THIS IS MY 174TH BLOG ON UNDERSTANDING MONEY
TOOLS
August, 2019
In this blog we are going to take another look at
stocks. I attempt to teach you to be
more independent when it comes to financial and business decisions. I am “not going to give you a fish, but
will give you the rod, reel, line, hook and bate for you to catch fish.” If you’ve referred to my past blogs on
the economy and markets they should have left you with some thoughts:
- President
Trump will do all he can to prop up the stock market and avoid recession until
he gets re-elected.
- The
stock markets are very manipulated with government and large banks intervening.
- The
stock market trends and erratic swings on a daily basis are not norms; there is
not a 50, 100 or 200 day moving average to rely on.
- The
bond markets have been in an inversion curve for some time, and the government
makes light of the historical reading on this. Short term note yields are higher than the 10 and 30 year
bond yields. Increased demand for
bonds. Interest rates (yield) come down and market value of existing bonds goes
up.
- The
tremendous printing of money, debt (governmental and private) and the ignoring
of warnings by the International Monetary Fund and World Bank about our fragile
financial situation are not to take lightly as the world “works” around our
currency.
- Except
for a couple times in history the unprecedented highs of the markets.
Let’s start by looking at the unrealistic highs of the stock
markets, as I keep pointing out.
Are we in a new paradigm to evaluate stock prices? Some people say the
new price to earnings ratios can be 20 to 25 to 1, versus the hundred year
average of 14 or 15 to 1. Is this
excuse because financial people want to sell you more? I want to ask you a question and we
will relate that to the stocks and
funds you are buying. Let’s assume
I have a small retail business for sale that has some growth potential. My bottom line pre-tax earnings are
$100,000. How much will an
investor most likely offer for my business if I wanted to sell? If you say about $250,000 to $300,000
plus inventory at cost it is realistic.
Let’s assume this small company is a public company in today’s market. Taking the DOW P/E today at 27.5 to
1. That would mean that you or
someone else thinks your company is worth $2,750,000. It’s not real nor are the stock markets today.
We have helped you analyze stocks in past blogs. We used price to earnings, projected
price to earnings, book value and other terms. I like to look at more tools. How about the price to book value as a ratio? Book value and break-up value are quite
similar. Take assets and remove
intangibles and “blue sky” from the equation, then less a company’s liabilities.
How about taking the capitalization in regard to price and
earnings. Capitalization is the
value of a company’s value taking the price of the stock times the number of
shares outstanding or “in the float”.
Some of these values are out of sight, and will come down. The favorite 5, or “FAANG”, are already
coming down or stable. The real
money has been made. Those stocks, if you don’t know, are Facebook, Amazon,
Apple, Netflix and Google.
For stocks look at “insider” trading. Insiders are the directors, officers,
Board members, and top management.
Are they selling or buying?
From what Trim Tabs Investment Research states about $600 million of
stock value is sold “each day” by insiders; tells me “watch out”! Many companies have completed initial public offerings
the past few years. Typically
insiders and stock “option” people cannot sell for a period of 2 years unless
they are defined as an institutional investor. (Ruling 144 of the Securities
and Exchange Commission.)
Institutional investor designation is a bit of a misnomer. An individual who makes himself wealthy
like Bill Gates, Jeff Bezos or Jeff Zuckerberg can be declared institutional
investors and sell large blocks of their stock through Wall Street banking firms
within the two year time period.
This has to be applied for and approved by the SEC.
For stock stability, look at the “liquid asset test” or
“quick ratio”. This is the ratio
between assets and total liabilities.
The ratio should be 2 assets for 1 liability, or 2:1.
Don’t just look at current earnings, look at track record of
earnings growth. What is the
pattern? Volatile? Is the Board of
Directors continually increasing the dividend yield, or just hoarding money?
Strong or weak days on Wall Street? Make sure you look at volume traded.
One stronger day with weak volume says nothing.
There is a “Tracking P/E” and a “Forward P/E”. Tracking P/E is the price to earnings
in the past 4 quarters. Forward
P/E is the projected price to earnings ratio the next 4 quarters, (PP/E).
Where to invest?
Basically for funds there are 4 locations, the DOW Jones Industrials,
the S&P 500, the NASDAQ and the Russell 2000. The NASDAQ and Russell 2000 are more small-capitalized
companies and technology oriented. I would tend to invest, if at all, in quality, staple
companies with low P/E’s around 10:1 paying good dividends. Why take the risk in these economic
times?
If I were buying bonds, I would “ladder” my bonds, meaning
purchasing with various maturity dates.
I do think interest rates and yields will come down from here. Many solid countries around the world
like Germany, Switzerland and the Scandinavian countries have lower interest
rates than we do. All economies
are slowing.
Gold? Always a
reason to keep a small amount in a good portfolio. Buy a gold stock instead of bullion on the dips. Analyze a gold company the same way you
would analyze an oil/gas company: what are the reserves, what are the potential
future reserves, good management in place, and history. About 20 years ago when gold was going
up I “played” a company called Randgold.
They met my criteria years ago.
I believe they merged and now under Barrick Gold. Symbol on the NASDAQ exchange is GOLD.
If you’ve made money on growth stocks, this may be the time
to re-evaluate your portfolio.
Long-term capital gains on stocks held longer than 12 months are 0%, 15%
or 20% based upon your income tax bracket. In the longer term I don’t see how the US can operate
without increasing taxes, especially if a Democrat becomes president. This may be good and needed for the
younger generation of people.
Farcical. Such
a delightful word, that only brings up Uber in my mindset. A company with no
assets to speak of, most likely will never see a profit and ran a $5 billion
loss second quarter 2019. I am not
sure how many quarters they could sustain as such.
Again, I hope you got something out of this blog.
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