Stock Picking Strategies of various Gurus

Stock Picking for Noobs

June 11, 2007 20076 12:06 pm | In Finanducation | Comments Off

Who best to learn but from the gurus themselves? Here's a brief list of gurus and their strategies:

1. Benjamin Graham – Value Investing Guru

Strategy: Buy shares at price well below company's intrinsic value!

Indicators:

• P/E < 15 for average earnings over last 3 fiscal years (or current P/E whichever is higher)
• No financial/technology stocks
• Annual Revenue > $340 million
• Liquidity: Current Assets/Current Liabilites > 2
• Industrial companies: Long-term debt < Net current assets
• EPS increases > 30% over 10-year period, must not be negative within last 5 years.
• (Price-to-book ratio)*(P/E) < 22

Source: NASDAQ, Kiplinger, Forbes

2. Peter Lynch – P/E Growth Guru

Strategy: Divide attractive stocks into different categories.

Indicators:

a. Fast Growers:

• Little debt, Debt to Equity Ratio < =1
• Annual EPS Growth Rate = 20 to 30
• Current P/E < = 1.75*Annual EPS Growth

b. Slow Growers:

• High dividend payouts
• Sales > $1 billion
• Low yield-adjusted PEG ratio
• Reasonable debt-to-equity ratio

c. Stalwarts:

• Moderate earnings growth
• Potential for 30-50% stock price gains over 2 year period if bought at attractive prices
• Positive earnings
• Debt-to-Equity ratio < 0.33
• Sales rates increasing inline with, or ahead of inventories
• Low yield-adjusted PEG ratio

Source: NASDAQ, MSN Money, AAII Journal

3. Martin Zweig – Conservative Growth Investor

Strategy: To be fully invested in the market when the indications are positive and to sell stocks when indications become negative.

Indicators:

• Quarterly earnings positive and growing faster than:

• –1 year ago
• –last 3 quarters
• –last 3 years

• Sales growing as fast or faster than earnings
• P/E > 5; BUT P/E < 3*Market P/E or 43, whichever is lower
• No high level of debt, below-average for industry

Source: NASDAQ,MartinZweig.org

4. Brothers David and Tom Gardner of Motley Fool – Small-Cap Growth Investor

Strategy: Search for stocks of small, fast-growing companies with solid fundamentals.

Indicators:

• Health profit margins
• Little debt
• Ample cash flow
• Respectable R&D budgets
• Tight inventory congtrols

Source: NASDAQ

5. Kenneth Fisher – Price-to-Sales Investor

Strategy: The lower a company's stock price is relative to its sales, the more attractive its stock is.

Indicators:

• Strong balance sheet with little debt
• Low Price-to-sales ratios

Source: NASDAQ

6. David Dreman – Contrarian

Strategy: Search for deep-discount value stocks.

Indicators:

• Good earnings growth
• Low P/E
• Low P/B Ratio
• Low Price-to-Cashflow Ratio

Source: NASDAQ, Investopedia

7. James P. O'Shaughnessy – Growth/Value Investor

Strategy: 2 investment strategies: "Cornerstone Growth" and "Cornerstone Value"

Indicators:

a. Cornerstone Growth

• Market value > $150 million
• Price-to-sales ratio < 1.5
• Persistent earnings growth, among market's best performers over prior 12 months

b. Cornerstone Value

• Market cap > $1 billion
• Revenue > 50% greater than mean of market's 12 month sales
• Cashflow per share > average publicly-traded company
• Yield Factor: Company which has highest dividend yield from 50 shortlisted using above criteria.

Source: NASDAQ, Forbes

http://boringest.blogasian.com/category/finanducation/

Analyzing Insurance Stocks: The Income Statement

http://streetcapitalist.com/2010/03/31/analyzing-insurance-stocks-the-income-statement/

Cash Flow Statement Classifications

http://pointsandfigures.com/2010/04/26/more-on-the-dodd-bill-courtesy-of-the-oracle-of-omaha/

AIG truly was too big to fail.

U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up


SEPTEMBER 16, 2008




The U.S. government seized control of American International Group Inc. -- one of the world's biggest insurers -- in an $85 billion deal that signaled the intensity of its concerns about the danger a collapse could pose to the financial system.

The step marks a dramatic turnabout for the federal government, which had been strongly resisting overtures from AIG for an emergency loan or some intervention that would prevent the insurer from falling into bankruptcy. Just last weekend, the government essentially pulled the plug on Lehman Brothers Holdings Inc., allowing the big investment bank to go under instead of giving it financial support. This time, the government decided AIG truly was too big to fail.



AIG's cash squeeze is driven in large part by losses in a unit separate from its traditional insurance businesses. That financial-products unit, which has been a part of AIG for years, sold the credit-default swap contracts designed to protect investors against default in an array of assets, including subprime mortgages.

But as the housing market has crumbled, the value of those contracts has dropped sharply, driving $18 billion in losses over the past three quarters and forcing AIG to put up billions of dollars in collateral. AIG raised $20 billion earlier this year. But the ongoing demands are straining the holding company's resources.

That strain contributed to the ratings downgrades on Monday. Those downgrades, in turn, ratcheted up the pressure on the company to come up with more cash, quickly.

Most insurance companies don't have financial-products units like these. But over nearly four decades, former CEO, Maurice R. "Hank" Greenberg built AIG into a firm that resembled no other. He transformed its insurance business, both by expanding abroad -- notably in China, where AIG has its roots -- and by buying up other firms.

http://online.wsj.com/article/NA_WSJ_PUB:SB122156561931242905.html

Types of Insurance Products Purchased by the Public

Managing the various structural units of a Company

Zech Management GmbH is the main service company in the Zech Group. The team of around 90 employees provides a variety of services on behalf of the parent company, Zech Group GmbH, as well as for the operating companies.

Zech Management discharges the controlling and steering functions. It supervises, for example, the strategy and the agreed-upon targets. Zech Management coordinates activities in the various fields of business and of the operating units. The following areas or sections are integrated in Zech Management:

Controlling
Accountancy, Financial Statements and Taxation
Financing and Cash Management
Group Financial Statements and Company Planning
Mergers & Acquisitions
Personnel
Insurance
IT (Information Technology) and Organization
Corporate Communications and Public Relations
Internal Audits (in preparation)
Central Services
Corporate Governance, Corporate Compliance and Code of Conduct
The company is headquartered in Bremen. Zech Management GmbH reports to Zech Group GmbH.

Real Estate Financial Statement

Financial Protection – One Hell of a Service

Insurance services provide a wide range of financial protection that help people arrange finances for any eventuality. Therefore, it is needless to state that they are lapped up by people who also term this service as income protection.


http://www.findinsurancebroker.info/uk-broker-insurance-network

High Healthcare Insurance Rates

MAY 29, 2007

New Study released: "No Basis for High Insurance Rates"

The American Association of Justice recently published a report entitled, “No Basis for High Insurance Rates”. The report illustrates the ways insurers are gouging doctors, padding their pockets with excessive premiums, and driving up the cost of health care. The alarmingly high medical malpractice insurance rates are the results of insurance companies' policies. Insurance reform is what is needed to ameliorate rates and lower the cost of health care without infringing on victim's rights.

The study cites the 2006 financial statements recently filed by medical malpractice insurers. The statements reveal that while the amount they paid out in claims has declined, their surplus is at an all time high. One example of an inconsistency in the claims of insurance companies is paid losses vs. written premiums. The net paid claims and losses have decreased substantially in the last few years even though these carriers have raised their rates considerably. This is only one example of the discrepancies in the reasoning of insurance companies regarding rising rates.

This is a further illustration of the ways insurance companies cause harm to doctors and victims, and blame medical malpractice lawsuits in order to cash in.

To view the full study, click here

http://medicalmalpractice.levinperconti.com/2007/05/new_study_released_no_basis_fo.html

7 Reasons Not to Buy Berkshire Hathaway

I am a big fan of Warren Buffett. However, I believe it is more advantageous to follow Buffett’s stock picks than own Berkshire Hathaway (BRK.A) for the following reasons:

1. Portfolio Concentrated in US Dollars

Berkshire has a portfolio of 41 stocks. The total portfolio value is $48,025,404,085 as of May 15, 2009, according to CNBC. The top 6 holdings: The Coca-Cola Company (KO), Wells Fargo & Company (WFC), Burlington Northern Santa Fe Corp. (BNI), Procter & Gamble Co. (PG), American Express Company (AXP) and Kraft Foods Inc. (KFT) account for almost 70% of it.

Paul Krugman, the recipient of the 2008 Nobel Price in Economics, in his new, greatly updated edition of The Return of Depression Economics,defines that failures on the demand side of the economy – insufficient private spending to make use of the available productive capacity – have become the clear and present limitation on prosperity for a large part of the world. The quintessential economic sentence is supported to be “There is no free lunch”; it says that there are limited resources, that to have more of one thing you must accept less of another, that there is no gain without pain.

With US government’s huge stimulate package, the deflated US dollar is unavoidable. With few exceptions, such as POSCO, Sanofi-Aventis (SNY), Swiss Re and Tesco plc, majority of Berkshire’s portfolio and operations are based in US and tired to US Dollar. That’s why I rather own iShares MSCI Emerging Markets Index (EEM) or Vanguard Emerging Markets Stock ETF (VWO).

2. Troubled Derivative Bets

Berkshire is big into the derivatives market, which made more complexity to the already black-box-like conglomerate’s balance sheet. The company as of March 31 had $13.85 billion of paper losses on derivatives, according to Reuters. Contracts tied to junk bond defaults mature between 2009 and 2013, and Buffett admitted they may lose money. S&P said the U.S. junk bond default rate rose to 5.42 percent from 3.96 percent at year-end.

1^st quarter 2009 operating earnings, which exclude investment and derivatives gains and losses, came in at $1.705 billion. In other words, Berkshire’s paper loss in derivatives would wipe out 2 years operating earnings.

3. Buy What You Know

Berkshire is an insurance-focused conglomerate and owns more than 60 subsidiaries including insurance, clothing, furniture, candy, restaurants, natural gas and corporate jet firms. As you can see from the chart I compiled, from its 1^st quarter 2009 report, 34% of revenue was from insurance.

I never understand insurance companies’ financial statements. The only thing I know about insurance is about projections, assumptions, probabilities and promises for future delivery, typically at a far-off date. Most of the products are highly intangible. Every year when I read Warren Buffett's annual letters, I always skipped the insurance portion, otherwise I would have had to reach for some aspirin.

4. Low Margins

Buffett said many of Berkshire's nearly 80 businesses were hurt by the recession and lower consumer spending, including housing-related units that make bricks, insulation and paint. Even if the rescue of the financial system starts to bring credit markets back to life, we might still face a global slump that’s gathering momentum. The only bright spots coming in are its utilities and insurance companies, which include Geico and General Reinsurance.

The 2^nd biggest operation, McLane, is marked by high sales volume and very low profit margins and has been subject to increased price competition in recent years. The gross margin rate was 6.95% in 2009. Approximately one-third of McLane’s annual revenues are from Wal-Mart. A curtailment of purchasing by Wal-Mart (WMT) could have a material adverse impact on the earnings of McLane.

Out of Berkshire's total $260 billion assets, only $48 billion is in equity. In other words, majority continue earnings are still need to come from operational business.

5. Downgrade By Moody's

Two credit rating agencies took away Berkshire's "triple-A" ratings in 2009, including Moody's Investors Service. The global credit crisis might be temporary, but the company could face significant pressure if it persists.

According to CFA ( source: cfapubs.org), between 1980 and 2000, banking sector accounted for 4% of the Japan Nikkei in 1980, peaked at 22%, and then came back to about 4% again. If the same happens to US, then we could still have a long way to go.

6. No Dividend

Berkshire didn’t pay any dividend.

7. “Warren Buffett Premium”

The average Price/Book for Property & Casualty Insurance company is 1.05, while Berkshire’s is 1.35. If anything happens Buffett, the stock might drop 30% instantly. Even something happens to Charlie Munger…

On Jan 2, 2008, Berkshire (BRK.A)’s price was 139,300. By the year-end on Dec 31, 2008, it was 96,600: it dropped over 30%. Though it still performed better than S&P, it was certainly not the loss of 9.6% reported by the Main Street media, which looked at book value only. We need to compare apples to apples.

Last Friday, May 15, 2009, the Wall Street Journal reported that the Treasury department will make $22 billion federal bailout funds available to a number of life insurers. This will certainly help insurance industry as a whole. In addition, as Donald Guloien, new President and Chief Executive Officer of Manulife Financial Corporation (MFC) stated in his memo to Manulife employees on May 4, 2009, “We would expect that global financial regulators may require higher levels of capital, and this will favor the stronger and more conservative companies.” People are looking for reliable, strong and trustworthy companies, and there will be a “flight to quality” that will favor Berkshire as well. However, you can always buy ETFs such as Financial Select Sector SPDR (XLF), if you like the financial sector.

By not owning Berkshire, you are not benefiting from deals and terms that are only available to it, such as Harley Davidson's (HOG) 15% and Tiffany's (TIF) 10% debt offerings, GE and Goldman Sachs Group Inc.'s 10% preferred stock, etc. To make that up, you might check into iShares S&P U.S. Preferred Stock Index (PFF) that might give you something in comfort.

http://seekingalpha.com/article/137996-7-reasons-not-to-buy-berkshire-hathaway

US Bail-Out Plan

UK Bail-Out Plan

When P/E fluctuates...is it Price or Earnings?

By Saj Karsan, Wednesday, June 25, 2008

We saw here that although the P/E average for the S&P 500 over the last 100+ years is around 15, the P/E actually fluctuates quite a bit, ranging from 5 all the way to 35. But what's actually happening? Is investor sentiment so fickle that it creates buying opportunities for those who wait for the market to drop? Or do earnings fluctuate based on economic conditions, with prices staying rather stable?

Here's the P/E of the S&P 500 since 1990 split into its two components:

We see that both price and earnings fluctuate, providing for the volatile P/E chart we saw here. Obviously, timing the market is not as simple as buying when P/E's are low, since for all one knows, earnings could drop and actually make P/E's high, leaving the investor holding the bag.

Therefore, other models have been developed that try to determine whether the market is over/undervalued. The Fed model, described here, uses interest rates along with earnings to determine what the market value of the S&P 500 should be. A model developped by Steve Foerster tries to determine when the business cycle hits its peaks and troughs, so that investors can determine when they should buy and when they should sell.


Rather than trying to time the market, value investors try to value individual companies within the stock market, to determine if they sell at discounts to their intrinsic values.

http://en.wikipedia.org/wiki/Fed_model
Fed Model

http://www.corporateinformation.com/Company-Advanced-Search.aspx?CountryCode=458
The P/E of the stocks are split into its two components of Price and Earnings in this site, as illustrated by the chart below.

Ireland - Economic Growth

Financial Ratios and Their Uses

KEY TAKEAWAYS

Earnings per share (EPS) and dividends per share (DPS) indicate stock returns on investment.

Dividend yield measures a shareholder’s cash return relative to investment.

Growth ratios such as the internal and sustainable growth rates indicate the company’s ability to grow given earnings and dividend expectations.

Market value ratios, most commonly price to earnings and price to book, indicate a stock’s market popularity and its effects on its price.


http://www.web-books.com/eLibrary/NC/B0/B65/73MB65.html

Health insurance premiums dwarf worker’s earnings and far exceed overall inflation.

http://rmwyatt.wordpress.com/

Earnings, Dividends and Payout Ratio: Earnings don’t grow at a constant rate. Dividends are more stable than earnings. Payout ratio varies over time.

Dividends are more stable than earnings, so the payout ratio certainly varies over time. Additionally, corporations have shown less willingness to pay dividends, and investors have shown less inclination to demand dividends, to the payout ratio today is roughly half of what it was in the early 60s.

Earnings don’t grow at a constant rate, either. Over the last 53 years, earnings have grown at a 6.7% rate, but that has included times of shrinkage, and boom times as well.




http://alephblog.com/2007/07/09/the-fed-model/

Banking Basics

http://wfhummel.cnchost.com/bankingbasics.html

The Risk Pyramid

Profile of University Graduates' Earnings

http://www.hrsdc.gc.ca/eng/cs/sp/sdc/pkrf/publications/bulletins/2000-000007/page09.shtml

When patience and prudence are ignored, portfolios are at risk.

We urge you to practice discipline and patience. Attempting to forecast the market or nit-pick quarterly returns are efforts that need to be discouraged. You will find it easier to be patient if you first evaluate your personal risk tolerance, time horizon, age, and income needs. This process of evaluation will guide you and us toward achieving the diversification appropriate for your long-term goals.



The stock market, as measured by the S&P 500, has shown an affinity toward investors who are willing to remain patient by holding stocks over long periods of time. The three pie charts above show the percent of periods the stock market was down over various holding periods. In the 61 one-year periods from 1945-2005 the stock market was down in 14 years. In the 56 five-year periods the stock market declined in five of those periods, but in the 46 15-year periods the stock market was not down once. Patience has certainly proven itself as a virtue when it comes to investing.

The Power of Diversification (Modern Portfolio Theory)

LIFO and FIFO

Price-Earnings Ratios as a Predictor of Twenty-Year Returns (Shiller Data)

Price-Earnings ratios as a predictor of twenty-year returns based upon the plot by Robert Shiller (Figure 10.1,^[1] source). The horizontal axis shows the real price-earnings ratio of the S&P Composite Stock Price Indexas computed in Irrational Exuberance (inflation adjusted price divided by the prior ten-year mean of inflation-adjusted earnings). The vertical axis shows the geometric average real annual return on investing in the S&P Composite Stock Price Index, reinvesting dividends, and selling twenty years later. Data from different twenty year periods is color-coded as shown in the key. See also ten-year returns. Shiller states that this plot"confirms that long-term investors—investors who commit their money to an investment for ten full years—did do well when prices were low relative to earnings at the beginning of the ten years. Long-term investors would be well advised, individually, to lower their exposure to the stock market when it is high, as it has been recently, and get into the market when it is low."^[1]

Robert Shiller's plot of the S&P Composite Real Price-Earnings Ratio and Interest Rates (1871–2008), from Irrational Exuberance, 2d ed.^[1] In the preface to this edition, Shiller warns that "[t]he stock market has not come down to historical levels: the price-earnings ratio as I define it in this book is still, at this writing [2005], in the mid-20s, far higher than the historical average. ... People still place too much confidence in the markets and have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad outcomes."

http://en.wikipedia.org/wiki/P/E_ratio

http://www.invalueable.net/fs_overview.html

Financial Statements 101

Table of Contents

1. Understanding Financial Statements
2. Balance Sheet
3. Income Statement
4. Statement of Cash Flows
5. Statement of Retained Earnings
6. Intrinsic Valuation Modeler™ and Putting it all Together

Market P/E Ratio Volatility Channel for The US Stock Market

The key point of the chart is that earnings and P/Es are cyclical. Spare us the your slacker analysis, merely stating that “you can make any chart look however you want.” (At least this sarcasm is amusing).

"I am very skeptical of earnings forecasts, because they have been so terrible for most of my adult life.  The conspiracy of optimists always seems to overestimate future earnings.

Trailing earnings are real data, not opinion of guesswork. They provide a factual basis for valuation, and not a wishful or theoretical version. Those who were claiming that there is no recession have now taken to saying we are at the worst levels of the recession. Often, we see forward earnings estimates at the heart of this faulty analysis."

http://www.ritholtz.com/blog/2009/02/a-cyclical-look-at-pe-ratios/