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Monday, 26 July 2010
Why Return on Equity Is Important
Historically, one of the best ways to grow wealthy has been to own businesses that generate high returns on equity with little or no debt, paying a fair or low price for your stock. It's been an easy way to shower your family with torrents of cash.
Why Return on Equity Is Important
A business that has a high return on equity is more likely to be one that is capable of generating cash internally. For the most part, the higher a company's return on equity compared to its industry, the better. This should be obvious to even the less-than-astute investor If you owned a business that had a net worth (shareholder's equity) of $100 million dollars and it made $5 million in profit, it would be earning 5% on your equity ($5 ÷ $100 = .05, or 5%). The higher you can get the "return" on your equity, in this case 5%, the better.
Return On Equity (ROE): Find Explosive Momentum Stocks With This Financial Ratio
Return On Equity (ROE): Find Explosive Momentum Stocks With This Financial Ratio
June 4th, 2009
Green Mountain Coffee Roasters produced a return of over 113% this year alone. When powerful momentum stocks are charging upwards, it can be difficult to know when to get on board.
But it’s not as difficult as you would believe.
If you want the inside track on the best momentum stocks with ultra-explosive gains, throw on your “x-ray glasses” and focus on one of the most useful financial ratios around.
It’s called return on equity (ROE), but in many ways it tells us so much more.
ROE is one of the best measures of a corporation’s profitability. It shows you how much profit the company generates with the money shareholders have invested. Let me show you how to easily pull this number out – and how profitable it can be.
How to Calculate Return On Equity (ROE)
You calculate return on equity (ROE) by dividing net income by a shareholder’s equity. The higher the number, the more effective a company is at turning its assets and employees into piles of money for investors.
For instance, between 1998 and 2003, Dell Computer’s highly efficient direct sales and high profit-margin strategy paid off in terms of strong earnings growth and a double-digit ROE of 46%. During that same period Dell shares soared 91.95% raining money on shareholders.
ROE explains why Green Mountain Coffee Roasters (Nasdaq: GMCR) posted a 92.86% return while the S&P500tanked, -34.37%, over the last year. It’s been a horrific time for most investors, but GMCR shareholders have had lots to smile about as management skillfully squeezed out a 27.85% return on equity.
It’s made Green Mountain one of the few really safe harbors for the investors to ride out the market’s “storm of the century.”
The ROE ratio looks like this:
The only way this ratio can stay high or increase is by maintaining or increasing the bottom line net income through good management. If executives try to hose investors by sucking profit away – issuing more shares through a seasoned equity offering – you’ll catch them by the drop in this ratio.
Other investors who solely focus on net income won’t know the jig is up, because it will stay the same. That’s why ROE is a much better indicator of management effectiveness at bringing home the bacon.
How to Track Return On Equity (ROE)
Return on equity (ROE) is easy to track through many free financial websites – I like to use Yahoo! Finance. First, type the stock symbol of the company you’re looking for into the “Get Quotes” form on the upper left part of the web page.
When the page for the company’s information comes up, click on the “Key Statistics” link. Then on the same page in the “Management Effectiveness” section you’ll see the value for “Return on Equity (ttm).” This tells you how well management is generating profits for shareholders.
Just look at how their shares have soared…
We can also pull up the amount of institutional shareholders of this company. One of the other interesting things we can access on Yahoo! is the amount of institutional ownership of GMCR. Today it’s almost 27.85% of the company shares.
Institutions are some of the biggest drivers of price movements on the markets and a low institutional ownership means that this stock could have much more to go. By comparison, Starbucks has an institutional ownership of 66% – and a ROE of 3.47%.
Return On Equity (ROE) – How Well Is Management Doing?
Quite simply, a higher return on equity (ROE) number tells us how well management is doing, and if a company is undervalued.
It’s imperative you watch closely how ROE changes over time – ideally you want it to increase. Print off and save the Yahoo Finance web page for “Key Statistics” each week and you’ll see for yourself how return on equity is changing. If return on equity is double-digit and increasing you might want to consider buying the stock.
If a momentum stock like Green Mountain keeps on increasing its ROE, the stock should continue rising as well. So watch for the new ROE numbers for GMCR on June 28.
It all starts with education,
Dr. Scott Brown
Investment U
Investment U
The last decade has been very kind to investors that bought emerging market stocks.
The last decade has been very kind to investors that bought emerging market stocks, returning a “modest” 100% in some cases and an incredible 1000% in others. The S&P, in contrast, declined slightly over the same period. In some ways, 2009 was a microcosm for this trend, as the MSCI emerging markets index gained 73%, compared to 25% in the S&P. While investors are cautious about bubbles forming in some of these markets (bubbles seem to form and burst with alarming regularity), they continue to pour money in. $75 Billion was added to emerging market equity funds in 2009, to be precise. They are buoyed by predictions that emerging markets will account for the lion’s share of global GDP growth going forward.
This has facilitated a twist on the carry trade, whereby investors are now commonly using Dollar-funded loans to buy stocks, rather than sit back and earn a modest return investing in comparatively low-risk interest-bearing securities. This “traditional” carry trade is perhaps less popular now because interest rates are at all-time lows in many countries. But this is already starting to change as a healthy recovery in emerging markets has paved the way for rate hikes. While this could put a damper on stocks, it would re-open the bread and butter for carry traders, which is to sit back and earn a simple interest rate spread. Moreover, these carry traders can rest assured that if/when the Fed eventually raises rates, Central Banks in Asia and Latin America will almost certainly be in the same position.
http://www.forexblog.org/category/investing-trading
"Does the Bond Insurance/ Financial Guarantee Business Make Sense?"
To show a slide which summarizes the argument:
http://rationalangle.blogspot.com/2007/12/bill-ackman-how-to-save-bond-insurers.html
http://rationalangle.blogspot.com/2007/12/bill-ackman-how-to-save-bond-insurers.html
According to Buffett, stocks are a logical investment when their total market value equates to 70%-80% of GNP.
“People like to second guess Warren Buffett, but it’s not just a flip question to ask if he should have kept his powder dry a bit longer,” Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of Ram Partners LP, told Bloomberg. “He’s paid dramatically higher prices than where some of them are now trading at, so you have to wonder if he was too quick on the trigger.”
But, as a long term investor who has said that his favorite time to hold a stock is “forever,” Buffett sees things differently.
“Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now,” said Buffett. “What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
To support this claim, Fortune points to a long-revered Buffett metric: Total U.S. stock value versus gross national product (GNP). According to Buffett, stocks are a logical investment when their total market value equates to 70%-80% of GNP. And right now, it does.
In late January, total stock value equated to just 75% of GNP, down from a record peak of nearly 200% in March 2000. Indeed, for most of the past decade, the ratio of stock value to GNP has ranged from 150% to 190%. That makes now an ideal time to buy. And Buffett continues to do just that.
http://jutiagroup.com/2009/02/12/warren-buffett-looking-for-bargain-prices-despite-2008-setback/
But, as a long term investor who has said that his favorite time to hold a stock is “forever,” Buffett sees things differently.
“Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now,” said Buffett. “What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
To support this claim, Fortune points to a long-revered Buffett metric: Total U.S. stock value versus gross national product (GNP). According to Buffett, stocks are a logical investment when their total market value equates to 70%-80% of GNP. And right now, it does.
In late January, total stock value equated to just 75% of GNP, down from a record peak of nearly 200% in March 2000. Indeed, for most of the past decade, the ratio of stock value to GNP has ranged from 150% to 190%. That makes now an ideal time to buy. And Buffett continues to do just that.
http://jutiagroup.com/2009/02/12/warren-buffett-looking-for-bargain-prices-despite-2008-setback/
Sunday, 25 July 2010
Using Market P/E to determine the Value of the Stock Market
Many of us follow the Market Index. However, few of us realise its relationship to Market P/E.
The chart above helps us to relate Market Index to Market P/E.
“It’s time in the market, not timing the market” that counts."
This gives rise to the all-important question: does one’s entry level into the market, i.e. the valuation of the market at the time of investing, make a significant difference to subsequent investment returns?
In an attempt to cast light on this issue, an interesting multi-year comparison of the price-earnings (PE) ratios of the S&P 500 Index (as a measure of stock valuations) and the forward real returns was done by my colleagues at Plexus Asset Management. The study covered the period from 1871 to 2006 and used the S&P 500 Composite Index (and its predecessors). In essence, a total real return index and coinciding ten-year forward real returns were calculated, and used together with PEs based on rolling ten-year earnings.
This analysis strongly confirms the downward trend of the average ten-year forward real returns from the cheapest grouping (PEs of less than six) to the most expensive grouping (PEs of more than 21).
The second study also shows that any investment at PEs of less than 12 always had positive ten-year real returns, while investments at PE ratios of 12 and higher experienced negative real returns at some stage.
A third observation from this analysis is, interestingly, that the ten-year forward real returns of investments made at PEs between 12 and 17 had the biggest spread between minimum and maximum returns and were therefore more volatile and less predictable.
It is easy to understand why Grantham came to the conclusion that “the best case for caution and bearishness is value, which is a weak predictor of one-year returns, but a dynamic predictor of longer-term returns”.
http://investmentpostcards.wordpress.com/2007/06/05/us-equity-returns-what-to-expect/
Warren Buffett's Personal Stock Holdings (31.12.2009)
Although Buffett has 95% of his fortune invested in Berkshire Hathaway, he does maintain a very sizable personal investment portfolio.
Warren Buffett's concept of Equity Bond evidenced by Kraft Foods' increasing dividends over the years.
"Warren Buffett’s definition of a good company is one that has a limit on capital expenditure, a reliable income, and no competition. "
Free cash flow yield trumps dividends as a driver of returns
Managing risk: An emphasis on free cash flow and transparency
As dividend cuts make headlines, it is important to remember that dividend payouts are only the tip of the iceberg when it comes to identifying dividend-paying companies and sizing up dividend risk relative to a company’s total return3 potential. Moreover, in the current environment of rising dividend yields, it’s important to be cautious about “yield chasing”, as some of these yield premiums could be due to precipitous stock price declines instead of bona fide, sustainable growth in the underlying businesses.
Consistent dividends and dividend growth are characteristics of good businesses, but in the view of the management team of the PH&N Dividend Income Fund, other more important factors must be evaluated in tandem. These include strong free cash flow, a solid financial position, and a management team with a record of making intelligent decisions regarding how it deploys free cash.
In an era when corporate earnings can easily be obfuscated by the rotating door of GAAP methodologies4, it is refreshing to be able to rely on a valuation metric that is difficult to manipulate or misrepresent. Free cash flow is one such measure, and it is attractive for its transparency.
Free cash flow is the cash that is left over after a company has made the appropriate allocations to maintain or grow its asset base (working capital and capital expenditures). Essentially, this pool of “free cash” allows a company to pursue shareholder-friendly activities, such as paying dividends, making acquisitions, and paying down outstanding debt.
The chart below was adapted from research conducted by Empirical Research Partners – it depicts relative returns for U.S. large cap stocks sorted by dividend growth, share repurchases, and price/free cash flow over the 35-year period from 1970-2005.
You will notice the following:
Even in today’s severely compromised market environment, companies are fiercely protective of their free cash flow. Despite the downturn, free cash flow has held up remarkably well due to a couple of factors: a low capital expenditure base and aggressive management of working capital.
https://www.phn.com/Default.aspx?tabid=1103
As dividend cuts make headlines, it is important to remember that dividend payouts are only the tip of the iceberg when it comes to identifying dividend-paying companies and sizing up dividend risk relative to a company’s total return3 potential. Moreover, in the current environment of rising dividend yields, it’s important to be cautious about “yield chasing”, as some of these yield premiums could be due to precipitous stock price declines instead of bona fide, sustainable growth in the underlying businesses.
Consistent dividends and dividend growth are characteristics of good businesses, but in the view of the management team of the PH&N Dividend Income Fund, other more important factors must be evaluated in tandem. These include strong free cash flow, a solid financial position, and a management team with a record of making intelligent decisions regarding how it deploys free cash.
In an era when corporate earnings can easily be obfuscated by the rotating door of GAAP methodologies4, it is refreshing to be able to rely on a valuation metric that is difficult to manipulate or misrepresent. Free cash flow is one such measure, and it is attractive for its transparency.
Free cash flow is the cash that is left over after a company has made the appropriate allocations to maintain or grow its asset base (working capital and capital expenditures). Essentially, this pool of “free cash” allows a company to pursue shareholder-friendly activities, such as paying dividends, making acquisitions, and paying down outstanding debt.
The chart below was adapted from research conducted by Empirical Research Partners – it depicts relative returns for U.S. large cap stocks sorted by dividend growth, share repurchases, and price/free cash flow over the 35-year period from 1970-2005.
You will notice the following:
- Strategies focused only on dividend growth have only modestly outperformed the S&P 500 Index.
- Companies that pay no dividends at all have the worst return records.
- Strategies focused on price/free cash flow were the most effective at outperforming the S&P 500 Index.
Even in today’s severely compromised market environment, companies are fiercely protective of their free cash flow. Despite the downturn, free cash flow has held up remarkably well due to a couple of factors: a low capital expenditure base and aggressive management of working capital.
https://www.phn.com/Default.aspx?tabid=1103
How Much Stock Dividend Did You Receive in 2009?
While the annual dividend receipt of $5,000 is quite insignificant compared with my portfolio size of over $850,000, bear in mind it only comes from my individual stock holdings, which grew from about $200,000 at the start of the year to about $280,000 by the end of November. The $5,000 dividend payout, therefore, represents about a 2.0% dividend yield for my individual stock holdings.
It is amazing that at one point in November, Bank of America is yielding 6% and Citigroup is yielding 7%. It reminds me of 2002-2004 where I invested in R. J. Reynolds and Altria when they were facing apparently huge litigation risks and yielded over 5%. Am I bottom fishing again?
http://www.pfblog.com/archives/6316_how_much_stock_dividend_did_i_receive_in_2007.shtml
Value investing style drives investors to many companies that pay handsome dividends. Therefore, it is quite useful to ask the question: how much stock dividend did you receive in 2009?
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