Growth means that the business is becoming larger, this may be an objective for the business.
It can grow in a number of ways;
1. INTERNAL GROWTH
This means that it grows without joining with another business. It could
• build new premises
• ‘take on’ more employees
2. EXTERNAL GROWTH
In this case it has some involvement with another business
a) MERGER
Two firms join together and have equal ownership e.g. Lloyds and TSB merge to create Lloyds TSB bank.
b) TAKEOVER
One firm takes over another firm and has the ownership of that business. It is probably against the wishes of the other business. e.g. Lloyds could takeover TSB. It would probably still be called Lloyds but it would also own TSB.
BENEFITS OF GROWTH
• Increased profits
• Increased market share
• Gain new ideas from the other business
• Avoid having to compete with the other business
• Gain from economies of scale
• The new business may not need all of the workers. They could remove some workers to become efficient and make more profit
PROBLEMS OF GROWTH
To the businesses
• There may be two sets of managers who are unable to agree on the best direction for the company. This could cause many problems.
• The businesses may have different objectives and targets
• It costs a lot of money to merge with or takeover another business
To customers
• Possibly less choice in the market and possibly higher prices to pay
To workers
• Possible job losses and job insecurity
http://tutor2u.net/economics/gcse/revision_notes/firms_growth%20of%20businesses.htm
http://tutor2u.net/economics/presentations/a2economics/micro/GrowthofBusinesses/default.html
Monday 7 September 2009
Meet a “Ten Bagger” in less than 6 months!
Meet a “Ten Bagger” in less than 6 months!Wednesday, January 2, 2008
When I first spotted this stock back in June, it was just like another penny stock at 17 . Today six months later the stock is at 191. That is 11 times its price!
The stock is VB Desai Finance and please look at the chart below. In December alone, it has moved from 90 levels to 190+ levels.
The only way you can make money in such stocks is through trend trading. A “buy and hold” never works here! Right entry and right exit are the key to making money.
For your information- the stock had moved from 2 to 32 during 1999-2000 and then fell back to 1 in 2001!
http://sagecapital.wordpress.com/2008/01/02/meet-a-ten-bagger-in-less-than-6-months/
Comment: Unlikely to be an investment grade stock. So much volatility. Usually avoided by those who buy and hold.
Checking out the multi-baggers
Checking out the multi-baggers
2009-05-24 10:01:25
If you were keen on buying the multi-baggers in this particular rally, you should have bought small-caps from the beaten down realty and infrastructure sectors on March 9.
Thirty-eight of the BSE-500 stocks were multi-baggers in this rally, delivering a threefold or higher gain to their investors. The Sensex rose 70 per cent in this period.
Realty/infra lead from front
The real estate and infrastructure sectors would have been the last to be picked by fund managers had they been asked to pick out-performers in March. While the former was grappling with dwindling demand and a severe liquidity crunch, the latter was feeling the effect of a capex slowdown. But both sectors have surprised, with more than half the list of multi-baggers coming from them.
Housing Development and Infrastructure Ltd. (HDIL) tops the multi-baggers list, with a five-fold price increase over this period. A recovery from a very low valuation and a unique business model made it stand out from its competitors.
B.L. Kashyap and Sons, Orbit Corp, IVR Prime Urban and Mahindra Life Space Developers were the top real estate gainers while Housing Development and Infrastructure, Reliance Industrial Infra- structure and Hindustan Construction led the infrastructure gainers. Fifteen of the 38 multi baggers came from these two sectors. Depite the trepidation about the rupee wreaking havoc on IT companies, a few stocks from the sector did make it to the multi-baggers list - NIIT, Everonn Systems and Tanla Solutions.
Small-cap bias
Predictably, a clear small-cap bias was observed among stocks delivering manifold gains.
Twenty-eight of the 38 stocks that delivered fantastic returns by tripling in price were small-caps (market capitalisation less than Rs 2,000 crore). Reliance Industrial Infrastructure, B.L. Kashyap & Sons and Orbit Corporation topped small-caps.
Of the remaining, nine were mid-cap stocks. HDIL is the top gainer both in the BSE-500 and BSE Mid-cap space. Reliance Capital was the lone large-cap that notched up threefold gains.
Though multi-baggers were rare in the Sensex pack, a few index stocks did see prices double.
Seven stocks of the Sensex 30 saw prices rise over 100 per cent since March 9. The top index gainers were ICICI Bank (up 156 per cent), Reliance Infrastructure (up 152 per cent) and DLF (up 147 per cent).
Low price
If you didn't pick realty or infrastructure on March 9, you may have done equally well betting on stocks with a low absolute price. It bears mention that 28 of the 38 multi-baggers traded below Rs 100 on March 9.
More India business stories
Nineteen of them languished below Rs 50 before the rally. This clearly points to the investor fancy for low-priced stocks.
http://sify.com/finance/fullstory.php?a=jfykbzcdeaa&title=Checking_out_the_multi_baggers&tag=Investors
2009-05-24 10:01:25
If you were keen on buying the multi-baggers in this particular rally, you should have bought small-caps from the beaten down realty and infrastructure sectors on March 9.
Thirty-eight of the BSE-500 stocks were multi-baggers in this rally, delivering a threefold or higher gain to their investors. The Sensex rose 70 per cent in this period.
Realty/infra lead from front
The real estate and infrastructure sectors would have been the last to be picked by fund managers had they been asked to pick out-performers in March. While the former was grappling with dwindling demand and a severe liquidity crunch, the latter was feeling the effect of a capex slowdown. But both sectors have surprised, with more than half the list of multi-baggers coming from them.
Housing Development and Infrastructure Ltd. (HDIL) tops the multi-baggers list, with a five-fold price increase over this period. A recovery from a very low valuation and a unique business model made it stand out from its competitors.
B.L. Kashyap and Sons, Orbit Corp, IVR Prime Urban and Mahindra Life Space Developers were the top real estate gainers while Housing Development and Infrastructure, Reliance Industrial Infra- structure and Hindustan Construction led the infrastructure gainers. Fifteen of the 38 multi baggers came from these two sectors. Depite the trepidation about the rupee wreaking havoc on IT companies, a few stocks from the sector did make it to the multi-baggers list - NIIT, Everonn Systems and Tanla Solutions.
Small-cap bias
Predictably, a clear small-cap bias was observed among stocks delivering manifold gains.
Twenty-eight of the 38 stocks that delivered fantastic returns by tripling in price were small-caps (market capitalisation less than Rs 2,000 crore). Reliance Industrial Infrastructure, B.L. Kashyap & Sons and Orbit Corporation topped small-caps.
Of the remaining, nine were mid-cap stocks. HDIL is the top gainer both in the BSE-500 and BSE Mid-cap space. Reliance Capital was the lone large-cap that notched up threefold gains.
Though multi-baggers were rare in the Sensex pack, a few index stocks did see prices double.
Seven stocks of the Sensex 30 saw prices rise over 100 per cent since March 9. The top index gainers were ICICI Bank (up 156 per cent), Reliance Infrastructure (up 152 per cent) and DLF (up 147 per cent).
Low price
If you didn't pick realty or infrastructure on March 9, you may have done equally well betting on stocks with a low absolute price. It bears mention that 28 of the 38 multi-baggers traded below Rs 100 on March 9.
More India business stories
Nineteen of them languished below Rs 50 before the rally. This clearly points to the investor fancy for low-priced stocks.
http://sify.com/finance/fullstory.php?a=jfykbzcdeaa&title=Checking_out_the_multi_baggers&tag=Investors
To find a mystical 10-bagger you must ignore all the froth
To find a mystical 10-bagger you must ignore all the froth
By Luke Johnson
Published: 12:01AM BST 07 Aug 2005
One of the best books of modern times about investing was published in 1989 and is called One Up On Wall Street. It was written by a clever fund manager at Fidelity, Peter Lynch, and it introduced me to the concept of "10-baggers", the Holy Grail of investing.
Ten-baggers are shares where you make 10 times your money (I believe the phrase is derived from baseball). Such opportunities are rare, but I have been fortunate enough over the past 15 years to be involved in a few such situations: Pizza Express, Topps Tiles and Abacus Recruitment among them.
There tend to be some common characteristics among these winners. The businesses all operate in growth industries and the company in question must be able to grow the top line. No one ever made a tenfold return on a pure margin improvement, or cost-cutting story with no sales growth.
Turnarounds are, however, a rich source of 10-baggers. For these to work, one's timing has to be immaculate, and the underlying business has to be sound - just desperately unloved by the stock market.
Those two retail recovery stories, Next and French Connection, come to mind: both have been 10-baggers for those who bought at the bottom in the early 1990s. Recessions and downturns will occasionally reveal such gems, decent firms with temporary problems which can be cured.
Such returns need patience. A hedge fund that churns its holdings every few months will never enjoy a 10-bagger. And therein lies the greatest danger: selling too early to enjoy the 1,000 per cent gain.
When you have doubled or trebled your money, it is so tempting to cash in profits. It must have been tempting in the early 1950s to take profits on Glaxo shares, just a few years after their 1947 flotation. Or to have done the same for Tesco which floated in the same year. Or sell Racal in the late 1960s after its 1961 market debut, decades before it spun off Vodafone. Yet each of those shares rewarded patient investors with epic performances over many decades, all 20-baggers at least, not even allowing for dividend.
One of the advantages that private equity enjoys is that it is forced to take a reasonably long-term view, and so is usually unable to rush for the exit at the first opportunity. Venture capital's other edge over quoted investors is debt: gearing in successful situations always amplifies the return to equity-holders. Typically, buy-outs have structures where 70 per cent of the capital is borrowed.
Quoted companies probably have the reverse capitalisation, with equity providing three-quarters of the funding. And as ever in investing, those who regularly find 10-baggers say you should stick to your own sphere of competence: buy what you understand.
A good source of 10-baggers has been privatisations. Of the 43 public-sector companies floated in London, at least four have returned more than 10 times their issue price: Associated British Ports, Amersham, BP and Forth Ports. Proof, I suppose, that governments tend to sell state assets cheaply, or perhaps that such organisations thrive in private ownership.
While the UK has few such businesses left to flog off, there are a number of countries such as France and Turkey that have active privatisation programmes where there might just be 10-baggers waiting to be discovered.
Indeed the UK is a mature economy and therefore finding new sectors - and stocks - experiencing sustained, rapid growth is harder than ever.
It may well be that the most exciting investments are in emerging economies which are expanding quickly. Luckily capital markets like Aim are attracting dozens of foreign companies looking to raise money, so British investors do not necessarily need to buy shares quoted on overseas exchanges. But the usual rules apply: look for real companies with competent management and a proven business model.
You won't find a 10-bagger among much of the over-hyped, speculative froth that comes to Aim. Search for the solid operation with strong fundamentals and a high quality of earnings.
Very few acquisitive vehicles are 10-baggers. Management in such firms focuses on doing deals rather than organically growing its core business. This can produce reasonable returns, but rarely delivers the stellar, long-run performance that can come from a strong business franchise in an attractive niche. And balance sheets matter: 10-baggers must be able to fund expansion internally or through debt. Companies that are forever issuing equity dilute their stock performance.
So good luck in your search for the next blockbuster. It may well be an obscure, neglected company now, but with the potential for greatness. The secret is to spot that potential.
• Luke Johnson is chairman of Signature Restaurants and Channel 4
http://www.telegraph.co.uk/finance/2920265/To-find-a-mystical-10-bagger-you-must-ignore-all-the-froth.html
By Luke Johnson
Published: 12:01AM BST 07 Aug 2005
One of the best books of modern times about investing was published in 1989 and is called One Up On Wall Street. It was written by a clever fund manager at Fidelity, Peter Lynch, and it introduced me to the concept of "10-baggers", the Holy Grail of investing.
Ten-baggers are shares where you make 10 times your money (I believe the phrase is derived from baseball). Such opportunities are rare, but I have been fortunate enough over the past 15 years to be involved in a few such situations: Pizza Express, Topps Tiles and Abacus Recruitment among them.
There tend to be some common characteristics among these winners. The businesses all operate in growth industries and the company in question must be able to grow the top line. No one ever made a tenfold return on a pure margin improvement, or cost-cutting story with no sales growth.
Turnarounds are, however, a rich source of 10-baggers. For these to work, one's timing has to be immaculate, and the underlying business has to be sound - just desperately unloved by the stock market.
Those two retail recovery stories, Next and French Connection, come to mind: both have been 10-baggers for those who bought at the bottom in the early 1990s. Recessions and downturns will occasionally reveal such gems, decent firms with temporary problems which can be cured.
Such returns need patience. A hedge fund that churns its holdings every few months will never enjoy a 10-bagger. And therein lies the greatest danger: selling too early to enjoy the 1,000 per cent gain.
When you have doubled or trebled your money, it is so tempting to cash in profits. It must have been tempting in the early 1950s to take profits on Glaxo shares, just a few years after their 1947 flotation. Or to have done the same for Tesco which floated in the same year. Or sell Racal in the late 1960s after its 1961 market debut, decades before it spun off Vodafone. Yet each of those shares rewarded patient investors with epic performances over many decades, all 20-baggers at least, not even allowing for dividend.
One of the advantages that private equity enjoys is that it is forced to take a reasonably long-term view, and so is usually unable to rush for the exit at the first opportunity. Venture capital's other edge over quoted investors is debt: gearing in successful situations always amplifies the return to equity-holders. Typically, buy-outs have structures where 70 per cent of the capital is borrowed.
Quoted companies probably have the reverse capitalisation, with equity providing three-quarters of the funding. And as ever in investing, those who regularly find 10-baggers say you should stick to your own sphere of competence: buy what you understand.
A good source of 10-baggers has been privatisations. Of the 43 public-sector companies floated in London, at least four have returned more than 10 times their issue price: Associated British Ports, Amersham, BP and Forth Ports. Proof, I suppose, that governments tend to sell state assets cheaply, or perhaps that such organisations thrive in private ownership.
While the UK has few such businesses left to flog off, there are a number of countries such as France and Turkey that have active privatisation programmes where there might just be 10-baggers waiting to be discovered.
Indeed the UK is a mature economy and therefore finding new sectors - and stocks - experiencing sustained, rapid growth is harder than ever.
It may well be that the most exciting investments are in emerging economies which are expanding quickly. Luckily capital markets like Aim are attracting dozens of foreign companies looking to raise money, so British investors do not necessarily need to buy shares quoted on overseas exchanges. But the usual rules apply: look for real companies with competent management and a proven business model.
You won't find a 10-bagger among much of the over-hyped, speculative froth that comes to Aim. Search for the solid operation with strong fundamentals and a high quality of earnings.
Very few acquisitive vehicles are 10-baggers. Management in such firms focuses on doing deals rather than organically growing its core business. This can produce reasonable returns, but rarely delivers the stellar, long-run performance that can come from a strong business franchise in an attractive niche. And balance sheets matter: 10-baggers must be able to fund expansion internally or through debt. Companies that are forever issuing equity dilute their stock performance.
So good luck in your search for the next blockbuster. It may well be an obscure, neglected company now, but with the potential for greatness. The secret is to spot that potential.
• Luke Johnson is chairman of Signature Restaurants and Channel 4
http://www.telegraph.co.uk/finance/2920265/To-find-a-mystical-10-bagger-you-must-ignore-all-the-froth.html
My first two bagger
Sun 10 Jun 2007
My first two bagger
I was just perusing over my portfolio this weekend and realized that I have my first two “bagger”. In investing the term “bagger” was coined by Peter Lynch, which refers to an investment that has multiplied in value. He actually often used terms like 6 or 10 bagger, which he grabbed from the game of baseball where “bags” or “bases” that a runner reaches are the measure of the success of a play.
Regardless I have my first investment that has doubled in value. On Oct 21, 2005 I bought 22 shares of PCAR @ 42.49 per share. Today the price sits at roughly $86 per share netting me a 100+% return on my money on paper. It actually happened a while ago, but I just realized it now. PCAR also has a 1.2% dividend yield which I haven’t been counting into my returns so overall it has been a pretty good investment for me.
So what does this mean?
My first two bagger
I was just perusing over my portfolio this weekend and realized that I have my first two “bagger”. In investing the term “bagger” was coined by Peter Lynch, which refers to an investment that has multiplied in value. He actually often used terms like 6 or 10 bagger, which he grabbed from the game of baseball where “bags” or “bases” that a runner reaches are the measure of the success of a play.
Regardless I have my first investment that has doubled in value. On Oct 21, 2005 I bought 22 shares of PCAR @ 42.49 per share. Today the price sits at roughly $86 per share netting me a 100+% return on my money on paper. It actually happened a while ago, but I just realized it now. PCAR also has a 1.2% dividend yield which I haven’t been counting into my returns so overall it has been a pretty good investment for me.
So what does this mean?
- Nothing really, other than I got lucky and picked an investment that has done well the last year and a half.
- It has nothing to say about my stock picking skills or the quality of investment that PCAR will be for me in the long-run.
- It’s just an oddball statistic that is pretty cool to point out. Sort of like a hole-in-one, it really requires no skill and can happen to anyone and doesn’t mean you aren’t going to still shoot 100+ for the round.
- Only time will tell.
Sources: Wikipedia
http://www.myfinancialjourney.com/archive/my-first-two-bagger
Why two-baggers are bad
Thursday, April 9, 2009 05:02 PM
Why two-baggers are bad
David Berman
If a stock you have steadfastly avoided has doubled in price over the past year, you might feel out to lunch. But according to recent research, now is not the time to go chasing after it in the hope of catching a little momentum.
Steve Foerster, professor of finance at Richard Ivey School of Business at the University of Western Ontario, has taken at look at what he calls “doublers” – stocks that have risen 100 per cent in the previous 12 months – and found that they typically underperform “non-doublers” over the following three to four years. The reason may have to do with the idea that fast-rising stocks tend to move beyond underlying fundamentals and start rising because of momentum and exuberance.
Mr. Foerster looked at the U.S. market – so Peter Gibson, vice chairman at Desjardins Securities, applied the concept to Canadian stocks.
He found that since 1991, investors who jettisoned doublers from a capitalization weighted S&P/TSX composite index would have enjoyed average annual returns of about 14 per cent, versus 12 per cent for the benchmark index. Even better, you would have benefited from lower volatility.
“As a general rule, excluding doubled stocks from a capitalization weighted index tends to produce returns equal to or better than the S&P/TSX composite index with a reasonably consistent performance profile over time,” Mr. Gibson said in a note to clients. “The major exception was during the early stages of the dot-com bubble, and perhaps somewhat disconcertingly, the current period.”
Indeed, avoiding today's doubler stocks means ignoring Potash Corp. of Saskatchewan Inc., Agrium Inc. and Research In Motion Ltd. – which is no easy feat. Curiously, energy stocks are not doublers and nor is oil. Crude oil has risen 95 per cent over the past year, while even high-flying Petrobank Energy & Resources is up 97 per cent – a steep rise, but not quite a double.
http://www.theglobeandmail.com/blogs/markets/why-two-baggers-are-bad/article691891/
Comment: Always fall back on the fundamentals.
Why two-baggers are bad
David Berman
If a stock you have steadfastly avoided has doubled in price over the past year, you might feel out to lunch. But according to recent research, now is not the time to go chasing after it in the hope of catching a little momentum.
Steve Foerster, professor of finance at Richard Ivey School of Business at the University of Western Ontario, has taken at look at what he calls “doublers” – stocks that have risen 100 per cent in the previous 12 months – and found that they typically underperform “non-doublers” over the following three to four years. The reason may have to do with the idea that fast-rising stocks tend to move beyond underlying fundamentals and start rising because of momentum and exuberance.
Mr. Foerster looked at the U.S. market – so Peter Gibson, vice chairman at Desjardins Securities, applied the concept to Canadian stocks.
He found that since 1991, investors who jettisoned doublers from a capitalization weighted S&P/TSX composite index would have enjoyed average annual returns of about 14 per cent, versus 12 per cent for the benchmark index. Even better, you would have benefited from lower volatility.
“As a general rule, excluding doubled stocks from a capitalization weighted index tends to produce returns equal to or better than the S&P/TSX composite index with a reasonably consistent performance profile over time,” Mr. Gibson said in a note to clients. “The major exception was during the early stages of the dot-com bubble, and perhaps somewhat disconcertingly, the current period.”
Indeed, avoiding today's doubler stocks means ignoring Potash Corp. of Saskatchewan Inc., Agrium Inc. and Research In Motion Ltd. – which is no easy feat. Curiously, energy stocks are not doublers and nor is oil. Crude oil has risen 95 per cent over the past year, while even high-flying Petrobank Energy & Resources is up 97 per cent – a steep rise, but not quite a double.
http://www.theglobeandmail.com/blogs/markets/why-two-baggers-are-bad/article691891/
Comment: Always fall back on the fundamentals.
Sunday 6 September 2009
Don't Buy Stocks based on P/E Ratio alone
Don't Buy Stocks based on P/E Ratio alone
By Chris Perruna
I use the P/E ratio as a secondary indicator for buying and selling stocks but I don't use the ratio in the same a manner as many value investors teach. I will explain the difference in my methodology for using the P/E ratio to your advantage.
Many value investors will pass on a growth stock that has a P/E ratio higher than a predetermined level. For example, they may discard all stocks that have a ratio of 15 or higher, no matter what industry group they come from. Some investors will discard any stocks that have P/E ratios above the industry group averages, concluding that they are grossly overvalued. I am not saying that this method doesn't work, because it does but it will not work when you focus on buying young innovative small cap stocks that are growing at tremendous rates, rates that "big caps" can no longer sustain.
I have never passed on buying a stock due to its P/E ratio being too high. What is too high? Too high to one investor may be low to another investor. This is the same logic that I use when speaking of stock’s prices. One problem that have with some value investors is their lack of understanding of the movement of the P/E ratio line on a chart. As a stock begins to move 100% or 200% from its pivot point, the P/E ratio will also move higher over the course of time. Plotting the P/E ratio on a chart will show you how much of a gain the ratio has made as the stock continues its up-trend.
Value investors that pass on buying stocks with P/E ratio’s above a certain threshold have missed some of the biggest winners of all time (the 10-baggers as Peter Lynch would say). Analysts frequently downgrade stocks when their P/E ratios cross what they believe to be fully valued thresholds.
Some things in life are worth more than other things although they offer the same use, such as a car. I tend to use this example often but I would rather own a Mercedes for $50k over a Pinto for $10k. They will both take me where I want to go but I value the amenities that the Mercedes gives me and the added comfort, quality and style that comes with the luxury vehicle. The same holds true for stocks, certain companies offer greater appeal and are valued at higher ratios than their competitors. The best materialistic things in life, including growth stocks, are usually bought at a premium.
The P-E ratio uses a stock's current price and divides it by total earnings per share over the past four quarters. For example, currently GDP has a P/E ratio 51.06 with a share price of $24.00. Its last four quarters of EPS add up to $0.47. Its P-E ratio is $24.00 divided by $0.47, or 51.06. MSN Money Central has the P/E ratio listed at 51.30.
Growth stocks usually sport higher P/E ratios than the rest of the general market, even at the start of up-trends. A high P/E ratio typically means that the stock is enjoying strong demand. If a stock climbs in price from 40 to 60, its P/E ratio also gains 50%. Even though the P/E ratio may be high according to some analysts and value investors, the stock may be about to breakout from a cup-with-handle and go on to double from this point. Would you want to miss out on a possible 100% gain because the P/E ratio is too high?
Investor’s Business Daily conducted an excellent case study in 1996-97: “The 95 best small- and mid-cap stocks of 1996-97 had an average P-E of 39 at their pivot and 87 at the peak of their run-ups. The 25 best large caps of those years began with an average P-E of 20 and rose to 37. To get a piece of these big winners, you had to pay a premium.”
When I purchase a stock, I note the current P/E ratio and chart it along with the price. Historically, P/E's that move up 100%-200% or more while the stock is advancing, usually become vulnerable stocks and can start to become extended and flash sell signals. It holds true for a stock with a P/E starting at 15 and going to 40 or a stock with a P/E of 50 and going to 115. Don't skip over EXCELLENT companies that are growing at amazing clips because of a high P/E ratio. What may seem high now, may be low later on! Earnings and Sales are much more important. Price and volume are the most important. The P/E ratio is just a secondary indicator that can be used to further analyze the stocks in your portfolio.
Always use price and volume as your first line of offense and defense. From this point, turn to some dependable secondary indicators to confirm your original analysis and then make a decision. I would never throw out a stock because its P/E ratio is too high. Take GOOG for example, every value investor missed the 100% gain that this stock boasted after the release of its IPO. Growth stocks are expensive for a reason, don’t forget the analogy to a Mercedes.
Chris Perruna - http://www.marketstockwatch.com
Chris is the Founder and President of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don't stop at just showing you our daily and weekly screens, we teach you how to make your own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.
Article Source: http://EzineArticles.com/?expert=Chris_Perruna
http://ezinearticles.com/?Dont-Buy-Stocks-based-on-P/E-Ratio-alone&id=18466
By Chris Perruna
I use the P/E ratio as a secondary indicator for buying and selling stocks but I don't use the ratio in the same a manner as many value investors teach. I will explain the difference in my methodology for using the P/E ratio to your advantage.
Many value investors will pass on a growth stock that has a P/E ratio higher than a predetermined level. For example, they may discard all stocks that have a ratio of 15 or higher, no matter what industry group they come from. Some investors will discard any stocks that have P/E ratios above the industry group averages, concluding that they are grossly overvalued. I am not saying that this method doesn't work, because it does but it will not work when you focus on buying young innovative small cap stocks that are growing at tremendous rates, rates that "big caps" can no longer sustain.
I have never passed on buying a stock due to its P/E ratio being too high. What is too high? Too high to one investor may be low to another investor. This is the same logic that I use when speaking of stock’s prices. One problem that have with some value investors is their lack of understanding of the movement of the P/E ratio line on a chart. As a stock begins to move 100% or 200% from its pivot point, the P/E ratio will also move higher over the course of time. Plotting the P/E ratio on a chart will show you how much of a gain the ratio has made as the stock continues its up-trend.
Value investors that pass on buying stocks with P/E ratio’s above a certain threshold have missed some of the biggest winners of all time (the 10-baggers as Peter Lynch would say). Analysts frequently downgrade stocks when their P/E ratios cross what they believe to be fully valued thresholds.
Some things in life are worth more than other things although they offer the same use, such as a car. I tend to use this example often but I would rather own a Mercedes for $50k over a Pinto for $10k. They will both take me where I want to go but I value the amenities that the Mercedes gives me and the added comfort, quality and style that comes with the luxury vehicle. The same holds true for stocks, certain companies offer greater appeal and are valued at higher ratios than their competitors. The best materialistic things in life, including growth stocks, are usually bought at a premium.
The P-E ratio uses a stock's current price and divides it by total earnings per share over the past four quarters. For example, currently GDP has a P/E ratio 51.06 with a share price of $24.00. Its last four quarters of EPS add up to $0.47. Its P-E ratio is $24.00 divided by $0.47, or 51.06. MSN Money Central has the P/E ratio listed at 51.30.
Growth stocks usually sport higher P/E ratios than the rest of the general market, even at the start of up-trends. A high P/E ratio typically means that the stock is enjoying strong demand. If a stock climbs in price from 40 to 60, its P/E ratio also gains 50%. Even though the P/E ratio may be high according to some analysts and value investors, the stock may be about to breakout from a cup-with-handle and go on to double from this point. Would you want to miss out on a possible 100% gain because the P/E ratio is too high?
Investor’s Business Daily conducted an excellent case study in 1996-97: “The 95 best small- and mid-cap stocks of 1996-97 had an average P-E of 39 at their pivot and 87 at the peak of their run-ups. The 25 best large caps of those years began with an average P-E of 20 and rose to 37. To get a piece of these big winners, you had to pay a premium.”
When I purchase a stock, I note the current P/E ratio and chart it along with the price. Historically, P/E's that move up 100%-200% or more while the stock is advancing, usually become vulnerable stocks and can start to become extended and flash sell signals. It holds true for a stock with a P/E starting at 15 and going to 40 or a stock with a P/E of 50 and going to 115. Don't skip over EXCELLENT companies that are growing at amazing clips because of a high P/E ratio. What may seem high now, may be low later on! Earnings and Sales are much more important. Price and volume are the most important. The P/E ratio is just a secondary indicator that can be used to further analyze the stocks in your portfolio.
Always use price and volume as your first line of offense and defense. From this point, turn to some dependable secondary indicators to confirm your original analysis and then make a decision. I would never throw out a stock because its P/E ratio is too high. Take GOOG for example, every value investor missed the 100% gain that this stock boasted after the release of its IPO. Growth stocks are expensive for a reason, don’t forget the analogy to a Mercedes.
Chris Perruna - http://www.marketstockwatch.com
Chris is the Founder and President of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don't stop at just showing you our daily and weekly screens, we teach you how to make your own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.
Article Source: http://EzineArticles.com/?expert=Chris_Perruna
http://ezinearticles.com/?Dont-Buy-Stocks-based-on-P/E-Ratio-alone&id=18466
Do You Need To Make Your Money Work Harder?
Do You Need To Make Your Money Work Harder?
If you are anything like the rest of us, life is becoming harder financially. In days and years gone by, it was easy to put money in the bank or into a stock fund and simply forget about it. As time passed, it would have increased and life was good.
But the world is changing rapidly. Globalisation is increasing demand for everyday goods around the world. This is pushing up the price of nearly everything. Inflation seems to be rising and wages are not keeping up. The purchasing power of money in a bank account seems to be falling - fast.
If that wasn't enough, financial companies seem to be handing the risks in our investments over to us. If you have heard the words 'self-invested' when applied to your pension planning, you will know that things are changing.
On the one hand, being able to choose how to invest for your retirement sounds liberating! But on the other, it brings massive responsibility. If it goes wrong - and it might - only one person is responsible. That person is YOU!
This is a massive change in responsibility for the future of you and your family.
What can be done about it?
The obvious place to start is in building up an increased financial knowledge. Whether you choose to take full responsibility or not, you clearly have some work to do.
Finding your way to a website like this with lots of free information was a good start. Well done! But there must be more. Simply gathering knowledge will not make anyone wealthy.
That knowledge needs to be put to profitable use.
It is important to try and define your strategy. Some people are suited to long-term investment and others to trading. Some have time to spend thinking, analysing and researching whilst others do not. Some people are very aggressive with their money and want big profits, whilst others are more cautious.
However you view yourself, there is a trading approach for you. Whether you need to increase the value of your capital or add an extra income stream to help the family finances, you need to take more control of your money.
Many years ago, investment newsletter writer and guru, Harry Schultz, suggested this: "Trading is for orphans and widows, investment is for gamblers." He thinks we should all be flexible in our approach to money. Markets rise and fall - why bet on them going in only one direction?
Skilled traders can make money when a market rises, falls or moves sideways!
However, most traders don't!
Whilst in theory traders can make money in any market conditions, the reality is that most are broke within a year. The ones that learn and survive can make vast amounts of money. It is an all or nothing business.
But economic problems mean that even experienced traders need help. The issues in credit and banking markets, market volatility and global political turbulence make it difficult - if not impossible - for one person to work successfully alone. We all need some help!
Most if not all successful traders subscribe to some form of market advisory service. You might know it better as a financial newsletter. Of course in the internet world, it isn't how we might think of a newsletter!
These services have a different perspective that can help any investor to see through the fog of market movements. They also suggest trades - some daily and others weekly - to help produce the profits that pay for the service and more.
http://www.stockexchangesecrets.com/online-trading-service.html
If you are anything like the rest of us, life is becoming harder financially. In days and years gone by, it was easy to put money in the bank or into a stock fund and simply forget about it. As time passed, it would have increased and life was good.
But the world is changing rapidly. Globalisation is increasing demand for everyday goods around the world. This is pushing up the price of nearly everything. Inflation seems to be rising and wages are not keeping up. The purchasing power of money in a bank account seems to be falling - fast.
If that wasn't enough, financial companies seem to be handing the risks in our investments over to us. If you have heard the words 'self-invested' when applied to your pension planning, you will know that things are changing.
On the one hand, being able to choose how to invest for your retirement sounds liberating! But on the other, it brings massive responsibility. If it goes wrong - and it might - only one person is responsible. That person is YOU!
This is a massive change in responsibility for the future of you and your family.
What can be done about it?
The obvious place to start is in building up an increased financial knowledge. Whether you choose to take full responsibility or not, you clearly have some work to do.
Finding your way to a website like this with lots of free information was a good start. Well done! But there must be more. Simply gathering knowledge will not make anyone wealthy.
That knowledge needs to be put to profitable use.
It is important to try and define your strategy. Some people are suited to long-term investment and others to trading. Some have time to spend thinking, analysing and researching whilst others do not. Some people are very aggressive with their money and want big profits, whilst others are more cautious.
However you view yourself, there is a trading approach for you. Whether you need to increase the value of your capital or add an extra income stream to help the family finances, you need to take more control of your money.
Many years ago, investment newsletter writer and guru, Harry Schultz, suggested this: "Trading is for orphans and widows, investment is for gamblers." He thinks we should all be flexible in our approach to money. Markets rise and fall - why bet on them going in only one direction?
Skilled traders can make money when a market rises, falls or moves sideways!
However, most traders don't!
Whilst in theory traders can make money in any market conditions, the reality is that most are broke within a year. The ones that learn and survive can make vast amounts of money. It is an all or nothing business.
But economic problems mean that even experienced traders need help. The issues in credit and banking markets, market volatility and global political turbulence make it difficult - if not impossible - for one person to work successfully alone. We all need some help!
Most if not all successful traders subscribe to some form of market advisory service. You might know it better as a financial newsletter. Of course in the internet world, it isn't how we might think of a newsletter!
These services have a different perspective that can help any investor to see through the fog of market movements. They also suggest trades - some daily and others weekly - to help produce the profits that pay for the service and more.
http://www.stockexchangesecrets.com/online-trading-service.html
The Stock Exchange For Beginners - Part 2
The Stock Exchange For Beginners - Part 2
In my previous message about the stock exchange for beginners, I tried to convey some of the realisations that a new investor needs to make to help him or her become successful.
This time, I am going to offer a few thoughts on what I believe helps me to be successful and a few examples of what can and may go wrong. As ever, I hope that this isn't below your level of either confidence or competence as I don't wish to insult. However, I have found that there seem to be far more people that want to understand finance 'a little better' than there are people who can lecture on the subject.
Firstly to an example. Back in the mid 90's I joined an Investment club in the UK. I knew a couple of the members from a local health club I was a member at. Knowing that I was (a) keenly interested in investment and (b) more knowledgeable than most of them, I was invited along.
Suffice to say that on the first evening, I realised that I had been invited along to do all the work! I enjoyed the work so that didn't actually bother me. I also could purchase some additional investment tools 'for the club' which I couldn't justify for myself.
The main work of analysis was carried out by myself and another member who is a long-time friend and no mug in the world of shares and investment himself. We were using as our template a theory offered by Jim Slater which centred around price / earnings growth ratios. In short, it was highly successful.
At the end of the first year, we were 'up' by around 80%. Admittedly, this was during the tech-boom bull and any idiot could get 30% pa without trouble or effort, but still we were very impressed. The second year started well too and within 6 months of year two, our small company growth share portfolio (the only portfolio) was up comfortably over 100%. Nice work if you can get it.
For those of you that haven't been a member of an investment club and don't know, they are a democracy. Every opinion counts equal in a vote to buy or sell, whether they understand investment - or not. Here was our trouble. If you can believe it, making an enormous profit was 'boring' and they needed 'excitement'. To me, making money as quickly as we did was not merely exciting - it was thrilling!! But, when we wanted to sell they wouldn't and when we offered rock solid buy predictions they disliked something and again, we wouldn't.
I think our lowest point was not buying shares in a UK pizza delivery firm (that was growing very quickly and would have turned into a great investment) because (and I kid you not) one of the founding members didn't like 'Italian food'. Who cares?
The club ended rather badly with arguments and falling outs. Several years later it still has a couple of holdings in shares that might 'one day turn around'. Fat chance!!!!
So here is the tip: why do you want to invest? This needs analysis.
My friend and I invested because we were willing to put in the effort, wanted to increase our holdings, make money and frankly, we like winning in a global market against the nation's smartest minds!!
Our other members however, were there to gamble. It was just fun. Who cares about the result? We all meet in a pub, have a meal, chat about shares and throw some money at the market. We wanted profits, they wanted a social group.
After being up by over 100% after 18 months, we closed the club at a loss of both money and friendship. Ridiculous.
What about you? Why do you want to invest? If you want to gamble, take up sports betting. You get to watch a game as well as be financially involved - that sounds much better.
Do you plan to follow the market? If you don't, best to keep away.
I'm not the world's greatest at tracking a market - I can admit it. Each day, I look at the shares in my portfolio, funds I advise clients about, prospective investments I am mulling over, general financial news and read a few posts by other advisers / analysts online. And yet, if I'm honest, I worry that don't pay enough time each day to the markets.
If you want to make serious decisions, with serious amounts of money and (hopefully) make serious amounts of profit, you need to be - SERIOUS!!!
Personally, I don't like the idea of gambling much. I consider myself to be either a speculator or an investor, not a gambler. When I first started investing, I didn't know the difference (though I started at 18 and had no-one to guide me). That meant that all my investments were gambles. Mostly, they weren't so hot.
These days, I assess and analyse much more. I avoid 'turnarounds', since I don't think they turn around too often. Greater life experience has taught me to recognise that most companies that need to turn, or might turn, are already dead - they just don't know it yet.
I also have learned my lesson with 'development' companies. You know the thing, one great idea that 'if' they get to market will make 'tens of millions'. I own shares in a couple that I bought years ago. Broadly, I was right to buy. Of all the development stocks I could have bought, these actually did develop and do make products. They just don't make profits yet - years after I bought.
One of my development picks actually dominates the bluetooth market. That's right, I invested in the company that developed much of the bluetooth technology we use today! How could it not make a bundle of money? Am I a genius or what? Years later, I am still down 65%.
Another has an amazing fuel saving device for gear boxes in cars, lorries and off-road vehicles. In this age, you'd think that fuel saving technology would be all the rage. Over the years, I have bought more shares in the lows and sold them in the highs to make some 'trading' profits. But still my initial investment (I think 8 years ago) is down.
Though I may not have realised it at the time, these were not investments, they were gambles. So is the stock exchange really a place for beginners?
An investment is in a company that has products, a defined market and notable market share, profits, a track record and much more. Remember that. Think about Warren Buffett - he makes investments, good ones at that.
I'm also quite traditional about investing. I have never spread bet, used an option or future or sold short. I don't use leverage. If I can't figure out what might go wrong, FOR CERTAIN, I'd rather not do it. I buy, I hold and I sell. That's it.
I have no doubt that these admissions mean that I miss out on all sorts of possible investment opportunities. There are all sorts of weird and wonderful investments out there, but I invest and I don't like to gamble.
If you think about it though, what I just said doesn't really hold me back. I own some coins, stamps, comics, unit funds, shares, books and art - I did mention that I speculate didn't I? And if the world suddenly has a crisis, it means that I own actual, physical assets as well as just share certificates.
So that brings me to another point ... can you focus?
Ideally, you need to know quite a lot about certain areas and use that knowledge for your investment benefit. The art and books I own are mostly related to cricket. I love cricket and know a lot about the game and it's history - which means that I know when I see something of value. If it has value now, it probably will have for some time to come. Whether I buy at a good price or not, value and scarcity count.
Who'd imagine ME telling you that the stock market isn't everything?
Investment risk is lowered by knowledge. Every time. If you are buying shares on the stock exchange, what does the seller know that you don't? What do you know that the seller does not? You can bet your life that the buyer or seller opposite you in any transaction has done some serious research. If you don't do yours, who do you think will win? You or the market?
So of all the things that I might have said about investing, I haven't really made it sound 'sexy' yet. Have I? The truth is, investing isn't really very sexy. Lap dances are sexy. Pop stars are sexy. Carmen Electra is sexy. Investing is graphs, moving averages, annual reports, company statements, calculators and work. Not so sexy. It's kind of like being an accountant but with marginally more life and a few graphs.
But the great thing about investment is that in the long run, you decide whether you'll be successful or not. The harder you work at it, the luckier you will be. If you are just starting out, think about YOU first, not the market or companies. Decide on what you want to specialise on, whether the stock market for beginners is a place to invest and how you will approach it.
It might help to find areas in which you have useful knowledge already. Either that or decide on an area and slowly become an expert. What do I mean? Well, if you worked in a bank for 10 years, you must know something about banking. When you read an annual report from a bank, do you laugh and see through the waffle or does it make real sense? If you can see through the waffle of some far off CEO and CFO, you can start to compare the relative prospects in the same market of competing firms. Hey - that could be an opportunity!
If you really know about banking, you can compare the product offerings and service as well as the annual reports. You might still know some bank staff that are happy to tell you honestly that they are being 'creamed' in the market or whatever. Before you know it, you have a picture building of a competitive market. Before long, you will REALLY understand the investment potential of several companies. That will put you far ahead of many other investors.
As I said earlier, investment risk is lowered by knowledge - EVERY TIME.
Would your profits improve with help from a great market advice service?
To read more about very similar topics, please visit:
http://www.stockexchangesecrets.com/the-stock-exchange-for-beginners.html
In my previous message about the stock exchange for beginners, I tried to convey some of the realisations that a new investor needs to make to help him or her become successful.
This time, I am going to offer a few thoughts on what I believe helps me to be successful and a few examples of what can and may go wrong. As ever, I hope that this isn't below your level of either confidence or competence as I don't wish to insult. However, I have found that there seem to be far more people that want to understand finance 'a little better' than there are people who can lecture on the subject.
Firstly to an example. Back in the mid 90's I joined an Investment club in the UK. I knew a couple of the members from a local health club I was a member at. Knowing that I was (a) keenly interested in investment and (b) more knowledgeable than most of them, I was invited along.
Suffice to say that on the first evening, I realised that I had been invited along to do all the work! I enjoyed the work so that didn't actually bother me. I also could purchase some additional investment tools 'for the club' which I couldn't justify for myself.
The main work of analysis was carried out by myself and another member who is a long-time friend and no mug in the world of shares and investment himself. We were using as our template a theory offered by Jim Slater which centred around price / earnings growth ratios. In short, it was highly successful.
At the end of the first year, we were 'up' by around 80%. Admittedly, this was during the tech-boom bull and any idiot could get 30% pa without trouble or effort, but still we were very impressed. The second year started well too and within 6 months of year two, our small company growth share portfolio (the only portfolio) was up comfortably over 100%. Nice work if you can get it.
For those of you that haven't been a member of an investment club and don't know, they are a democracy. Every opinion counts equal in a vote to buy or sell, whether they understand investment - or not. Here was our trouble. If you can believe it, making an enormous profit was 'boring' and they needed 'excitement'. To me, making money as quickly as we did was not merely exciting - it was thrilling!! But, when we wanted to sell they wouldn't and when we offered rock solid buy predictions they disliked something and again, we wouldn't.
I think our lowest point was not buying shares in a UK pizza delivery firm (that was growing very quickly and would have turned into a great investment) because (and I kid you not) one of the founding members didn't like 'Italian food'. Who cares?
The club ended rather badly with arguments and falling outs. Several years later it still has a couple of holdings in shares that might 'one day turn around'. Fat chance!!!!
So here is the tip: why do you want to invest? This needs analysis.
My friend and I invested because we were willing to put in the effort, wanted to increase our holdings, make money and frankly, we like winning in a global market against the nation's smartest minds!!
Our other members however, were there to gamble. It was just fun. Who cares about the result? We all meet in a pub, have a meal, chat about shares and throw some money at the market. We wanted profits, they wanted a social group.
After being up by over 100% after 18 months, we closed the club at a loss of both money and friendship. Ridiculous.
What about you? Why do you want to invest? If you want to gamble, take up sports betting. You get to watch a game as well as be financially involved - that sounds much better.
Do you plan to follow the market? If you don't, best to keep away.
I'm not the world's greatest at tracking a market - I can admit it. Each day, I look at the shares in my portfolio, funds I advise clients about, prospective investments I am mulling over, general financial news and read a few posts by other advisers / analysts online. And yet, if I'm honest, I worry that don't pay enough time each day to the markets.
If you want to make serious decisions, with serious amounts of money and (hopefully) make serious amounts of profit, you need to be - SERIOUS!!!
Personally, I don't like the idea of gambling much. I consider myself to be either a speculator or an investor, not a gambler. When I first started investing, I didn't know the difference (though I started at 18 and had no-one to guide me). That meant that all my investments were gambles. Mostly, they weren't so hot.
These days, I assess and analyse much more. I avoid 'turnarounds', since I don't think they turn around too often. Greater life experience has taught me to recognise that most companies that need to turn, or might turn, are already dead - they just don't know it yet.
I also have learned my lesson with 'development' companies. You know the thing, one great idea that 'if' they get to market will make 'tens of millions'. I own shares in a couple that I bought years ago. Broadly, I was right to buy. Of all the development stocks I could have bought, these actually did develop and do make products. They just don't make profits yet - years after I bought.
One of my development picks actually dominates the bluetooth market. That's right, I invested in the company that developed much of the bluetooth technology we use today! How could it not make a bundle of money? Am I a genius or what? Years later, I am still down 65%.
Another has an amazing fuel saving device for gear boxes in cars, lorries and off-road vehicles. In this age, you'd think that fuel saving technology would be all the rage. Over the years, I have bought more shares in the lows and sold them in the highs to make some 'trading' profits. But still my initial investment (I think 8 years ago) is down.
Though I may not have realised it at the time, these were not investments, they were gambles. So is the stock exchange really a place for beginners?
An investment is in a company that has products, a defined market and notable market share, profits, a track record and much more. Remember that. Think about Warren Buffett - he makes investments, good ones at that.
I'm also quite traditional about investing. I have never spread bet, used an option or future or sold short. I don't use leverage. If I can't figure out what might go wrong, FOR CERTAIN, I'd rather not do it. I buy, I hold and I sell. That's it.
I have no doubt that these admissions mean that I miss out on all sorts of possible investment opportunities. There are all sorts of weird and wonderful investments out there, but I invest and I don't like to gamble.
If you think about it though, what I just said doesn't really hold me back. I own some coins, stamps, comics, unit funds, shares, books and art - I did mention that I speculate didn't I? And if the world suddenly has a crisis, it means that I own actual, physical assets as well as just share certificates.
So that brings me to another point ... can you focus?
Ideally, you need to know quite a lot about certain areas and use that knowledge for your investment benefit. The art and books I own are mostly related to cricket. I love cricket and know a lot about the game and it's history - which means that I know when I see something of value. If it has value now, it probably will have for some time to come. Whether I buy at a good price or not, value and scarcity count.
Who'd imagine ME telling you that the stock market isn't everything?
Investment risk is lowered by knowledge. Every time. If you are buying shares on the stock exchange, what does the seller know that you don't? What do you know that the seller does not? You can bet your life that the buyer or seller opposite you in any transaction has done some serious research. If you don't do yours, who do you think will win? You or the market?
So of all the things that I might have said about investing, I haven't really made it sound 'sexy' yet. Have I? The truth is, investing isn't really very sexy. Lap dances are sexy. Pop stars are sexy. Carmen Electra is sexy. Investing is graphs, moving averages, annual reports, company statements, calculators and work. Not so sexy. It's kind of like being an accountant but with marginally more life and a few graphs.
But the great thing about investment is that in the long run, you decide whether you'll be successful or not. The harder you work at it, the luckier you will be. If you are just starting out, think about YOU first, not the market or companies. Decide on what you want to specialise on, whether the stock market for beginners is a place to invest and how you will approach it.
It might help to find areas in which you have useful knowledge already. Either that or decide on an area and slowly become an expert. What do I mean? Well, if you worked in a bank for 10 years, you must know something about banking. When you read an annual report from a bank, do you laugh and see through the waffle or does it make real sense? If you can see through the waffle of some far off CEO and CFO, you can start to compare the relative prospects in the same market of competing firms. Hey - that could be an opportunity!
If you really know about banking, you can compare the product offerings and service as well as the annual reports. You might still know some bank staff that are happy to tell you honestly that they are being 'creamed' in the market or whatever. Before you know it, you have a picture building of a competitive market. Before long, you will REALLY understand the investment potential of several companies. That will put you far ahead of many other investors.
As I said earlier, investment risk is lowered by knowledge - EVERY TIME.
Would your profits improve with help from a great market advice service?
To read more about very similar topics, please visit:
http://www.stockexchangesecrets.com/the-stock-exchange-for-beginners.html
The Stock Exchange For Beginners Guide - Part 1
The Stock Exchange For Beginners Guide - Part 1
As I start my guide, about the Stock Exchange For Beginners, where should a newbie really start?
Firstly, I believe, with a realisation.
The stock exchange is rarely a place where anyone 'gets rich quick'. Offhand, I don't know where anyone does that, but certainly not in investments. Sure, some occassional stocks and shares will rise quickly making their owners money, but rarely will you become rich. Bear in mind that if an investment doubles in one year (which is pretty rare) you needed to be already wealthy to make a lot of money. If you invested a thousand, you will have just 'made' a thousand. You aren't wealthy or rich yet.
There are ways for an investor to make enormous profits, but as ever, they involve enormous risks. Things like options and futures really are NOT for the beginner with limited resources. They are highly technical, involve the potential to lose all of your investment quickly and need constant monitoring. I know that I am quite traditional in this sense, but many options appear to me as if they are little more than a gamble. That is not how a prudent investor operates! Instead look for reliable and predictable companies, quoted on the stock exchange and suitable for beginners.
Second realisation is this ... It isn't easy for beginners to make money on the stock exchange . If everyone could become a billionaire by investing, Warren Buffett would not be famous. It takes time, study and effort and most importantly - independent thought. Not everyone has the will or stamina to carry that through. I know that mine wavers from time to time. Who doesn't suffer setbacks and confidence knocks?
Thirdly, though it may be a 'hobby', the stock exchange isn't 'fun'. The world of investment is dominated by investment banks and their bankers. They do all the big deals, float companies, issue bonds, trade stocks, bonds, currencies and commodities and make lots of money. They employ some of the world's brightest young MBA's to figure out new and improved profit making ventures. They do all this because it is a business, with real money and real profits. Nobody is playing around.
If you want to be successful, you too need to view it as a business. Here is tip number one: if you are interested, go and do some reading about Benjamin Graham. Buy his books and digest. It will take a while, but it is the proper place to start. It was Ben Graham that first coined the idea successful investment is businesslike.
All that said, the little guy can still make money investing. I know, I do. Why can't you? Funds find it hard to invest in small companies, maybe that offers you an edge. Often, money managers are so busy working their 15 hour days that they miss wider discoveries in society. Just by going to the mall or supermarket, you might spot lines selling well and get a head start on the analysts. If that approach sounds good, you might like to grab a book by Peter Lynch - he offers guidance on how he finds winners, or as he puts it 'tenbaggers'.
If you really want to do well in investment on the stock exchange, then you need to approach it as if it were your own business. A part-time business perhaps, but still a business.
The stock exchange for beginners can be a daunting way to make a second income. Fear not, with time, you can learn the skills. But, I warn you again that it takes effort, independent thought and study to really do well.
http://www.stockexchangesecrets.com/stock-exchange-for-beginners-1.html
As I start my guide, about the Stock Exchange For Beginners, where should a newbie really start?
Firstly, I believe, with a realisation.
The stock exchange is rarely a place where anyone 'gets rich quick'. Offhand, I don't know where anyone does that, but certainly not in investments. Sure, some occassional stocks and shares will rise quickly making their owners money, but rarely will you become rich. Bear in mind that if an investment doubles in one year (which is pretty rare) you needed to be already wealthy to make a lot of money. If you invested a thousand, you will have just 'made' a thousand. You aren't wealthy or rich yet.
There are ways for an investor to make enormous profits, but as ever, they involve enormous risks. Things like options and futures really are NOT for the beginner with limited resources. They are highly technical, involve the potential to lose all of your investment quickly and need constant monitoring. I know that I am quite traditional in this sense, but many options appear to me as if they are little more than a gamble. That is not how a prudent investor operates! Instead look for reliable and predictable companies, quoted on the stock exchange and suitable for beginners.
Second realisation is this ... It isn't easy for beginners to make money on the stock exchange . If everyone could become a billionaire by investing, Warren Buffett would not be famous. It takes time, study and effort and most importantly - independent thought. Not everyone has the will or stamina to carry that through. I know that mine wavers from time to time. Who doesn't suffer setbacks and confidence knocks?
Thirdly, though it may be a 'hobby', the stock exchange isn't 'fun'. The world of investment is dominated by investment banks and their bankers. They do all the big deals, float companies, issue bonds, trade stocks, bonds, currencies and commodities and make lots of money. They employ some of the world's brightest young MBA's to figure out new and improved profit making ventures. They do all this because it is a business, with real money and real profits. Nobody is playing around.
If you want to be successful, you too need to view it as a business. Here is tip number one: if you are interested, go and do some reading about Benjamin Graham. Buy his books and digest. It will take a while, but it is the proper place to start. It was Ben Graham that first coined the idea successful investment is businesslike.
All that said, the little guy can still make money investing. I know, I do. Why can't you? Funds find it hard to invest in small companies, maybe that offers you an edge. Often, money managers are so busy working their 15 hour days that they miss wider discoveries in society. Just by going to the mall or supermarket, you might spot lines selling well and get a head start on the analysts. If that approach sounds good, you might like to grab a book by Peter Lynch - he offers guidance on how he finds winners, or as he puts it 'tenbaggers'.
If you really want to do well in investment on the stock exchange, then you need to approach it as if it were your own business. A part-time business perhaps, but still a business.
The stock exchange for beginners can be a daunting way to make a second income. Fear not, with time, you can learn the skills. But, I warn you again that it takes effort, independent thought and study to really do well.
http://www.stockexchangesecrets.com/stock-exchange-for-beginners-1.html
Peter Lynch and the ' Ten Bagger '
Peter Lynch and the ' Ten Bagger '
Peter Lynch, the fund manager legend from the Fidelity Magellan fund first used the phrase ' ten bagger ' in his excellent book, One Up On Wall Street. The term actually comes from baseball, but Lynch uses it to describe stocks which have risen in value by ten or more times! To the amateur or newbie, the idea of making a 1,000% profit may seem a little extreme, but Lynch built a reputation and his fund on this very ability.
For example, in the UK between July 1996 and July 2006, there were a number of companies that can be described as ten baggers. In fact, there were 19! A few had passed the 1,000% growth mark and then fallen back in price, but the opportunity was there.
The largest of these share prices grew by a staggering 3,049% (Anglo Irish Bank Corporation PLC), the lowest was Goodwin PLC, up by a very respectable 904%.
Other notable performers included: Numis Corporation PLC at 2,021%, Savills PLC at 1,271% and Amstrad PLC at 997%.
As you may imagine, this period included the dot com boom and bust, so companies that showed amazing growth, only to lose the vast majority of the gains are not included in the 19.
The sectors which are best represented in the list of 19 ten baggers are not what you might expect. Rather than being the glamorous sectors like telecoms or mining, they are actually finance, real estate and construction.
UK stock market legend Jim Slater described in several of his books that, 'elephants don't gallop'. The companies seem to prove him to be correct as the majority of the firms are small by FTSE standards (even after the tremendous growth).
Peter Lynch revelled in the fact that his family could spot rising stock market stars before Wall Street could. Thus, his theory that with the right mindset and effort, anyone could become a successful investor. Having spotted firms that seemed to be trading successfully and had products that people wanted, he would then swing into action and investigate thoroughly.
To read more related articles, please visit:
http://www.stockexchangesecrets.com/ten-bagger.html
Peter Lynch, the fund manager legend from the Fidelity Magellan fund first used the phrase ' ten bagger ' in his excellent book, One Up On Wall Street. The term actually comes from baseball, but Lynch uses it to describe stocks which have risen in value by ten or more times! To the amateur or newbie, the idea of making a 1,000% profit may seem a little extreme, but Lynch built a reputation and his fund on this very ability.
For example, in the UK between July 1996 and July 2006, there were a number of companies that can be described as ten baggers. In fact, there were 19! A few had passed the 1,000% growth mark and then fallen back in price, but the opportunity was there.
The largest of these share prices grew by a staggering 3,049% (Anglo Irish Bank Corporation PLC), the lowest was Goodwin PLC, up by a very respectable 904%.
Other notable performers included: Numis Corporation PLC at 2,021%, Savills PLC at 1,271% and Amstrad PLC at 997%.
As you may imagine, this period included the dot com boom and bust, so companies that showed amazing growth, only to lose the vast majority of the gains are not included in the 19.
The sectors which are best represented in the list of 19 ten baggers are not what you might expect. Rather than being the glamorous sectors like telecoms or mining, they are actually finance, real estate and construction.
UK stock market legend Jim Slater described in several of his books that, 'elephants don't gallop'. The companies seem to prove him to be correct as the majority of the firms are small by FTSE standards (even after the tremendous growth).
Peter Lynch revelled in the fact that his family could spot rising stock market stars before Wall Street could. Thus, his theory that with the right mindset and effort, anyone could become a successful investor. Having spotted firms that seemed to be trading successfully and had products that people wanted, he would then swing into action and investigate thoroughly.
To read more related articles, please visit:
http://www.stockexchangesecrets.com/ten-bagger.html
Stocks cannot go up ten fold, unless they first go up two and four and six and then eight fold.
It's all about the next 10 baggers !
However stocks cannot go up ten fold, unless they first go up two and four and six and then eight fold. This is an indisputable fact on Wall Street, where very few things are factual or indisputable.
If a stock is going to go up 10 fold, odds are it will sooner or later show its face.
http://nationalstockreview.ning.com/
However stocks cannot go up ten fold, unless they first go up two and four and six and then eight fold. This is an indisputable fact on Wall Street, where very few things are factual or indisputable.
If a stock is going to go up 10 fold, odds are it will sooner or later show its face.
http://nationalstockreview.ning.com/
How to pick multi-baggers
How to pick multi-baggers
Here is the Motilal Oswal guide to hitting sixers in the stock markets
N Mahalakshmi / Mumbai March 29, 2004
"To achieve satisfactory investment results is easier than most people realise; to achieve superior results is harder than it looks."
- Benjamin Graham
For most investors in stock markets, all that matters is a couple of stock tips which can make them really rich. Just a few stocks which could probably multiply some 10 or 20 times in value.
And it is not that stock markets do not present such opportunities. Of course, they do. Unfortunately, ordinary investors lack the vision to spot such opportunities.
During 2003, for instance, there were 734 companies which tripled in value and created wealth of at least Rs 100 crore. How many of these stock did you own? For many of us, the answer is probably none.
But don't fret. The market is going through a corrective phase now, presenting investors with a good opportunity to pick up stocks cheap. And to help you do that we bring to you insights from the Motilal Oswal Wealth Creation Study for 2003 which analyses the process of wealth creation in mutli-baggers.
Some hot tips from the study and with a little bit of luck, you could expect to buy into some mutli-baggers which can change the complexion of your portfolio.
Here are the key lessons from the study:
■Bad businesses can never create a multi-bagger, though they can create transitory multi-baggers during short phases when the conditions are good.
■Bad managements with good businesses are likely to create only transitory gainers.
■Overpriced shares have no chance of becoming multi-baggers ever.
So the only way one can hope to find lasting multi-baggers is by buying into great businesses run by good managements purchased at huge margin of safety.
When can you find multi-baggers?
According to the study, every period is not amicable for a multi-fold increase in stock prices and unless there are more than 25-30 multi-baggers of reasonable sizes spread across industries in the market, it is quite likely that the common investor would miss an opportunity to spot them.
A study of the bi-annual data of all the companies since 1990 reveals that the latest bull run has seen the maximum number of triplers with at least Rs 100 crore of net-wealth created in two years. The study also reveals that the bull run of 2003 is different from the bull runs in 1998-2000 and 1990-92.
This time, the study says, the rally provided a conducive environment to find multi-baggers in general. The factors that propelled the bull run were:
■Drop in interest rates from 12 per cent to 6 per cent
Values in business markets are relative. The relative valuation of stocks over bonds has increased significantly. It was at the historically highest level of 1.53 in March 2003. It was at its worst at 0.13 when the Sensex P/E was 70 in 1992.
The Sensex rally in 1998-2000 was very sector-specific and it did not have a non-tech earning support. The Sensex tech weight was quite limited and the rally could not sustain at a relative value of 0.32.
■Acceleration in corporate earnings
Drop in the interest cost has led to an increase in the corporate profits. Last year, corporate profits went up by 44 per cent even though sales growth was only 11 per cent because interest cost was very muted.
■Severe depreciation in 2003
Though the relative value increased, investors remained at a distance from the stock market in 2002-03. They decided to put their money in bonds because bond prices were going up whereas stock prices were falling. Now that the bond rally is over, investors will flock back to stocks.
Why some multi-baggers destroy wealth eventually
Having said that, it is not that one could get rich for ever by buying multi-baggers. The study says there are two types of multi-baggers: Enduring multi-baggers and transitory multi-baggers.
Enduring multi-baggers are those companies whose wealth creation is long-lasting and correction from the peak valuation is limited. In fact, they continue to exist as multi-baggers even after the correction.
Top enduring baggers
Company
Net wealth created (Rs Cr)
Wipro
36322.49
Infosys Technologies
33738.74
ICICI Bank
16221.37
Satyam Computer Services
10196.78
HDFC Bank
7968.43
Cipla
6607.20
Sun Pharmaceuticals Ind
5208.66
Moser Baer (India)
2801.60
Zee Telefilms
2387.25
Nirma
2226.75
The enduring multi-bagging companies like Infosys, Wipro, HDFC Bank, Dr Reddy's, Hero Honda and Cipla are typically few and difficult to be spotted, and most of the time they appear to be expensive at the time of buying because of the lack of faith in their longevity and size of growth.
Transitory multi-baggers, on the contrary, are easier to be spotted but they always end up giving nasty end results. Corrections are typically almost 100 per cent. Cyclicals broadly come under this category. The tragedy with this class of companies is that if you cannot sell in time, nothing is left in your hand.
Top transitory baggers
Company
Net wealth created (Rs Cr)
Pentamedia Graphics
-1238.35
NIIT
-1050.78
Silverline Technologies
-1008.99
Pentasoft Technologies
-911.24
Trigyn Technologies
-763.68
SSI
-493.21
DSQ Software
-379.38
Himachal Futuristic
-318.05
Morepen Laboratories
-253.91
Vikas Wsp
-170.69
But as correction is inevitable, market as a whole is left high and dry with a bad experience. These companies are plenty and easy to be found, and they attract a lot of crowd.
The study looked at the sustainability of the companies that were multi-baggers during the period between 1998 and 2000 when 115 companies more than tripled. The assumption: All these stocks were purchased on April 1, 1998, and sold on December 31, 2003.
The result reveals that most of the multi-baggers were transitory in nature during this period and they threw back all the wealth that had been created on their journey upwards.
What is the winning strategy?
"Stocks are simple. All you do is buy shares in a great business - with managers of the highest integrity and ability - for less than the business is intrinsically worth. Then you own those shares forever."
- Warren Buffet
According to Raamdeo Aggarwal, managing director, Motilal Oswal, there are three factors investors must look at: Business, management and the price of the stock relative to its value.
Business:
Improvement in business conditions leads to a change in earnings trend. That is typically the starting point of dismantling the pessimism on the stock. The study finds that a positive change is a must for any type of stock though such change can be temporary or permanent.
The problem arises when the business condition or the opportunity is temporary in nature. Take the example of private banking system - the switch in favour of private banking system is long lasting and permanent in nature. Similarly the changes happening in businesses like pharma, infotech services, auto ancillary and consumer non-durables will have a lasting impact.
However, the changes in fortunes of businesses like steel, cement and shipping are driven by mere price changes and, hence, transitory in nature.
Management:
Management plays a major role in creation of enduring multi-baggers. But how does one judge whether a management is good or bad? The study examined capital allocation of some companies. It is clear that SSI could not manage its capital allocation properly while Infosys could make a come-back due to its superior and sustained capital productivity.
The study observed that in businesses like banking and pharma, the importance of management is clearly visible. As the assessment of new private sector for the period 1998-2003 reveals, good managements can make a difference to the wealth created. For instance, HDFC Bank gained 361 per cent in market-cap during the five-year period when its net worth grew by 687 per cent. At the same time, Global Trust Bank saw its market-cap erode by 73 per cent as its net worth was down 99 per cent.
In cyclical businesses, management efficiency is even more necessary because every business cycle brings different challenges. Allocating capital at the time of cyclical downturn requires a lot of conviction because it may be found to be against popular opinion. Similarly, resisting huge build-up capacity at the peak of the cycle requires insightful management. Hence, the contribution of good managements cannot be undermined in cyclical businesses, too.
In essence, weak managements will lead only to transitory gainers whereas good managements can shine only if business performance helps.
As per Warren Buffet: "With a few exceptions, when management with a reputation for brilliance tackles a business with a reputation for poor fundamentals, it is the reputation of the business that remains intact."
So it boils down to the fact that for the making of enduring multi-baggers, a good business with a good management is necessary.
Price/value:
"Have the purchase price be so attractive that even a mediocre sale gives attractive returns."
- Warren Buffet
One factor, which is absolutely important for making a multi-bagger, is gross under-valuation or huge margin of safety in price at the time of purchase.
The study refers to the work by Tweedy Brown and Co entitled What has worked in investing. Some of the pointers to under-valued stocks are one or more of the following:
■Low price in relation to asset value
■Low price in relation to earnings and cash flows
■Sustained purchase by insiders
■A significant decline in stock prices
■Small market capitalisation with growth
The study concludes that the above findings are relevant in the Indian context, too. Also, the best time to get a huge margin of safety is when:
■Business conditions are unfavorable and near-term prospects look poor.
■When low prices of stocks reflect the current pessimism either in a particular stock or in the market as a whole.
■When a large company's performance is hit and the pessimism is fully reflected in the price.
Low P/E and P/B works because:
■The reinvested earnings are substantial in relation to the price paid. The effect of large earnings addition year after year keeps adding to the intrinsic strength of the stock and, hence, can't be ignored by the market for long.
■The bull market is typically very generous to low-priced issues and thus will raise the typical bargain issue to at least a reasonable level.
■There could be chances of smaller companies with high earnings being taken over by larger ones as a part of diversification programme.
http://www.business-standard.com/india/news/how-to-pick-multi-baggers/147266/
Here is the Motilal Oswal guide to hitting sixers in the stock markets
N Mahalakshmi / Mumbai March 29, 2004
"To achieve satisfactory investment results is easier than most people realise; to achieve superior results is harder than it looks."
- Benjamin Graham
For most investors in stock markets, all that matters is a couple of stock tips which can make them really rich. Just a few stocks which could probably multiply some 10 or 20 times in value.
And it is not that stock markets do not present such opportunities. Of course, they do. Unfortunately, ordinary investors lack the vision to spot such opportunities.
During 2003, for instance, there were 734 companies which tripled in value and created wealth of at least Rs 100 crore. How many of these stock did you own? For many of us, the answer is probably none.
But don't fret. The market is going through a corrective phase now, presenting investors with a good opportunity to pick up stocks cheap. And to help you do that we bring to you insights from the Motilal Oswal Wealth Creation Study for 2003 which analyses the process of wealth creation in mutli-baggers.
Some hot tips from the study and with a little bit of luck, you could expect to buy into some mutli-baggers which can change the complexion of your portfolio.
Here are the key lessons from the study:
■Bad businesses can never create a multi-bagger, though they can create transitory multi-baggers during short phases when the conditions are good.
■Bad managements with good businesses are likely to create only transitory gainers.
■Overpriced shares have no chance of becoming multi-baggers ever.
So the only way one can hope to find lasting multi-baggers is by buying into great businesses run by good managements purchased at huge margin of safety.
When can you find multi-baggers?
According to the study, every period is not amicable for a multi-fold increase in stock prices and unless there are more than 25-30 multi-baggers of reasonable sizes spread across industries in the market, it is quite likely that the common investor would miss an opportunity to spot them.
A study of the bi-annual data of all the companies since 1990 reveals that the latest bull run has seen the maximum number of triplers with at least Rs 100 crore of net-wealth created in two years. The study also reveals that the bull run of 2003 is different from the bull runs in 1998-2000 and 1990-92.
This time, the study says, the rally provided a conducive environment to find multi-baggers in general. The factors that propelled the bull run were:
■Drop in interest rates from 12 per cent to 6 per cent
Values in business markets are relative. The relative valuation of stocks over bonds has increased significantly. It was at the historically highest level of 1.53 in March 2003. It was at its worst at 0.13 when the Sensex P/E was 70 in 1992.
The Sensex rally in 1998-2000 was very sector-specific and it did not have a non-tech earning support. The Sensex tech weight was quite limited and the rally could not sustain at a relative value of 0.32.
■Acceleration in corporate earnings
Drop in the interest cost has led to an increase in the corporate profits. Last year, corporate profits went up by 44 per cent even though sales growth was only 11 per cent because interest cost was very muted.
■Severe depreciation in 2003
Though the relative value increased, investors remained at a distance from the stock market in 2002-03. They decided to put their money in bonds because bond prices were going up whereas stock prices were falling. Now that the bond rally is over, investors will flock back to stocks.
Why some multi-baggers destroy wealth eventually
Having said that, it is not that one could get rich for ever by buying multi-baggers. The study says there are two types of multi-baggers: Enduring multi-baggers and transitory multi-baggers.
Enduring multi-baggers are those companies whose wealth creation is long-lasting and correction from the peak valuation is limited. In fact, they continue to exist as multi-baggers even after the correction.
Top enduring baggers
Company
Net wealth created (Rs Cr)
Wipro
36322.49
Infosys Technologies
33738.74
ICICI Bank
16221.37
Satyam Computer Services
10196.78
HDFC Bank
7968.43
Cipla
6607.20
Sun Pharmaceuticals Ind
5208.66
Moser Baer (India)
2801.60
Zee Telefilms
2387.25
Nirma
2226.75
The enduring multi-bagging companies like Infosys, Wipro, HDFC Bank, Dr Reddy's, Hero Honda and Cipla are typically few and difficult to be spotted, and most of the time they appear to be expensive at the time of buying because of the lack of faith in their longevity and size of growth.
Transitory multi-baggers, on the contrary, are easier to be spotted but they always end up giving nasty end results. Corrections are typically almost 100 per cent. Cyclicals broadly come under this category. The tragedy with this class of companies is that if you cannot sell in time, nothing is left in your hand.
Top transitory baggers
Company
Net wealth created (Rs Cr)
Pentamedia Graphics
-1238.35
NIIT
-1050.78
Silverline Technologies
-1008.99
Pentasoft Technologies
-911.24
Trigyn Technologies
-763.68
SSI
-493.21
DSQ Software
-379.38
Himachal Futuristic
-318.05
Morepen Laboratories
-253.91
Vikas Wsp
-170.69
But as correction is inevitable, market as a whole is left high and dry with a bad experience. These companies are plenty and easy to be found, and they attract a lot of crowd.
The study looked at the sustainability of the companies that were multi-baggers during the period between 1998 and 2000 when 115 companies more than tripled. The assumption: All these stocks were purchased on April 1, 1998, and sold on December 31, 2003.
The result reveals that most of the multi-baggers were transitory in nature during this period and they threw back all the wealth that had been created on their journey upwards.
What is the winning strategy?
"Stocks are simple. All you do is buy shares in a great business - with managers of the highest integrity and ability - for less than the business is intrinsically worth. Then you own those shares forever."
- Warren Buffet
According to Raamdeo Aggarwal, managing director, Motilal Oswal, there are three factors investors must look at: Business, management and the price of the stock relative to its value.
Business:
Improvement in business conditions leads to a change in earnings trend. That is typically the starting point of dismantling the pessimism on the stock. The study finds that a positive change is a must for any type of stock though such change can be temporary or permanent.
The problem arises when the business condition or the opportunity is temporary in nature. Take the example of private banking system - the switch in favour of private banking system is long lasting and permanent in nature. Similarly the changes happening in businesses like pharma, infotech services, auto ancillary and consumer non-durables will have a lasting impact.
However, the changes in fortunes of businesses like steel, cement and shipping are driven by mere price changes and, hence, transitory in nature.
Management:
Management plays a major role in creation of enduring multi-baggers. But how does one judge whether a management is good or bad? The study examined capital allocation of some companies. It is clear that SSI could not manage its capital allocation properly while Infosys could make a come-back due to its superior and sustained capital productivity.
The study observed that in businesses like banking and pharma, the importance of management is clearly visible. As the assessment of new private sector for the period 1998-2003 reveals, good managements can make a difference to the wealth created. For instance, HDFC Bank gained 361 per cent in market-cap during the five-year period when its net worth grew by 687 per cent. At the same time, Global Trust Bank saw its market-cap erode by 73 per cent as its net worth was down 99 per cent.
In cyclical businesses, management efficiency is even more necessary because every business cycle brings different challenges. Allocating capital at the time of cyclical downturn requires a lot of conviction because it may be found to be against popular opinion. Similarly, resisting huge build-up capacity at the peak of the cycle requires insightful management. Hence, the contribution of good managements cannot be undermined in cyclical businesses, too.
In essence, weak managements will lead only to transitory gainers whereas good managements can shine only if business performance helps.
As per Warren Buffet: "With a few exceptions, when management with a reputation for brilliance tackles a business with a reputation for poor fundamentals, it is the reputation of the business that remains intact."
So it boils down to the fact that for the making of enduring multi-baggers, a good business with a good management is necessary.
Price/value:
"Have the purchase price be so attractive that even a mediocre sale gives attractive returns."
- Warren Buffet
One factor, which is absolutely important for making a multi-bagger, is gross under-valuation or huge margin of safety in price at the time of purchase.
The study refers to the work by Tweedy Brown and Co entitled What has worked in investing. Some of the pointers to under-valued stocks are one or more of the following:
■Low price in relation to asset value
■Low price in relation to earnings and cash flows
■Sustained purchase by insiders
■A significant decline in stock prices
■Small market capitalisation with growth
The study concludes that the above findings are relevant in the Indian context, too. Also, the best time to get a huge margin of safety is when:
■Business conditions are unfavorable and near-term prospects look poor.
■When low prices of stocks reflect the current pessimism either in a particular stock or in the market as a whole.
■When a large company's performance is hit and the pessimism is fully reflected in the price.
Low P/E and P/B works because:
■The reinvested earnings are substantial in relation to the price paid. The effect of large earnings addition year after year keeps adding to the intrinsic strength of the stock and, hence, can't be ignored by the market for long.
■The bull market is typically very generous to low-priced issues and thus will raise the typical bargain issue to at least a reasonable level.
■There could be chances of smaller companies with high earnings being taken over by larger ones as a part of diversification programme.
http://www.business-standard.com/india/news/how-to-pick-multi-baggers/147266/
What are value traps?
Above all else, we try to avoid value traps.
What are value traps?
Deysher: A value trap refers to a stock that looks cheap, probably is cheap, and stays inexpensive forever. It never appreciates because nothing really changes -- there‘s no growth or things don‘t get better. For some companies, it is difficult to change. The only way to make money is if they are acquired, which may never happen. Right now there are several companies that meet all of my other criteria, except that I feel they are value traps.
http://www.fundemail.com/pinnacle.html
What are value traps?
Deysher: A value trap refers to a stock that looks cheap, probably is cheap, and stays inexpensive forever. It never appreciates because nothing really changes -- there‘s no growth or things don‘t get better. For some companies, it is difficult to change. The only way to make money is if they are acquired, which may never happen. Right now there are several companies that meet all of my other criteria, except that I feel they are value traps.
http://www.fundemail.com/pinnacle.html
Manager Insight
Manager Insight: The Pinnacle Value Fund
By Lori Pizzani
June 17, 2003
...................................................................................
The Pinnacle Value Fund prefers to lean into the smallest capitalization area of the market. It likes to get up close and personal with companies that haven’t yet blipped onto mainstream analysts’ radar screens, or walk into an air traffic controller’s worst nightmare and scoop up companies that have fallen completely off radar. The fund’s manager, John E. Deysher, believes he can achieve oversized gains with undersized companies, and possibly grab some dividend yield along the way to reward investors for their wait.
That contrarian approach means shopping for bargains and hanging on to winners. While the fund is less than three months old, it’s in positive territory, and worthy of a look.
Fundemail: The Pinnacle Value Fund may be new, but you aren’t new to the mutual fund industry, right?
Deysher: Right. Before starting Bertolet Capital in January and the fund in April, I worked for 12-plus years as a portfolio manager and senior research analyst with Royce & Assoc. which manages mutual funds here in New York. Royce specializes in managing small cap value stocks. All told, I have two decades of industry experience.
Fundemail:The Pinnacle Value Fund can invest in common stocks as well as preferred stocks and convertible securities. Why the broader mandate?
Deysher: I manage the fund for total return. Our goal is to give investors a 2% or 3% yield while they are waiting for the securities to appreciate. We won’t invest in common stocks unless we think the stock can double or triple over the next two to three years.
Right now we own the preferred stock on a REIT, Price Legacy Corp., which is yielding 8-1/2%. It was structured by Sol Price who used to own Price Club before it merged with Costco in 1994. The REIT owns the real estate that 42 shopping centers sit on with key tenants like Costco, Home Depot, Lowes and Sport Authority.
Fundemail: The fund focuses its attention on the micro- and small cap universe. Why is this the sweet spot of the market for you?
Deysher: Small and micro-cap securities tend to trade under radar screens. Many are what I call “orphaned” stocks that no one pays much attention to. They often don’t get coverage from stock analysts, and that lack of interest usually makes for better values. Also, lots of other portfolio managers cannot invest in stocks under $100 million or even under $200 million so there are fewer analysts watching.
The sweet spot for us is any company under $400 million in market cap, and we have lots under $100 million. But a comfortable floor for us is within the $8 to $10 million range. We normally won’t buy companies smaller than that because they can be really fragile and are often overly dependent on a key customer, product or senior executive.
Fundemail: But if analysts aren’t covering these smaller companies, doesn’t that mean more work for you?
Deysher: Yes, it certainly does. Investing in smaller companies is much more labor intensive and requires more research. One of our biggest challenges is gathering the intelligence, which you have to do yourself. So we talk with their management, their competitors, their suppliers and others. We talk to people who often have no vested interest in speaking with us. We try to become as knowledgeable as possible beforehand so in exchange for their insight and thoughts, we can offer them information about something they didn’t know. We try to make it a two-way dialog.
Fundemail: Where do your stock ideas come from?
Deysher: We get ideas from many places, including the Wall Street Journal table showing the stocks making New Lows each day. We carefully look at SEC filings. We follow 13D and 13G ownership filings of smart, successful small company investors. We also review Warren Buffet’s Berkshire Hathaway filings every quarter. Sometimes there is an idea that we haven’t heard before that‘s small enough for us.
We have a nice network of brokers who we talk to, and we attend trade shows and trade association conferences. We read lots of publications and reports.
Fundemail: What do you ask when you talk with a small company’s management?
Deysher: We try to understand what they think are the key issues critical to a company’s success over the next few years. What are their strategic, financial and operating priorities? Do they understand the concepts of capital allocation and incentive compensation? We always wrap up our dialog by asking: Who is your toughest competitor? Who is your best vendor, and who is your best customer?
Fundemail: What do their answers tell you?
Deysher: It tells us whom they really respect and gives us insight into what they think about their company within the competitive landscape. We may also obtain new investment ideas that are worth further analysis.
Fundemail: Do you talk with the top brass at every company you own?
Deysher: We interview the CEO and/or CFO whenever we can. Some companies simply won’t talk to us. That doesn’t prohibit us from buying that company if we like it.
Fundemail: The fund has almost $2 million now. What is a comfortable number of securities for you to hold in the portfolio?
Deysher: Well, we are not yet fully invested. We have only 12% of the fund‘s assets invested now. We have about 15 or 16 securities in the portfolio right now, and are holding the other 88% in cash in a money market fund. Once we are fully invested, a comfortable number will be from 80 to100 securities.
The fund’s charter allows us to take fairly significant positions up to 10%. We will have a handful that will represent 4% or 5% of the fund. We’ll have a bunch of 2% to 4% positions. We’ll also have lots where we will own 2% or less, especially where we are just getting to know the companies. But we are diversified across industries and sectors.
Fundemail: So, you apparently aren’t afraid to hold cash?
Deysher: We’re not afraid to hold cash. I would much rather earn 1% in a money market fund than lose 10% because we paid too much for a security. Paying too much can turn a good investment into a poor one.
We’re not sure that the recent rally we’ve had is sustainable. Yes, we have now removed the uncertainty of war with Iraq. And after three years of a bear market, people are looking for a recovery. But people are just tossing money into the market now, and I’m unsure the recovery will justify current valuations. There have been a lot of managers covering their short positions and that has contributed to the rise in the market, too.
Fundemail: Conversely, you’ve indicated that down the road, too much cash could hurt the fund and you would consider closing the fund and not accepting new investments.
Deysher: That’s true. We expect that we will close the fund at some point. I don’t know if we will close it at $100 million or $500 million, but I don’t want to dilute the quality of investment ideas just to grow assets. That’s something that can happen if this kind of fund grows too large. The problem then becomes how to put that money to work. Often managers must migrate to bigger companies, or change their investment style. We call this market cap, or style creep.
Fundemail: Speaking of style, what particular characteristics do you look for in companies you invest in for this value fund?
Deysher: We look for companies that employ conservative accounting methods and have strong balance sheets. We also look for companies whose management is entrepreneurial. They have to think like owners. We also like it when they own a lot of stock in the company. When they own considerable stock, they pay more attention to capital allocation and don’t do dumb things just to satisfy Wall Street. These companies must also have an understandable business model. If I can’t understand a business model fairly quickly, we’ll move on to something else.
Fundemail: Have the recent past financial reporting scandals brought new emphasis to the concept of conservative accounting?
Deysher: Yes, the past scandals have emphasized the importance of conservative accounting. It’s certainly not new for us to look for conservative accounting. But micro-cap companies can be so much more vulnerable to economic slowdowns. We want to invest in companies that are able to survive and we weed out most others.
Fundemail: How does your value style come into play?
Deysher: We are contrarians. We invest in companies that are out of favor, but who have a strong balance sheet to get them out of their current troubles. Then we look for a catalyst to turn the company around, although we don’t require that there be a catalyst.
Once we own a company, we like it when other analysts and managers begin to pick up that company on their radar. But if a company has fallen off radar and becomes undervalued, that’s when we get interested.
Fundemail: What type of catalyst do you want to see?
Deysher: It might be a new management team that comes in, or a new shareholder base where someone with a 5% or 10% position surfaces and starts pushing for change. Sometimes, it’s the decision to begin a divestiture program, where the company has done too many acquisitions and now needs to sell off non-core assets. Conversely, they may decide to make strategic acquisitions. Sometimes a company will decide to adopt a share repurchase program or the insiders will begin accumulating shares. With all of the choices companies or managers have on where to invest capital, if they’re willing to invest in their own stock, that’s normally a pretty strong signal to us.
Above all else, we try to avoid value traps.
Fundemail: What are value traps?
Deysher: A value trap refers to a stock that looks cheap, probably is cheap, and stays inexpensive forever. It never appreciates because nothing really changes -- there‘s no growth or things don‘t get better. For some companies, it is difficult to change. The only way to make money is if they are acquired, which may never happen. Right now there are several companies that meet all of my other criteria, except that I feel they are value traps.
Fundemail: You also invest in so-called “special situation” securities. What are these?
Deysher: We do a lot of detailed work, and we aren’t afraid to traffic in turnarounds. That includes broken IPOs, which are IPOs that come to market with unrealistic expectations. Perhaps management is overly optimistic, or the IPO has been over-hyped by investment bankers. These companies come to market with rich valuations that hold up for a year or two. Then earnings drop and P/Es shrink leading to a share price decline.
A great example of a broken IPO is AirNet Systems, a $40 million market cap company we own which is a major holding. It came to market six years and got as high as $30 per share before falling to $4 recently. The company provides fast, critical air shipping for things such as organ transplants and checks that banks must physically have in order to pay.
The new check truncation legislation which will allow banks to clear checks via electronic check presentment will mean that part of AirNet’s business will disappear. But they’ve been changing their business model and providing services to businesses who need to fly cargo and charter services to individuals and groups. They’ve been growing and we think the liquidation value of their planes in higher than the current share price.
Fundemail: With the stock market up recently, are you finding pockets of value now?
Deysher: Yes. Right now the manufactured housing industry is very depressed. There’s little or no financing in manufactured housing, and unit sales have come down 65% over the last five years. So that’s an area we are interested in. Also, recreational vehicle manufacturing companies are depressed. Winnebago, for example, just warned about its earnings. The aerospace and airline industries are also quite depressed, and there are a lot of little companies that exist in that area.
Fundemail: What about your sell discipline?
Deysher: We will often sell if a security hits our price target. We have buy and sell triggers on every security that are adjusted accordingly as events unfold. That allows our winners to continue to generate profits even if they have appreciated past their target price. We are comfortable maintaining a security that has appreciated significantly so long as events continue to track a plan. Of course, that doesn’t mean that at the higher price we would initiate a position.
Did you ever hear Peter Lynch (the former Fidelity Magellan Fund guru) refer to 10-baggers? Those are stocks that appreciate 10 times their value generating significant returns. Well, one way to capture a 10-bagger is to let a security grow and appreciate. We will hold a security until we think it is fairly valued.
We’ll also sell if we’ve made a mistake -- in our facts, our judgment or our reasoning -- or if the catalyst or trigger we expected doesn’t happen. If it’s obvious that something good won’t happen after two to three years, we’ll scale back. If a company is doing well but the price just doesn’t reflect that yet, we will maintain our position.
Fundemail: What makes your fund unique?
Deysher: We’re in a really specialized asset class of neglected, overlooked and orphaned securities. Also, we can go small, really small. We also don’t think with the crowd. We take lots of contrarian stances. When others are selling, we’re buying, and vice versa. We invest on the basis of valuations and fundamentals, not popularity. Our goal is to generate meaningful long-term returns on a tax efficient basis.
My family and I have a substantial amount of money invested in the fund. That’s one of our core principals, both for us and the companies we invest in. People who run a business should have their wallet on the line everyday, just like we do.
About the author:.
Lori Pizzani, who serves as managing editor for FundEmail, is a New York-based freelance journalist specializing in mutual funds, investment management and personal finance. She is currently the editor-at-large for a nationally recognized weekly mutual fund/investment management trade publication, writes a recurring column for mutualfundcareers.com, and is a regular contributor to two publications sponsored by the Association for Investment Management and Research (AIMR). She has written for cnbc.com, and worldlyinvestor.com, as well as several highly regarded financial services magazines. She previously served as the managing editor of a monthly mutual fund trade publication. Before beginning her writing career, she worked for seven years within the mutual fund industry.
http://www.fundemail.com/pinnacle.html
By Lori Pizzani
June 17, 2003
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The Pinnacle Value Fund prefers to lean into the smallest capitalization area of the market. It likes to get up close and personal with companies that haven’t yet blipped onto mainstream analysts’ radar screens, or walk into an air traffic controller’s worst nightmare and scoop up companies that have fallen completely off radar. The fund’s manager, John E. Deysher, believes he can achieve oversized gains with undersized companies, and possibly grab some dividend yield along the way to reward investors for their wait.
That contrarian approach means shopping for bargains and hanging on to winners. While the fund is less than three months old, it’s in positive territory, and worthy of a look.
Fundemail: The Pinnacle Value Fund may be new, but you aren’t new to the mutual fund industry, right?
Deysher: Right. Before starting Bertolet Capital in January and the fund in April, I worked for 12-plus years as a portfolio manager and senior research analyst with Royce & Assoc. which manages mutual funds here in New York. Royce specializes in managing small cap value stocks. All told, I have two decades of industry experience.
Fundemail:The Pinnacle Value Fund can invest in common stocks as well as preferred stocks and convertible securities. Why the broader mandate?
Deysher: I manage the fund for total return. Our goal is to give investors a 2% or 3% yield while they are waiting for the securities to appreciate. We won’t invest in common stocks unless we think the stock can double or triple over the next two to three years.
Right now we own the preferred stock on a REIT, Price Legacy Corp., which is yielding 8-1/2%. It was structured by Sol Price who used to own Price Club before it merged with Costco in 1994. The REIT owns the real estate that 42 shopping centers sit on with key tenants like Costco, Home Depot, Lowes and Sport Authority.
Fundemail: The fund focuses its attention on the micro- and small cap universe. Why is this the sweet spot of the market for you?
Deysher: Small and micro-cap securities tend to trade under radar screens. Many are what I call “orphaned” stocks that no one pays much attention to. They often don’t get coverage from stock analysts, and that lack of interest usually makes for better values. Also, lots of other portfolio managers cannot invest in stocks under $100 million or even under $200 million so there are fewer analysts watching.
The sweet spot for us is any company under $400 million in market cap, and we have lots under $100 million. But a comfortable floor for us is within the $8 to $10 million range. We normally won’t buy companies smaller than that because they can be really fragile and are often overly dependent on a key customer, product or senior executive.
Fundemail: But if analysts aren’t covering these smaller companies, doesn’t that mean more work for you?
Deysher: Yes, it certainly does. Investing in smaller companies is much more labor intensive and requires more research. One of our biggest challenges is gathering the intelligence, which you have to do yourself. So we talk with their management, their competitors, their suppliers and others. We talk to people who often have no vested interest in speaking with us. We try to become as knowledgeable as possible beforehand so in exchange for their insight and thoughts, we can offer them information about something they didn’t know. We try to make it a two-way dialog.
Fundemail: Where do your stock ideas come from?
Deysher: We get ideas from many places, including the Wall Street Journal table showing the stocks making New Lows each day. We carefully look at SEC filings. We follow 13D and 13G ownership filings of smart, successful small company investors. We also review Warren Buffet’s Berkshire Hathaway filings every quarter. Sometimes there is an idea that we haven’t heard before that‘s small enough for us.
We have a nice network of brokers who we talk to, and we attend trade shows and trade association conferences. We read lots of publications and reports.
Fundemail: What do you ask when you talk with a small company’s management?
Deysher: We try to understand what they think are the key issues critical to a company’s success over the next few years. What are their strategic, financial and operating priorities? Do they understand the concepts of capital allocation and incentive compensation? We always wrap up our dialog by asking: Who is your toughest competitor? Who is your best vendor, and who is your best customer?
Fundemail: What do their answers tell you?
Deysher: It tells us whom they really respect and gives us insight into what they think about their company within the competitive landscape. We may also obtain new investment ideas that are worth further analysis.
Fundemail: Do you talk with the top brass at every company you own?
Deysher: We interview the CEO and/or CFO whenever we can. Some companies simply won’t talk to us. That doesn’t prohibit us from buying that company if we like it.
Fundemail: The fund has almost $2 million now. What is a comfortable number of securities for you to hold in the portfolio?
Deysher: Well, we are not yet fully invested. We have only 12% of the fund‘s assets invested now. We have about 15 or 16 securities in the portfolio right now, and are holding the other 88% in cash in a money market fund. Once we are fully invested, a comfortable number will be from 80 to100 securities.
The fund’s charter allows us to take fairly significant positions up to 10%. We will have a handful that will represent 4% or 5% of the fund. We’ll have a bunch of 2% to 4% positions. We’ll also have lots where we will own 2% or less, especially where we are just getting to know the companies. But we are diversified across industries and sectors.
Fundemail: So, you apparently aren’t afraid to hold cash?
Deysher: We’re not afraid to hold cash. I would much rather earn 1% in a money market fund than lose 10% because we paid too much for a security. Paying too much can turn a good investment into a poor one.
We’re not sure that the recent rally we’ve had is sustainable. Yes, we have now removed the uncertainty of war with Iraq. And after three years of a bear market, people are looking for a recovery. But people are just tossing money into the market now, and I’m unsure the recovery will justify current valuations. There have been a lot of managers covering their short positions and that has contributed to the rise in the market, too.
Fundemail: Conversely, you’ve indicated that down the road, too much cash could hurt the fund and you would consider closing the fund and not accepting new investments.
Deysher: That’s true. We expect that we will close the fund at some point. I don’t know if we will close it at $100 million or $500 million, but I don’t want to dilute the quality of investment ideas just to grow assets. That’s something that can happen if this kind of fund grows too large. The problem then becomes how to put that money to work. Often managers must migrate to bigger companies, or change their investment style. We call this market cap, or style creep.
Fundemail: Speaking of style, what particular characteristics do you look for in companies you invest in for this value fund?
Deysher: We look for companies that employ conservative accounting methods and have strong balance sheets. We also look for companies whose management is entrepreneurial. They have to think like owners. We also like it when they own a lot of stock in the company. When they own considerable stock, they pay more attention to capital allocation and don’t do dumb things just to satisfy Wall Street. These companies must also have an understandable business model. If I can’t understand a business model fairly quickly, we’ll move on to something else.
Fundemail: Have the recent past financial reporting scandals brought new emphasis to the concept of conservative accounting?
Deysher: Yes, the past scandals have emphasized the importance of conservative accounting. It’s certainly not new for us to look for conservative accounting. But micro-cap companies can be so much more vulnerable to economic slowdowns. We want to invest in companies that are able to survive and we weed out most others.
Fundemail: How does your value style come into play?
Deysher: We are contrarians. We invest in companies that are out of favor, but who have a strong balance sheet to get them out of their current troubles. Then we look for a catalyst to turn the company around, although we don’t require that there be a catalyst.
Once we own a company, we like it when other analysts and managers begin to pick up that company on their radar. But if a company has fallen off radar and becomes undervalued, that’s when we get interested.
Fundemail: What type of catalyst do you want to see?
Deysher: It might be a new management team that comes in, or a new shareholder base where someone with a 5% or 10% position surfaces and starts pushing for change. Sometimes, it’s the decision to begin a divestiture program, where the company has done too many acquisitions and now needs to sell off non-core assets. Conversely, they may decide to make strategic acquisitions. Sometimes a company will decide to adopt a share repurchase program or the insiders will begin accumulating shares. With all of the choices companies or managers have on where to invest capital, if they’re willing to invest in their own stock, that’s normally a pretty strong signal to us.
Above all else, we try to avoid value traps.
Fundemail: What are value traps?
Deysher: A value trap refers to a stock that looks cheap, probably is cheap, and stays inexpensive forever. It never appreciates because nothing really changes -- there‘s no growth or things don‘t get better. For some companies, it is difficult to change. The only way to make money is if they are acquired, which may never happen. Right now there are several companies that meet all of my other criteria, except that I feel they are value traps.
Fundemail: You also invest in so-called “special situation” securities. What are these?
Deysher: We do a lot of detailed work, and we aren’t afraid to traffic in turnarounds. That includes broken IPOs, which are IPOs that come to market with unrealistic expectations. Perhaps management is overly optimistic, or the IPO has been over-hyped by investment bankers. These companies come to market with rich valuations that hold up for a year or two. Then earnings drop and P/Es shrink leading to a share price decline.
A great example of a broken IPO is AirNet Systems, a $40 million market cap company we own which is a major holding. It came to market six years and got as high as $30 per share before falling to $4 recently. The company provides fast, critical air shipping for things such as organ transplants and checks that banks must physically have in order to pay.
The new check truncation legislation which will allow banks to clear checks via electronic check presentment will mean that part of AirNet’s business will disappear. But they’ve been changing their business model and providing services to businesses who need to fly cargo and charter services to individuals and groups. They’ve been growing and we think the liquidation value of their planes in higher than the current share price.
Fundemail: With the stock market up recently, are you finding pockets of value now?
Deysher: Yes. Right now the manufactured housing industry is very depressed. There’s little or no financing in manufactured housing, and unit sales have come down 65% over the last five years. So that’s an area we are interested in. Also, recreational vehicle manufacturing companies are depressed. Winnebago, for example, just warned about its earnings. The aerospace and airline industries are also quite depressed, and there are a lot of little companies that exist in that area.
Fundemail: What about your sell discipline?
Deysher: We will often sell if a security hits our price target. We have buy and sell triggers on every security that are adjusted accordingly as events unfold. That allows our winners to continue to generate profits even if they have appreciated past their target price. We are comfortable maintaining a security that has appreciated significantly so long as events continue to track a plan. Of course, that doesn’t mean that at the higher price we would initiate a position.
Did you ever hear Peter Lynch (the former Fidelity Magellan Fund guru) refer to 10-baggers? Those are stocks that appreciate 10 times their value generating significant returns. Well, one way to capture a 10-bagger is to let a security grow and appreciate. We will hold a security until we think it is fairly valued.
We’ll also sell if we’ve made a mistake -- in our facts, our judgment or our reasoning -- or if the catalyst or trigger we expected doesn’t happen. If it’s obvious that something good won’t happen after two to three years, we’ll scale back. If a company is doing well but the price just doesn’t reflect that yet, we will maintain our position.
Fundemail: What makes your fund unique?
Deysher: We’re in a really specialized asset class of neglected, overlooked and orphaned securities. Also, we can go small, really small. We also don’t think with the crowd. We take lots of contrarian stances. When others are selling, we’re buying, and vice versa. We invest on the basis of valuations and fundamentals, not popularity. Our goal is to generate meaningful long-term returns on a tax efficient basis.
My family and I have a substantial amount of money invested in the fund. That’s one of our core principals, both for us and the companies we invest in. People who run a business should have their wallet on the line everyday, just like we do.
About the author:.
Lori Pizzani, who serves as managing editor for FundEmail, is a New York-based freelance journalist specializing in mutual funds, investment management and personal finance. She is currently the editor-at-large for a nationally recognized weekly mutual fund/investment management trade publication, writes a recurring column for mutualfundcareers.com, and is a regular contributor to two publications sponsored by the Association for Investment Management and Research (AIMR). She has written for cnbc.com, and worldlyinvestor.com, as well as several highly regarded financial services magazines. She previously served as the managing editor of a monthly mutual fund trade publication. Before beginning her writing career, she worked for seven years within the mutual fund industry.
http://www.fundemail.com/pinnacle.html
Small Caps: Growing Value And Valuing Growth
Small Caps: Growing Value And Valuing Growth
03/26/01 11:35:03 PM PST
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by David Penn
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With the Nasdaq reeling and the economy teetering on the edge of a recession, why would anyone be interested in small-cap stocks and mutual funds? Growth, for one thing. Value, for another.
It's something that almost anyone can tell you: Small-cap stocks tend to outperform large-cap stocks on the way up and underperform them on the way down. This conventional wisdom, however, was turned on its head in the final, delirious years of the most recently ended bull market. As Greg McCrickard, manager of T. Rowe Price's Small Cap Stock Fund, put it in a recent update on the fund's strategy: "When the markets [are] really moving up and the animal spirits are in the market and people are feeling great ... people have historically looked to small caps to get that extra bit of performance. It didn't happen this time."
What did happen, according to McCrickard and others, was that large-capitalization stocks led the charge to dizzying heights in the spring of 2000 and were among the first, when the overly exuberant valuations of these large-cap companies became suspect, to come crashing down (Figure 1). While the market downturns of 2000 were widespread, the collapse of many large-cap companies may have been an opportunity for small caps. "Given that valuations were very extended for large caps and not so bad for small caps, when we finally had the correction that we saw, small caps actually did pretty well," McCrickard noted.
http://premium.working-money.com/wm/display.asp?art=124
03/26/01 11:35:03 PM PST
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by David Penn
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With the Nasdaq reeling and the economy teetering on the edge of a recession, why would anyone be interested in small-cap stocks and mutual funds? Growth, for one thing. Value, for another.
It's something that almost anyone can tell you: Small-cap stocks tend to outperform large-cap stocks on the way up and underperform them on the way down. This conventional wisdom, however, was turned on its head in the final, delirious years of the most recently ended bull market. As Greg McCrickard, manager of T. Rowe Price's Small Cap Stock Fund, put it in a recent update on the fund's strategy: "When the markets [are] really moving up and the animal spirits are in the market and people are feeling great ... people have historically looked to small caps to get that extra bit of performance. It didn't happen this time."
What did happen, according to McCrickard and others, was that large-capitalization stocks led the charge to dizzying heights in the spring of 2000 and were among the first, when the overly exuberant valuations of these large-cap companies became suspect, to come crashing down (Figure 1). While the market downturns of 2000 were widespread, the collapse of many large-cap companies may have been an opportunity for small caps. "Given that valuations were very extended for large caps and not so bad for small caps, when we finally had the correction that we saw, small caps actually did pretty well," McCrickard noted.
FIGURE 1: COMPARATIVE PERFORMANCE OF LARGE- AND SMALL-CAP STOCKS IN 2000. The Russell Large Cap Index was down 10%. The Russell Small Cap Index was down 5%.
Much of the wreckage from last year's stagnant Standard & Poor's 500 index and bearish Nasdaq was in the technology sector, so it is little surprise that many of the small-cap companies that did well were outside this arena. Richard Baker, a stock analyst for SmallCapStockNews.com, points to a number of small-cap stocks in the retail area that have done well. Many small-cap value names in the energy sector also fiddled a spritely tune while their technology and telecommunications brethren spent much of 2000 burning. As much of the excess in the stock market continues to drain out and more traditional valuation methods make a comeback, is it time for average investors to pay more attention to small-cap stocks?
WHAT ARE SMALL-CAP STOCKS?
The textbook definition of a small-cap, or small-capitalization, stock is a stock whose company's total market capitalization -- the market value of all outstanding shares -- is between about $350 million and $750 million. Small-cap companies, as one analyst put it, are the "disregarded, unrecognized backbone of America's economy." Often overlooked due to the lack of brand recognition and major institutional backing (some publicly traded small-cap companies have little, if any, analyst coverage, to boot), small-cap companies are nevertheless the small businesses that provide jobs to hundreds of thousands of Americans and often serve as important product suppliers and service providers for larger companies.
Why do small caps tend to outperform large caps? While there is no direct relationship between any given company's market capitalization and its future stock price, there is a strong relationship between a company's market capitalization and that company's ability to raise capital. A company's ability to raise capital to pay for growth and expansion, or to reduce debt, is a major factor in a company's ability to become and remain profitable, and for its stock price to appreciate. Smaller companies tend to have much less capital (in terms of overall assets) to devote to growth and expansion compared to larger companies. Issuing corporate bonds, preferred stock, secondary issues of common stock, bank loans -- all of these are more difficult for smaller companies (say, the RealNetworks of the world) than they are for larger companies (say, the General Electrics of the world).
As such, small-cap stocks usually feature higher risk-return ratios than large- or mid-cap stocks. In other words, because the risks are greater, the potential returns must be greater. This form of risk is often referred to as size risk and is among the risk-return questions that investors must ask themselves when they are searching for investment products to help them meet their goals. Size risk can also play a major factor in properly diversifying a portfolio of stocks or mutual funds. A mix of small-cap stocks in a portfolio overweighted with large-cap stocks can help sustain a portfolio's positive returns when larger issues are failing or not advancing as fast as an investor might prefer.
WHAT SHOULD INVESTORS IN SMALL-CAP STOCKS LOOK FOR?
Analyst Richard Baker has his own mnemonic to help investors remember the key characteristics of small-cap stocks that are likely to appreciate in value. His Miss acronym, which stands for management, innovative and value-added, sector, sales and earnings, helps screen out hundreds of small-cap stocks, making it easier for investors to focus on those small-cap companies that have a background of success and bright growth prospects.
"These four things actually precede a big runup in price appreciation in a given stock," Baker adds. With regard to management, he likes business development experience and, especially, subject matter expertise. Businesses started by industry veterans or those with significant academic credentials and accomplishments can often have insurmountable advantages over businesses initiated with little more than entrepreneurial enthusiasm. In the wake of the dot-com meltdown of 2000, Baker also casts a suspicious eye toward what he calls "concept stocks" -- the shares of companies that might be interesting ideas, but turn out to be lousy businesses. "They sound like a great idea," he points out. "But did they really have a market where they were generating existing revenue from customers who were really purchasing products or services?"
Another interesting aspect of Baker's methodology is his emphasis on sectors. "When you look at buying a house, you look at the proverbial three most important things: location, location, location," he reminds us. According to Baker, that's the same criteria we should keep in mind in selecting a stock: What sector or area of the economy or what industry will experience growth as a part of demographic changes, changes with technology, or changes of consumer needs? In trying to find small-cap stocks in the early stages of their growth phase, he suggests, looking at sectors can be especially helpful. On this score, some of the small-cap stocks that Baker has been impressed with recently include retailers Chico's Fas (CHCS) and Hot Topic (HOTT). (See Figures 2 and 3.)
FIGURES 2, 3: SMALL-CAP RETAILERS. SmallCapStockNews analyst Richard Baker sees strength in small-cap retailers such as Chico's FAS and Hot Topic.
As a small-cap portfolio manager, McCrickard considers his approach to be a quest for both earnings growth and reasonable share prices. "Through a combination of blending growth and value, we can have lower volatility with good returns," he explains. "We look for good businesses; we want to find companies that have reasonably clean balance sheets or the ability through generating lots of cash to get that balance sheet cleaned up pretty quickly."
Another plus as far as McCrickard is concerned is managements that have a large stake in their companies. "We like them to be on the same side of the table with us," he notes. "If they are not just employees, then they are thinking about building value over long periods."
He also thinks that studying sectors can help point the way toward areas of the economy that may be experienc-ing exceptional growth. Says McCrickard, "Really, the sectors of the market tell us where we ought to be investing." While chasing after sector performance can be a tricky game for the average investor, there is little doubt that many of the stocks that see dramatic apprecia-tion in value don't do so alone and are often part of an industrywide, sectorwide, or even economywide (in the case of our recently ended bull market) advance. "In 1993 it was health care, 1994 was technology. In 1995 it was biotech," McCrickard recalls. "You could buy biotech for less than cash on the balance sheet."
At present, he sees opportunities in the often-treacherous technology sector -- though he tends to be less sanguine on pure semiconductor stocks, for example, referring to them as the "tail end of the whip." Nonetheless, some of the companies he has been impressed by include Brooks Automation (BRKS), a company that makes robotic automation arms as well as software for the semiconductor industry, and ATMI, which manufactures consumables such as air-handling equipment for semiconductor companies. (See Figures 4 and 5.)
FIGURES 4, 5: SMALL-CAP TECH STOCKS. T. Rowe Price's Greg McCrickard thinks Brooks Automation and ATMI may be small-cap tech stocks worth watching.
"I know from being an active participant in the markets that a lot of large institutional shareholders are interested in small- and mid-caps," adds McCrickard. "I've made money in large-cap stocks. It is time to diversify and look at small caps."
David Penn can be reached at DPenn@Traders.com.
http://premium.working-money.com/wm/display.asp?art=124
Is Buy-And-Hold The Strategy For You?
Is Buy-And-Hold The Strategy For You?
03/01/01 03:17:41 PM PST
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by RM Sidewitz, Ph.D
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Buying and holding stocks may not be the best approach for everyone, especially those who are unwilling to sit back and take large losses while they wait for their stocks to climb back up.
Many investors believe that buy-and-hold is the best strategy to use for the long term when it comes to stocks. However, over a two-year period, someone who buys ABC Corp. stock at $40, sees it rise to $50, decline to $35, and then rise again, this time to $65, is not getting as good an overall return as he or she thinks (Figure 1). Why, you ask? That investor has lost the opportunity to maximize what his money can do because he has chosen to remain in the market.
FIGURE 1: LOST OPPORTUNITY. The investor may think that he or she is using the best strategy possible when using buy-and-hold for the long term. But is it really the best?
SOMETIMES THEY COME BACK
The truth is that buy-and-hold isn't the best approach for everyone. Buy-and-hold means that even when the market is falling and struggling, you sit, waiting for it to rebound to previous heights. That could take a while; it took almost a year for the stock market to return to its previous levels from the 1974 decline, 10 months to come back from the 1994 dip, but almost 24 months to regain the losses from the 1987 stock market correction. This is time that you're spending just waiting to break even.
Look at it another way. If your portfolio falls in value from $10,000 to $8,000 (or $1 million to $800,000, for that matter), it has dropped 20% in value. That means the market will have to rise 25% just for you to get back to where you were before. Waiting to get back to being even creates the phenomenon I refer to as the "involuntary investor."
The underlying premise of buy-and-hold is that it's impossible to invest in a manner that better insulates you from eventual declines, and therefore, it's in your best interest if you just remain patient. "It'll come back," buy-and-hold believers always tell you.
SOMETIMES THEY DON'T
The truth is that not all stocks rebound; some stocks simply die. Among stock favorites of earlier periods, some such as Chrysler (DCX) went through rocky times, documented in detail in the news media, but eventually triumphed, coming back from the dead.
But some others such as Pan Am (PAAN) do not have such a happy ending. Further, in 2000, many so-called long-term investors in Nasdaq-listed companies found the value of their shares continuing to fall as they were waiting for them to come back. Ultimately, the pain became more than they could bear and many investors sold off their holdings at huge losses.
That reaction is understandable; on a very subtle level, you've been told over and over again to never, ever sell! Think about it. When was the last time you heard about or read a sell recommendation from a stock brokerage research department? In fact, according to Zacks Investment Research, of the 8,000 recommendations made by analysts covering the Standard & Poor's 500 index companies in 2000, only 29 were sells. That's less than one-half of 1%!
How can that be? According to Zacks vice president Mitch Zacks: "It's not that they're oblivious to things getting worse [at companies]. But the way an analyst gets fired is to damage an existing investment banking relationship with a company or sour a future investment banking relationship. The way you do that as an analyst is coming out and telling people to sell a stock."
The unavoidable result is that there is simply no one willing to tell you to get out of the market, ever. "You'll miss the next big move if you're not in the market," you're told. You are not told that the price of waiting for the next big move is you have to sit through substantial market declines that erode your assets. That's a big price to pay.
A buy-and-hold strategy for stocks is an investment approach that takes power away from the long-term investor. But there is a better way, which I will explain in my next article.
R.M. Sidewitz is president, chief executive officer, and founder of Qi2 Technologies, LLC, an investment management company, and the managing member of Qi2 Partners LP, a domestic hedge fund. For additional information on long-term investing, go to www.longterminvestor.org.
http://premium.working-money.com/wm/display.asp?art=105
03/01/01 03:17:41 PM PST
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by RM Sidewitz, Ph.D
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Buying and holding stocks may not be the best approach for everyone, especially those who are unwilling to sit back and take large losses while they wait for their stocks to climb back up.
Many investors believe that buy-and-hold is the best strategy to use for the long term when it comes to stocks. However, over a two-year period, someone who buys ABC Corp. stock at $40, sees it rise to $50, decline to $35, and then rise again, this time to $65, is not getting as good an overall return as he or she thinks (Figure 1). Why, you ask? That investor has lost the opportunity to maximize what his money can do because he has chosen to remain in the market.
FIGURE 1: LOST OPPORTUNITY. The investor may think that he or she is using the best strategy possible when using buy-and-hold for the long term. But is it really the best?
SOMETIMES THEY COME BACK
The truth is that buy-and-hold isn't the best approach for everyone. Buy-and-hold means that even when the market is falling and struggling, you sit, waiting for it to rebound to previous heights. That could take a while; it took almost a year for the stock market to return to its previous levels from the 1974 decline, 10 months to come back from the 1994 dip, but almost 24 months to regain the losses from the 1987 stock market correction. This is time that you're spending just waiting to break even.
Look at it another way. If your portfolio falls in value from $10,000 to $8,000 (or $1 million to $800,000, for that matter), it has dropped 20% in value. That means the market will have to rise 25% just for you to get back to where you were before. Waiting to get back to being even creates the phenomenon I refer to as the "involuntary investor."
The underlying premise of buy-and-hold is that it's impossible to invest in a manner that better insulates you from eventual declines, and therefore, it's in your best interest if you just remain patient. "It'll come back," buy-and-hold believers always tell you.
SOMETIMES THEY DON'T
The truth is that not all stocks rebound; some stocks simply die. Among stock favorites of earlier periods, some such as Chrysler (DCX) went through rocky times, documented in detail in the news media, but eventually triumphed, coming back from the dead.
But some others such as Pan Am (PAAN) do not have such a happy ending. Further, in 2000, many so-called long-term investors in Nasdaq-listed companies found the value of their shares continuing to fall as they were waiting for them to come back. Ultimately, the pain became more than they could bear and many investors sold off their holdings at huge losses.
That reaction is understandable; on a very subtle level, you've been told over and over again to never, ever sell! Think about it. When was the last time you heard about or read a sell recommendation from a stock brokerage research department? In fact, according to Zacks Investment Research, of the 8,000 recommendations made by analysts covering the Standard & Poor's 500 index companies in 2000, only 29 were sells. That's less than one-half of 1%!
How can that be? According to Zacks vice president Mitch Zacks: "It's not that they're oblivious to things getting worse [at companies]. But the way an analyst gets fired is to damage an existing investment banking relationship with a company or sour a future investment banking relationship. The way you do that as an analyst is coming out and telling people to sell a stock."
The unavoidable result is that there is simply no one willing to tell you to get out of the market, ever. "You'll miss the next big move if you're not in the market," you're told. You are not told that the price of waiting for the next big move is you have to sit through substantial market declines that erode your assets. That's a big price to pay.
A buy-and-hold strategy for stocks is an investment approach that takes power away from the long-term investor. But there is a better way, which I will explain in my next article.
R.M. Sidewitz is president, chief executive officer, and founder of Qi2 Technologies, LLC, an investment management company, and the managing member of Qi2 Partners LP, a domestic hedge fund. For additional information on long-term investing, go to www.longterminvestor.org.
http://premium.working-money.com/wm/display.asp?art=105
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