Tracking Performance
To track performance, several things need to be kept in mind.
If your portfolio returns 4% annually, then what's the point when you can get
the same rate in a bond? The return of your portfolio needs to justify the risk
that you undertake. Furthermore, you must account for the capital gains taxes
on the returns that you get. A discussion on taxes is well out of the scope of
this paper, but it is a consideration to be made when tracking your portfolio's
performance. In addition inflation is another thing to consider. How much money
are you making after factoring out those factors? In addition, another factor
that must be considered in gauging your performance is the fees that you pay
your brokerage. If you pay $8 per trade, then it takes you $16 to enter and
exit a position. These calculations need to be taken into effect when
calculating portfolio return.
To track your performance with the individual stocks themselves,
you can track four factors: - Stock Price 3 months Before Purchase
- Buy Price
- Sell Price
- Stock Price 3 months After Sell.
Based on these factors you can determine whether you bought too
high, sold too low, and how well the Dollar Cost Averaging strategies helped
you out.
47 Robert Hagstrom, The Warren Buffet
Way(147)
Example
Explanation: Following is an explanation of the theory we have
proposed, because we believe that seeing it in action will provide a clearer
example for a beginning investor.
Stock Screener Criteria Used the 05/21/08:
ROE: 25% or more, and above industry average
PEG: Less than 1
Debt to Total Cap: 0 - 5% and below the industry average
Capitalization: Mid cap, $2-10billion
Returned 4 companies, and we picked HANS because of the stability
of industry, and because it's in our circle of competence.
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Analysis Phase 1
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#
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Date
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Company
Name &
Ticker
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Current
Price
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52 Wk
High /
Low
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Market Cap
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Daily $
Volume
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Debt / Total
Capitalizati
on
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Industry
Debt / Total
Cap
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Return
On
Equity
- ROE
?
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1
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05/21/08
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Hansen
Natural
HANS
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$28.46
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$68.4 /
$38
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$2.7b
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$5.8m
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0.1% ?
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54.60%
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45.2%?
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2
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|
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3
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Analysis Phase 1
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#
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Industry
ROE
|
Insider
Ownership
%
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Stock
Buyback
Plan
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5yr Price
Appreciation
|
Current
P/E
|
Avg 5
Year P/E
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Industry
P/E
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Price to
Sales ?
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1
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30.90%
|
22
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Yes
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5366.00%
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17.9?
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23.86
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19.2
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2.83 ?
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2
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3
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Analysis Phase 2
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#
|
Ticker
|
Earnings Per
Share ?
|
Core Earnings
Per Share ?
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EPS - Core
EPS
|
Core P/E
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Net Earnings
Growth ?
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Industry
Earnings
Growth
|
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1
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HANS
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1.79?
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$1.51
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$0.28
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27.46
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62.7% ?
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11.30%
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2
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3
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Analysis Phase 2
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#
|
Projected
Earnings
Growth
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Quick Ratio ?
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Current Ratio
?
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Industry
Quick Ratio
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Industry
Current Ratio
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Dividend Yield
?
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Sales Per Share
?
|
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1
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20.1
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2.8?
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4?
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0.7
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1.1
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n/a
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$9.15?
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2
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3
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Analysis Phase 2
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#
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Free Cash
Flow / Share
|
Net Cash Flow
/ Share
|
Projected
High / Low
|
Value Line
Timeliness
|
Value Line
Safety
|
S&P Stars
Rating
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S&P Fair
Value Rating
|
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1
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$1.08
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$1.62
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No access to value line
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b
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5
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2
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3
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Analysis Phase 3
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#
|
Ticker
|
Revenues to
Direct Costs
|
Cash Ratio
?
|
Gross
Margin ?
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Growth Rate
Of Expenses
|
Growth Rate
of Revenues
|
Expense to
Revenue
Ratio ?
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|
1
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HANS
|
2.07
|
0.92?
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51.20%
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15.00%
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45.90%
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1.34%
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2
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3
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Analysis Phase 3
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#
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Operating
Profit
Growth
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Working
Capital
Turnover
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Bad Debts to
Accounts
Receivable ?
|
Accounts
Receivable
Turnover ?
|
Inventory
Turnover
|
DCF
Valuation
|
Margin Of
Safety
|
|
1
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4.33%
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4.83%
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n/a
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12.10%
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5.40%
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$35.54
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$7.08 / 27%
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2
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3
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Company Strengths Company
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Growth And / Or Value This is a value buy,
because the stock is currently undervalued by
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Why Buy?
The company has an extremely small amount of debt and a huge
return on equity to shareholders. It is poised better than the rest of the
industry. The earnings prediction is 20% for the next five years, and DCF
valuation shows a 27% margin of safety.
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The company's products are made to differentiate. It owns major
energy drink Monster which is a large competitor to Red Bull in the US. In
addition, France will be legalizing Red Bull and other energy drinks therefore
opening a new market for Monster.
Industry
|
|
a age g
Price Target
Long term hold
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Increase Position Target $30
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The industry outlook for this industry is neutral, projecting
steady growth in companies' earnings and cash flows.
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Company Challenges.
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Re-Evaluation Point
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Why Sell?
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$25
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Industry
|
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If the company begins to accumulate debt, or
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The industry is threatened by the higher
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if the ROE falls below 20% we will evaluate
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costs of corn, and therefore HFCS, but
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position. Also, we will watch the prices of
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because it's so competitive, companies
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HFCS and aluminum and predictions for
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price increases will be passed to
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those. In addition, if the legal arena for
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consumer because if one company has to
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Stop Loss Target
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energy drinks changes, this may cause us to
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increase prices because of increase in raw material cost, all
companies will have to do the sa me.
|
$23.50
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re-evaluate.
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In order to help a beginning investor understand our strategy,
we decided to put it into action on May 21, 2008. After running the stock
screener, we have picked one company which we have believed to be in our circle
of competence. Hansen Natural, which produces various non-alcoholic beverages
such as energy drinks and juice has a ticker of HANS. We have decided to
analyze this company as an example.
In order to find our data, we have relied on the information
provided by Scottrade in terms of financial statements. We have also used the
Reuters Research Report and the S&P stock report made available to us by
Scottrade. In addition, to gather our qualitative data, we have visited the
website of Hansen Natural and looked over the most recent 10q and 10k. The
purpose of this example is to show our strategy to the beginning investor and
giving an example of a great company.
In the case of Hansen Natural, after we have completed the
three phases of qualitative evaluation, we have been able to see several things
that made it a good investment. First of all, the debt to capitalization ratio
was extremely low (0.1%) and decreasing over the years, showing that the
company has been decreasing its debt and using mostly equity to produce
returns. In addition, the return on equity was 45.2% and higher than the
average of the industry showing us that the company is squeezing every last
dollar to make returns on investor capital. In addition, the company has grown
over 5000% in the past 5 years. The managers and employees are confident in the
future of the company even after the recent price drops because of the high
percentage of insider ownership. In addition, there is a $200m buyback plan
that was announced in April which means that the company plans to buy back
shares which will eventually increase the price. In addition, we believe the
industry outlook to be positive because of the high popularity of energy drinks
in the US. We have also calculated a value per share using DCF and have came up
with $35.54 and we feel comfortable with a 27% margin of safety provided to us
at the current price. Of course, these are not the only factors and investor
should look at, but weigh the importance of the ones we have provided him
| 
