The results of my modeling generally dictate my attitude toward investing in a company. This makes sense because presumably your best guesses about the future of that company go into your models.
The problem is that in general when I model a growth stock, I generally model a contracting multiple and when I model a value stock I generally model a stable to expanding multiple.
It doesn't take a rocket scientist to work out that usual outcome there wrt recommendations.
Showing posts with label business model. Show all posts
Showing posts with label business model. Show all posts
Saturday, July 11, 2015
Wednesday, July 2, 2014
Behind The Numbers - The Real Risk of Stock Investing
Most stocks lose money.
Study (1983-2007): 39% of stocks had a negative total return (2 out of 5 stocks are money losing investments); 18% lost at least 75% of their value; 64% underperformed the Russell 3000 (most stocks can't keep up with a diversified index); a small minority of stocks significantly outperformed their peers.
The best performing stocks (top 25%) accounted for all the gains. The bottom 75% collective had a total return of 0%.
It is obvious that a few stocks are responsible for all the market's gains. This shows why it is essential to avoid the losers - and that there are valuable opportunities to profit from shorting.
Beating inflation is likely an accident of birth.
Graham called "firmness of character" - the ability to keep your own emotional counsel.
To buy any individual stock, let alone take any contrary market position, you have to be able to identify earnings quality concerns in your companies financials, and you have to stay away from anything you don't understand well enough to do so.
Indexes are the best of poor alternatives for anyone not investing in individual stocks. The minute that investors choose stocks, they have to learn about earnings quality.
Poor bases for shorting: Overvaluation (can continue indefinitely); fads (can do very well against the odds for a long time); frauds (hard to identify until after the fact); identifying business models that will fail (when they will fail is all but impossible to know); the short seller who "needs to be right". Short selling on those bases is simply too hard, too risky, and unnecessary.
We recommend waiting until there is aggressive revenue recognition, weakening balance sheets, and deteriorating cash flow trends. Wait until there are negative catalysts for profits in the near future.
Finding a fad and simply shorting it can never be called risk management. It adds risk because it increases the chance of margins calls and being stopped out.
Does it hurt to wait until a stock has cracked before shorting? Ans. No. And this is one fundamental thing about short selling that is so obvious that it is confounding-and ignored. You make as much money shorting a stock that falls from $70 to $5 (93%) as one that falls from $100 to $5 (95%). Waiting for the right time isn't going to cost you money. The time to short will be only when accounting analysis shows that the revenues aren't real or aren't sustainable.
Short sellers take an unnecessary risk by focusing on fraud because frauds are preceded by accounting issues that can be identified. The problem is that constantly looking for fraud can cloud your judgment.
Our process focuses on revenue. Until we see revenue problems-revenues that may be falling while inventories build and credit terms lengthen-we won't bet on whether a company is a fraud.
It is rational to want to short a fraud, but the correct focus is not on whether a manager is lying, but on whether a company is practicing financial chicanery.
Short sellers rightly look for business models that can fail, but they can't know when to short without a specific catalyst that, if it materializes, will kill the company's model and let them profit from a short.
When the money tap is turned off, a business model that depends on huge leverage suddenly dries up and becomes unsustainable. That's the catalyst.
The time to short is not when you think a business model can't survive. The time is when the numbers suggest that management is covering up poor performance and when the stock has already begun to fall.
When buybacks are not opportunistic, they mask options grants or - worse - raise the question of whether they are specifically to transfer shareholder wealth to option holders and insider sellers.
Days Sales Outstanding (DSO): the time between when the company makes a sale and receives the revenue.
Earnings quality analysts don't short without analyzing short interest and days to cover in order to avoid the squeezes that lead to margin calls, covering at any cost, and catastrophic losses.
If a lot of shares are sold short and the stock is thinly traded, the slightest good news could be very bad.
Float means the shares that can be freely traded any given day, excluding restricted shares, insider holdings, and shares held by those with more than 5% ownership.
Instead of needing to be right, wait for the obvious indicator of accounting trouble and act then. You have your negative catalyst.
Financial analysis prevents the mistake where an investor unearths an accounting issue but does not understand whether it matters or not in the real world.
The BEST SITUATION IS AGGRESSIVE REVENUE RECOGNITION MASKING SOFTENING DEMAND.
Study (1983-2007): 39% of stocks had a negative total return (2 out of 5 stocks are money losing investments); 18% lost at least 75% of their value; 64% underperformed the Russell 3000 (most stocks can't keep up with a diversified index); a small minority of stocks significantly outperformed their peers.
The best performing stocks (top 25%) accounted for all the gains. The bottom 75% collective had a total return of 0%.
It is obvious that a few stocks are responsible for all the market's gains. This shows why it is essential to avoid the losers - and that there are valuable opportunities to profit from shorting.
Beating inflation is likely an accident of birth.
Graham called "firmness of character" - the ability to keep your own emotional counsel.
To buy any individual stock, let alone take any contrary market position, you have to be able to identify earnings quality concerns in your companies financials, and you have to stay away from anything you don't understand well enough to do so.
Indexes are the best of poor alternatives for anyone not investing in individual stocks. The minute that investors choose stocks, they have to learn about earnings quality.
Poor bases for shorting: Overvaluation (can continue indefinitely); fads (can do very well against the odds for a long time); frauds (hard to identify until after the fact); identifying business models that will fail (when they will fail is all but impossible to know); the short seller who "needs to be right". Short selling on those bases is simply too hard, too risky, and unnecessary.
We recommend waiting until there is aggressive revenue recognition, weakening balance sheets, and deteriorating cash flow trends. Wait until there are negative catalysts for profits in the near future.
Finding a fad and simply shorting it can never be called risk management. It adds risk because it increases the chance of margins calls and being stopped out.
Does it hurt to wait until a stock has cracked before shorting? Ans. No. And this is one fundamental thing about short selling that is so obvious that it is confounding-and ignored. You make as much money shorting a stock that falls from $70 to $5 (93%) as one that falls from $100 to $5 (95%). Waiting for the right time isn't going to cost you money. The time to short will be only when accounting analysis shows that the revenues aren't real or aren't sustainable.
Short sellers take an unnecessary risk by focusing on fraud because frauds are preceded by accounting issues that can be identified. The problem is that constantly looking for fraud can cloud your judgment.
Our process focuses on revenue. Until we see revenue problems-revenues that may be falling while inventories build and credit terms lengthen-we won't bet on whether a company is a fraud.
It is rational to want to short a fraud, but the correct focus is not on whether a manager is lying, but on whether a company is practicing financial chicanery.
Short sellers rightly look for business models that can fail, but they can't know when to short without a specific catalyst that, if it materializes, will kill the company's model and let them profit from a short.
When the money tap is turned off, a business model that depends on huge leverage suddenly dries up and becomes unsustainable. That's the catalyst.
The time to short is not when you think a business model can't survive. The time is when the numbers suggest that management is covering up poor performance and when the stock has already begun to fall.
When buybacks are not opportunistic, they mask options grants or - worse - raise the question of whether they are specifically to transfer shareholder wealth to option holders and insider sellers.
Days Sales Outstanding (DSO): the time between when the company makes a sale and receives the revenue.
Earnings quality analysts don't short without analyzing short interest and days to cover in order to avoid the squeezes that lead to margin calls, covering at any cost, and catastrophic losses.
If a lot of shares are sold short and the stock is thinly traded, the slightest good news could be very bad.
Float means the shares that can be freely traded any given day, excluding restricted shares, insider holdings, and shares held by those with more than 5% ownership.
Instead of needing to be right, wait for the obvious indicator of accounting trouble and act then. You have your negative catalyst.
Financial analysis prevents the mistake where an investor unearths an accounting issue but does not understand whether it matters or not in the real world.
The BEST SITUATION IS AGGRESSIVE REVENUE RECOGNITION MASKING SOFTENING DEMAND.
Friday, October 30, 2009
Hedge Funds. Huh!
I could have sworn that "hedge funds" were toast last year. Their business model was being seen to be the fraud that it is, and their performance was not living up to expectations (that is if you had any confidence in the performance they were reporting).
But by referring to "hedge funds" perjoratively we are doing most hedge funds a gross injustice. Now to be sure, the business model is a complete scam (2/20 with lock-ups), but the idea of taking a holistic investment approach has its merits. Of course, hedge fund investment strategies come in different shapes and sizes, and so it is an oversimplification (if not disingenuous) to refer to "hedge funds" as if they were all the same.
The hedge fund industry is like most other industries. The top 10%-20% of funds hold 80%+ market share. Most hedge funds that put their shingle out are small asset managers pursuing some specialized investment strategy. They use a little leverage here and there, but on the whole these are not organizations or strategies that can bang the market around. The real "hedge funds" are the major bank proprietary trading desks. When people refer to "hedge funds" euphemistically, this is who they really have in mind.
But by referring to "hedge funds" perjoratively we are doing most hedge funds a gross injustice. Now to be sure, the business model is a complete scam (2/20 with lock-ups), but the idea of taking a holistic investment approach has its merits. Of course, hedge fund investment strategies come in different shapes and sizes, and so it is an oversimplification (if not disingenuous) to refer to "hedge funds" as if they were all the same.
The hedge fund industry is like most other industries. The top 10%-20% of funds hold 80%+ market share. Most hedge funds that put their shingle out are small asset managers pursuing some specialized investment strategy. They use a little leverage here and there, but on the whole these are not organizations or strategies that can bang the market around. The real "hedge funds" are the major bank proprietary trading desks. When people refer to "hedge funds" euphemistically, this is who they really have in mind.
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