UnThreaded | Threaded | Whole Thread (11) | Ignore Thread Prev Thread | Next Thread
Author: Larry01Gott Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 3430  
Subject: How I select my stocks Date: 8/13/2003 12:28 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 25
The question one should always ask regularly is this, “Is my hard-earned money in the very best possible place that it can be?”

Here's my story, unpublished until now (except on the Quality Systems board), about how my money came to be where it is (as seen a few posts ago):

In the early 80's, I was a stockbroker who wanted to be a stock analyst. The firm wanted me to peddle their new-issue stocks door-to-door, but I wanted to analyze stocks -- those that already had a track record. We parted over a difference in philosophies. Soon afterwards, in 1985, I built my first spreadsheet analyzer of stocks. (call it ver 1.0).

By early 1999, I was monitoring 240 stocks using 45 different criteria, and spent eight months back-testing my results, still refining and eliminating many highly-touted factors as virtually worthless, and ranking and weighting those that had relevance.
I wanting my personal stocks to have both 1) excellent market appreciation potential for market updrafts, and 2) as much safety as possible for market downdrafts.

And now, having seen both the highs and lows of the market, I have full confidence in my system to use it for my own investing (call it ver 6.0). As a rule, the stocks that I have the largest position in are generally the stocks with the highest numerical rating in my system.

Here are the 15 factors I use to grade and rank stocks, but the factors are not shown in order of importance. After this list, I will give guidelines for their relative importance.

*Sales momentum – last 10 quarters
*Earnings momentum – last 10 quarters
*Profit Margin momentum – last 10 quarters
*Profit Margin %age
*Operating Margin %age (aka Oper Income)
*ROE (Return on Equity)
*Current Ratio (Curr Assets vs Curr Liabilities)
*Sales R.O.G. (growth rate), Next Qtr estimate and Curr Qtr actual
*Earnings R.O.G., Next Qtr estimate and Curr Qtr actual
*P/E Ratio, Next Qtr estimate
*PEG (PE/Growth rate), Next Qtr estimate
*Price/Sales Ratio, Next Qtr estimate
*Volatility/consistency/predictability of Sales and Earnings (not of stock price)
*Free Cash Flow margin
*Equity/Liability ratio

Noticeably absent are 1) beta; 2) Foolish Flow; 3) anything having to do with stock price – past, present, or future; 4) any attempt to numerically represent technical analysis (although I may use T.A. sparingly outside the ranking system).

There are four broad classes of criteria, or factors:
1. Rate of Growth factors
2. Momentum factors (a way of measuring consistency and stability of growth)
3. Valuation factors (looking for potentially undervalued stocks)
4. Financial factors (looking for safe stocks in the financial reports)

I have listed these broad classes in order of importance,
and my credo is:

“Look for fast-growing stocks, with consistent and stable growth, at the lowest possible price, with good financials.”


There are some major presuppositions in these statements:
A. The best financials in the world will not help a slow-growing company.
example: a fast-growing company with no free cash flow (FCF) will beat a company with great FCF but no growth.
B. In the long run, the R.O.G. of fast-growing companies acts BOTH as a price appreciation factor, and as a safety factor.
C. Using OPM (other people's money) is very late-90's'ish. That's why so many of the high-flyers are mired in deep trouble. Using IMW (incoming money wisely) is very 00's'ish, and most of the high-flyers now have that philosophy.
example: Foolish Flow is a 90's philosophy, and is counterintuitive to having safe financials. High Foolish Flow = potential danger ahead.
D. And based on C, Receivables are now better than Payables, and Receivables are better than Inventory. (To put it very simply in the terms of this decade, “Would you rather owe, or be owed?”)
E. The ROG of revenues is somewhat more important than the ROG of earnings – but the ROG of earnings should be the higher %age of the two.
(Why is the revenue R.O.G. more important than the earnings R.O.G. ??!)
Because future earnings growth comes from one place only -- future revenue growth. You show me a company that has stopped increasing revenue, and I'll show you a company that will stop having earnings growth within a year, if not immediately.


So, in order of priority,
1. Growth rate of Revenues.
2. Growth rate of Earnings.
3. Momentum of revenues and earnings.

Example: I monitor 60 fast-growing companies on a spreadsheet using the very factors listed here. But only nine of them have had increased revenues and earnings in every one of the last 10 quarters: NTES, JCOM, MRVL, ERES, ANSI, ARTI, PKTR, SINA, & SOHU. (although a few others missed only one quarter)
4. Momentum of profit margin percentage.
Only 4 of my 60 companies have increased their profit margin percentage in every one of the last 10 quarters: MRVL, ERES, SINA, and SOHU.
Just for example, ERES (eResearch Tech)'s growth of profit margin looks like this quarter-by-quarter (beginning in 6/30/01 and ending with my 9/30/03 estimate:
1.43%=>4.11%=>6.41%=>8.43%=>11.88%=>12.84%=>14.88%=>18.38%=> 18.92%=>20.00%(est next qtr)) WOW! What a record!
And notice: the four companies here are on both lists!

5. Potentially undervalued, as indicated in PE, PEG, and Price/Sales ratios
6. Financially sound, as shown in margins, current ratio, ROE, FCF etc. (although as Fool writers have pointed out, it's not easy to have a high FCF when you're growing at 80% a year)
Disclosure: long in all mentioned except PKTR (Packeteer).

That's about it for now.

If you are interested in printing this, remember the “Format for Printing” icon right below here. That makes it look much cleaner with no ads.

Best wishes to all you investors, and I hope this helps.
Lets discuss anything that you question or need more info on.
Larry
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: vonnygirl Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 201 of 3430
Subject: Re: How I select my stocks Date: 8/13/2003 12:35 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Hi Larry. Thanks for all the data on your selections. Did you get out of nte?????

Print the post Back To Top
Author: Larry01Gott Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 202 of 3430
Subject: Re: How I select my stocks Date: 8/13/2003 1:24 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
vonnygirl asks if I got out of NTE.

OUT OF NTE???!!!
Not on your life!

My post on my stock positions (about post 197??) lists NTE as my #1 holding. I won't be selling any of it anytime soon.



Print the post Back To Top
Author: jimpiccard Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 203 of 3430
Subject: Re: How I select my stocks Date: 8/13/2003 8:14 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Larry--
Appreciate you taking the time to outline what you're doing.
One question: is there a reason you use ROE, rather than ROIC?

jp


Print the post Back To Top
Author: Larry01Gott Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 204 of 3430
Subject: Re: How I select my stocks Date: 8/13/2003 10:51 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Jim asks me "...is there a reason you use ROE, rather than ROIC?"

Yes, the answer is "Plain Laziness", and more familiarity with ROE (Return on Equity).

I've never made the switch over to ROIC (Return on Invested Capital) in my spreadsheets... but on your (implied) recommendation, I've printed off the Fool sheets on ROIC, and will consider making the switch after I've evaluated the issue.

More later on that.

Until I make the switch, I'll be soon posting some comparisons that will still use ROE -- still a very useful tool.

Jim, thanks for the "head's up" about ROIC. If you want to explain here why you like ROIC better than ROE, it'll be helpful to all China Connection readers. If you do, please start a new thread with a new post.

Have an up day,
Larry

Print the post Back To Top
Author: reverendh Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 239 of 3430
Subject: Re: How I select my stocks Date: 8/18/2003 7:09 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Larry, could you pease explain why "using other people's money" is 90ish and what it means? I'm thinking it means using new stock proceeds rather than debt? Not sure. And why do you disapprove of it?

And please explain also what would constitute a high Foolish Flow ratio, and why you disapprove of it. I should know this, but all I can remember is it's a cash flow ratio.



Print the post Back To Top
Author: Larry01Gott Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 240 of 3430
Subject: Re: How I select my stocks Date: 8/19/2003 12:13 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
reverendh, here is a medium-size answer to your first of two questions.

Using OPM - other people's money - actually refers to debt, borrowing that which must be paid back rain or shine, good business or bad.

On a personal scale, the excessive use of credit cards is a counterpart.

On a national scale, an excessive national debt is a counterpart.
On a California scale, an excessive state debt is a counterpart.
(Democrats: Tax and spend; Republicans: Borrow and spend; Common Sense: Receive and spend)

On a corporate scale, an excessive use of credit subtlely presumes that the future will always be like the past (upward and upward), always providing enough income to allow both substantial r&d and debt payment.
[Borrow and Spend].

Almost all the major high-flyers of the 1999-2001 era got trapped in the borrow and spend cycle. The new high-flyers of 2002-03 are much more in the Receive and Spend mode, where most needed funds are provided by revenues and collection of receivables, and moderate-sized new-stock issues.

What do we learn from a bankrupcy? If we learn as we should, we learn to have a much larger "cushion" between our assets and liabilities.
The new high-flyers do not trust debt. They've seen those late 90's high-flyers become stagnant in their revenues and earnings from 2001 to the present, only now starting to break out.

Regarding Foolish Flow, I'm going to make a major post on that probably next weekend. I'll hold off on that, because I'm still preparing what I want to say.

Hope this helps,
Larry

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: ClientServer One star, 50 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 246 of 3430
Subject: Re: How I select my stocks Date: 8/20/2003 2:17 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
Larry,

Do you consider whether the growth rates are increasing or 
decreasing ? Wouldn't a decreasing growth rate indicate that these 
growth rates are not sustainable?

I just checked the growth rates of the companies that you had 
posted. I couldn't find data for all quarters for SINA. I have 
included OVTI in the list. This compares quarterly revenue growth yoy 
for the last 5 quarters. 1Q yoy growth is the most recent quarter, 2Q 
yoy is the previous quarter etc.

                  NTE(1)   OVTI(2)   SOHU(3)  UTSI(4)    NTES(5)
---------------------------------------------------------------       
1Q yoy growth      123       204       215       75       254
2Q yoy growth       72       206       218       80       393
3Q yoy growth       13        77       157       52       813
4Q yoy growth       -4        50       110       55       943
5Q yoy growth       -6        40       113       65       638

Though NTES has the best yoy growth rate in the list, its growth
rate has been falling for the past 4 quarters. A growth rate of 943%
probably was not sustainable. SOHU on the other hand, has an increasing
growth rate over the past 5 quarters.

So, for "rate of growth rate", NTE is on the top of the list followed 
by OVTI, SOHU, UTSI and NTES. 

Comments appreciated.


Print the post Back To Top
Author: westgl One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 253 of 3430
Subject: Re: How I select my stocks Date: 8/20/2003 4:05 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0

Hi Clientserver,

I do not see SINA in this yoy qtr growth. Do you have this information to show as a comparison, this would be greatly appreciated. Thanks

Gary

Print the post Back To Top
Author: Larry01Gott Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 254 of 3430
Subject: Re: How I select my stocks Date: 8/20/2003 4:15 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
And Clientserver, I'll respond to your post more extensively when I get home. But basically, I agree with everything you said.

I've got the Sina QbyQ Y2Y growth figures there also.

Print the post Back To Top
Author: Larry01Gott Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 260 of 3430
Subject: Re: How I select my stocks Date: 8/21/2003 2:33 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
(LG: I am copying Clientserver's post #246 below, so I can interact with it. 
My comments will be in italics.
Here's his post:

Larry,

Do you consider whether the growth rates are increasing or 
decreasing ? Wouldn't a decreasing growth rate indicate that these 
growth rates are not sustainable?

(LG: Absolutely correct. You are using revenue growth rates below, 
which is the most helpful R.O.G., since the earnings R.O.G. have two 
strikes against them, in the three portals particularly: either 
(1) they are uncalculable because they are coming from a loss to a 
gain, or (2) they are coming from a tiny gain to a big gain (like
1437% increase) which is basically meaningless. 
Rarely are such earnings growth rates sustainable, and 9 times out of 10, 
you should plan on a decrease next quarter -- and this would apply to
revenues as well.) 

I just checked the growth rates of the companies that you had 
posted. I couldn't find data for all quarters for SINA. (LG: Yes, and 
my SINA figures are still at home. They look about like SOHU if I remember 
right) I have included OVTI in the list. This compares quarterly
revenue growth yoy for the last 5 quarters. 1Q yoy growth is the most 
recent quarter, 2Q yoy is the previous quarter etc.

(LG: And what a variation! We have stocks with a R.O.G. increase every 
quarter, almost every quarter, steady and solid, and decreasing every 
quarter (except one) -- but the one that has decreased almost every quarter
still has the highest rate of growth. So what is a forecaster to do?) 


                  NTE(1)   OVTI(2)   SOHU(3)  UTSI(4)    NTES(5)
---------------------------------------------------------------       
1Q yoy growth      123       204       215       75       254
2Q yoy growth       72       206       218       80       393
3Q yoy growth       13        77       157       52       813
4Q yoy growth       -4        50       110       55       943
5Q yoy growth       -6        40       113       65       638

Though NTES has the best yoy growth rate in the list, its growth
rate has been falling for the past 4 quarters. A growth rate of 943%
probably was not sustainable. (LG: An understatement to be sure!) 
SOHU on the other hand, has an increasing growth rate over the past 5 quarters.

So, for "rate of growth rate", NTE is on the top of the list followed 
by OVTI, SOHU, UTSI and NTES.

(LG: This is why computer programs and Excel functions are not very
good at predicting. There are variables that lay outside the numbers,
and there are NUMBERS that lay outside the numbers above. By the latter
I mean sequential Q2Q rate of growth. Sometimes there are additional
patterns that show up sequentially that do not show up Y2Y.

What would a computer or Excel function do for the next quarter for NTE? 
180% 200%? This is why the human touch is so important! The figure I
have estimated is 138% next quarter Y2Y. Still increasing, and still
more than doubling, but reasonably attainable.

I almost hit OVTI sales head on (176% vs 180%), but was way off in the
earnings (OVTI's fault, not mine, sadly)
So adding the human touch, here are the next quarter ROG figures I am
using in my spreadsheet calculations: NTE: 138%, SOHU 195%, UTSI 79%,
NTES 128%, (and SINA 200%)

It is important to note that I do not start with the above figures -- 
I END with them. Here is what I mean:
(1) I first estimate the next quarter $$revenues and $$earnings based 
on the dollar and percent trends (and guidance, if any), then 
(2) I look at the newly derived sequential rates of growth to see 
if they are reasonable based on the sequential trends, then I adjust the
dollar figures if needed, then finally
(3) I look at the new Y2Y figure to see if it makes any sense at all.
Looking at the five above, at a glance they all seem to make sense
except NTES. It looks like I took too much off the top. So,
(4) I refigure, and readjust, and in the case of NTES, end up convinced
that apart from a revenue miracle revival, NTES is going to grow
significantly less than the other two portals.  Most of the rationale
for this conclusion can be seen on post #97 -- analyzing the ROG on the
latest earnings reports of the three.
Heres the link: http://boards.fool.com/Message.asp?mid=19390046

That's it for now. Thanks, Clientserver for the interesting topic.

Let's talk some more about this.

Larry




Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
UnThreaded | Threaded | Whole Thread (11) | Ignore Thread Prev Thread | Next Thread
Advertisement