THIS IS MY 149TH BLOG ON UNDERSTANDING MONEY
TOOLS
December, 2018
In this blog we are going to expand on “finances” from our
last blog. I write these blogs off
the top of my head. Any questions
that come to me I research the facts for accuracy.
In the last blog I wrote about the typical price to earnings
ratio that has been used as an overall baseline for many a year, and that is a
15 to 1 ratio. I showed how this
is calculated and can be used analyzing a market or a particular stock. Today markets have built in horrendous
upside for future expectations that I am afraid are not going to hold, and
therefore in 2019 and 2020 going to disappoint and hurt many people
financially.
Risk reward or loss plays a big part in analysis. As a for instance, the NASDAQ normally
carries a higher price to earnings ratio (P/E) than the DOW or S&P averages
because of the number of high tech companies in the average. Greater risk, perhaps greater upside.
Let’s look at a staple company, or consumer good’s
company. A “staple” company is one
that deals in items you use every day or on a regular basis, perhaps like food
and toilet paper. One such
company, Kroger Co., was started in 1883.
If you are not familiar with Kroger it is a grocery store chain. Grocery stores are mundane and have a
low profit margin. Let’s take a
peek. As the market heads downward
I like staple companies that pay a dividend, Kroger fits the bill and has a
long history so should remain in business. Looking up the most current facts on the company I find the
price of the stock as of December10, 2018 to be $28.36. It has a P/E of only 6.39 (well below
15), and pays a dividend at that price of about 2.5%, paid quarterly.
Using our formula from the last blog, is this stock a
reasonable buy? 15 (baseline
historical P/E)/ (divided by) 6.39 (Kroger’s P/E) X (times) $28.36 = $66. (Ah,
your forgotten 7th grade math!) Well, this price of $66 per share is well above what the
current price for Kroger stock is trading at. Is it a good buy?
Chances are that with the market trending downward it may also come down
further, but you can view this conservative company as a reasonable buy.
What other things raise yellow flags on my stock
investments? (By the way, currently I don’t own any stocks. Many stocks are impossible to analyze,
and are priced way to high as they were in 1929 and 1999-2000.)
- Jeff
Bezos, of Amazon, announced 3 times that he expects his company to no longer
exist far in the future. Most large companies last successfully no more than 30
years or less and head down.
Examples to this statement might be General Electric and Motorola. Oil companies following this would be
Standard Oil, Husky Oil, Sinclair Oil, Clark Oil and many more. In
entertainment Blockbuster was the big company 30 years ago and today it is
Netflix. In today’s world things
are happening and changing so much faster than in the past.
- Take
a good look at a company if any of these people are selling their stock: Board
of Directors, Insiders, Upper Management or Officers. They know what is happening in the company.
- If
you have a well performing mutual fund and the head of investments leaves the
company, you might look elsewhere for your money. A new investment manager will bring his style of managing
money to the table and the fund may not perform as well as in the past.
- Do
you remember the Rule of 7 and 10 discussed in previous blogs? Simply put, and
for easy arithmetic calculations any investment yielding 7% interest will
double in a 10 year period.
Conversely, any investment yielding 10% will double in 7 years. We have always viewed 6 to 7% return
over time a good return on investment; stocks, real estate and others The stock markets are up roughly 325%
since the lows in about 2010, don’t you think they should adjust to norms at
some point?
- Trading
is many times done on momentum theory using computers and paradigms, not
analysis.
- Lastly,
just dumb common sense.
I look at the news of why the recent downturn in markets.
Media blames it on Trump’s proposed tariffs, computer generated trading and
stop losses, the Chinese, Britain’s exit from Europe, etc. In my mind it is all
a bunch of garbage. To me it is
the economic cycle of growth, stagnation and downturn. We cannot falsely build an economy on
debt and continued governmental and private sector borrowing without repayment
of debt. As we, and the world
economies weaken, we will find it harder to sell bonds to sustain our economy.
Few countries can afford to buy our debt.
I see growth slowing to 2% next year and perhaps recession in 2020, an
election year.
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