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When i look at my portfolio, more often than not my focus is on buying companies with strong balance sheets, producing free cash flow at low multiples of trailing FCF to Market Cap or Enterprise Value. I do not focus that much on EPS growth. I do not hold much in large consumer staples that are stable earners and stable stocks in a down turn.

Wondering how others are thinking of their portfolios. Do you change it after a 6 year bull market? do you include more large cap stable earners?

I have 40% cash and 20 positions. I could add to my existing names here and there to get to 70-75% invested. but am not very excited. am i trying to time the market?
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PM was/is cheap and strong growth, 'much higher-than-expected +16.3% adj. FX-neutral operating company income (OCI) growth.' raised guidance to 9-11%.


I looked at adding more this week. Dithered, failed to do so.
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Oh, yes you are trying to time the market. Of course.

But you don't have to be fully invested either.
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It's not an either-or. ideally it's the IV of each individual stock compared to its current stock price. Having said that, computing IV is easier said than done.

My rough methodology is -
- Don't predict the future, don't assume earnings growth will continue, don't assume market sentiment will continue.
- Balance sheet is all-important for financials, important for resource companies (many energy and materials), relevant only to check red flags like excess leverage, excess goodwill etc for most other companies.
- Cash flow statement is mostly important to make sure income statement is not hiding something. e.g. net income should be comparable with CFO - CapEx (averaged over a few years.)
- Income statement tells you most of the story, except for direct-to-book "earnings" (not sure what the accounting term is for those.) Mostly the latter are relevant for financial companies who book gains and losses on long-term investments.

Bottom line, I still use the same method. But in the last year, less and less companies look cheap by any measure. Some in fact look fully valued. e.g. I sold PG at 25x P/E and no growth, though it is undoubtedly a solid company that can pay you a 3% dividend forever. But when everything has risen so much, opportunities due to volatile sentiments cannot be far behind.
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Oh, yes you are trying to time the market. Of course.

Err - I prefer the term "valuation appropriate action." Not ready to come out of the closet and admit that the general high level of the market has caused me to scrutinize individual stocks more carefully than I normally would. Even though, just letting them run free-range is probably the better thing to do.
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When i look at my portfolio, more often than not my focus is on buying companies with strong balance sheets, producing free cash flow at low multiples of trailing FCF to Market Cap or Enterprise Value. I do not focus that much on EPS growth. I do not hold much in large consumer staples that are stable earners and stable stocks in a down turn. Wondering how others are thinking of their portfolios. Do you change it after a 6 year bull market? do you include more large cap stable earners?

I have no clear answers - just thoughts:

*the thing you mentioned here is you focus on the same things I do (nice BS, high FCF at low multiples) but the last criteria is price sensitive. There is a utility to following companies generating FCF that AREN'T cheaply priced cause, among other things, you can develop a sense of whether the valuation is justified. Following a company you don't own seems odd but sometimes familiarity gives you more confidence. Otherwise, you may find yourself following and owning just 'eh' type companies trading at a low multiple for a reason. So not sure of your universe, but price can't be the only criteria for following companies cause price changes and your confidence can change during an analysis. That's why, IMO, screening can be counter-productive SOMETIMES.

*FCF is not the be and end all of analysis. As Buffett said:

The business is wonderful if it gives you more and more money every year without putting up anything – or (by putting) very little…A business is also wonderful if it ‘takes’ money, but where the rate at which you reinvest the money is very satisfactory. The ‘worst’ businesses of all is the one that grows a lot where you’re ‘forced’ to grow just to stay in the game at all and where you’ve reinvesting the capital at a very ‘low’ rate of return. And sometimes people are in those businesses without knowing it. (OID 9-24-98 transcript)

So you have to figure out if earnings growth without FCF generation is attractive. CMG should open as many of those restaurants as they can. High CapEx if translating to actual growth and earnings is a wonderful thing. This is hard, I know. But you have to divorce yourself from the idea that FCF is the only result you want to see. I have struggled with this for many years.

*you already know this but it bears repeating - we aren't just tracking past growth or 12m trailing growth or free cash flow. We are also predicting future growth too. Obviously life is easier if you can actually clearly identify HOW a company is going to increase its earnings and you then develop confidence they know what they are doing. And that involves all facets of capital allocation, from dividends, buybacks, internal growth, and acquisitions. And it also involves margin performance too, cause even a crummy top line can still result in strong earnings gains. But you can't just use trailing numbers in evaluations - skip thru VL to remind yourself of this fact. Look at the "1" rated stocks at times - maybe at least a few days a month.

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As far as whether to tinker with your existing position sizes, you have to ask yourself how scientific you are in current position sizes. It is arbitrary to begin with? If so, then tinkering is more than ok - assuming you have a good record and batting average in your picks. If you don't have a good batting average, then there could be a flaw in your investment style and you likely don't want to tinker. As for me, I always default toward doing something but always incremental. So you could go from 20 positions and 40% cash to 20 positions and 30 to 35% cash. And then decide if you are ok with it - give your brain a chance to see if it likes the new plan. I usually will tinker with ONE specific stock first and see how that 'feels'.

I know this sounds silly but tinkering is MUCH easier on a down day or down day for your positions.

just 2c

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this sounds ridiculous but it ain't - at least, to dabble with the 'dark side'

Where can investors find their research? Fortunately, it's practically everywhere, said Cramer, on sites like CNBC.com, TheStreet.com, Yahoo! Finance and others, as well as on the Web sites of every publicly traded company.

When starting out, Cramer recommended using the 52-week high list. The new highs list shows stocks with true momentum, said Cramer, especially in a bad market. But that does not mean that investors should just blindly chase every stock on that list. Instead, research will still need to be done to separate the truly great stocks from the ones that are just lucky.

After researching the new high list and picking out the true winners, Cramer said the next step is determining when to buy them. He said a pullback of at least 5% is usually a good entry point, especially when that pullback is caused by general market weakness. You should only buy stocks that have pulled back from the new high list if you're confident they'll make a comeback, he continued.
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0ne more thing

I have always struggled with how far to look with a stock. It is clear in some companies, looking too closely - a quarter, a couple quarters, a year, even three years - is really silly. I mean, if you follow a flaky retailer and look more than three months outs, you are likely a dummy. But a franchise business model - a SBUX or NKE for example - you are cheating yourself by looking at the next quarter. Or even the quarter after that. It is hard, I know. As value investors, and as managers of OPM, we want to maximize our picks and results. But it is REALLY true that sometimes indifference to earnings reports - not always insisting everything be perfect, not always insisting on a perfect valuation, letting some things ride - is a good way to invest.

Do we buy business or stocks? I have often in my career invested in stocks, not business. So the QUALITY of my businesses has often been lacking, or really wasn't a criteria in my evaluations to the extent it needed to be. One of my biggest winners in recent years was Paladin Labs. I was lucky enough that PLB-t didn't get TOO expensive so I wouldn't tinker with it. Think about that - a crown jewel business model gets a little expensive in my mind and I'm looking to sell it down soon enough. There's something wrong there. One solution is to make sure you have a "long-term" section written FOR EVERY REVIEW you do - esp. stuff you own.

This HARDER than it sounds, but if you have been investing any length of time (say, 10 years) and there exists no multi-baggers in your portfolio, then there is likely something wrong with your technique - esp. during an extended bull run like this one. Course, if you are doing 20% CAGR anyway, you don't need my wee advice.

just 2c
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I think we are all buying stocks. If we have another 2008 or late 1970s period, it won't matter if some of our businesses are great when the PE gets cut in half, or no one will lend them money, etc, etc.
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*you already know this but it bears repeating - we aren't just tracking past growth or 12m trailing growth or free cash flow. We are also predicting future growth too. Obviously life is easier if you can actually clearly identify HOW a company is going to increase its earnings and you then develop confidence they know what they are doing. And that involves all facets of capital allocation, from dividends, buybacks, internal growth, and acquisitions

I would rec this post 5 times if I could.

In my opinion no one metric offers a solution for all stocks. Perhaps value investing is one part calculation to four parts analysis.

If the FCF yield is high, why?
If the P/E ratio is low, why?
If the ROE is low, why?
And how are competitors doing?
And so on.

Obviously there are scenarios when a company with a trailing or estimated FCF yield of 10% prove to be poor investments. Likewise, a low P/Es is not a guarantee of success nor is a high P/E a guarantee of failure.

I try to force myself to look at stocks with a clean sheet but it's hard. Overall it's a great advantage to study the same stock or industry. But repetition can also harden inaccurate preconceptions or biases which when repeated transform into "mental cement". Again, there is no perfect solution as every solution exposes oneself to new weaknesses (although the net result may be very positive.)

Biases interact in weird way: Consider Mastercard (MA) in one of my taxable accounts:

1,350 shares total

6/21/06 - 1,050 shares at $4.56 cost basis (split adjusted) = $4,783.41
8/04/10 - 100 shares at $20.15 cost basis (split adjusted) = $2015.00
9/08/10 - 200 shares at $19.58 cost basis (split adjusted) = $3916.80

Why didn't I sell? To be honest part of the reason is that I dislike paying (obscene amounts of) taxes and these shares are held in a taxable account. But to be fair, in more recent years, I determined that I would be more than willing to buy the shares around my after-tax proceeds level so what's the point.

I have been a bit more active - not successfully - in tax-deferred accounts with MA.

Another question - why didn't I add more? I wouldn't have added much more, but I should have added more given my knowledge and opinion of MA at the time. Well, who wants to add at $50 but you last added at $20? Stupid, but true. I have to believe the knowledge of my low cost basis this time hurt me.

****

My point is that success, approach and biases interact in weird ways. Insisting on or greatly favoring stock offering a 10% FCF yield is an awfully firm bias that may have paid off in the past not necessarily 100% for the reasons you give them credit.

Perhaps one possible answer is not to lower standards, for example, moving from 10% FCF yield to 7.5% yield, but tinker with position sizes, cover new stocks, or add new metrics to the mix.

ET

P.S. Short answer is that one should always incorporate earnings growth into their analysis - positively or negatively.
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