Category: Personal Investing

Never forget these two axioms:

Money frees us, but its pursuit enslaves us.

It’s not how much you have at the end; it’s how much you could have made.

I’ll try to make this a shorter post after going extra long in the last post. I’ve been flooded with questions and some gentle criticisms (and some not-so-gentle yelling ALL CAPS INTERNET STYLE!!!!) about my financial chicanery at the end of my last post.

Essentially, all of it boiled down to the following question: Why pick Microsoft with a PE ratio of 51.01 with a dividend when you can get the same dividend yield at a PE ratio of 19.87 with Apple?

First, the disclaimers…

I am not advising anyone what to do for themselves, but rather what someone with my risk tolerance (high), debt burden (low), and critical mass of core holdings (my index funds and Dividend Champions) MIGHT DO. [In full disclosure, I bought Microsoft decades ago and have held it since even as “investment experts” bashed the company and said it should be dumped despite its steady rise in dividend and, of course, now it’s tripled its stock price over the past five years.Way to go, guys. Score another one for the “experts.”]

I’m not even advising for you to pick stocks if that is out of your comfort zone. (Though I firmly hold the position you should at least understand this process even if you don’t pick stocks yourself as either your financial advisor and/or mutual funds are doing it in your name.)

As Chuck Klosterman would often say, ANYWAY…

The rationale behind buying Microsoft at a higher PE ratio for the same dividend yield (after droning on about using the PE ratio as a leading metric of value) has to do with not its growth (its PEG ratio—remember what that is?—is 2.27 while Apple’s PEG ratio is 0.91 and Facebook has a PEG ratio of 0.93), but rather the other type of investing that has always intrigued me. If you enjoy investing in individual stocks (which I do immensely) in hopes to “beat the market”, it’s intriguing to take an educated guess on what secular trends will elevate which companies. For example, who will win the cloud computing wars? Well, I’m certainly smart enough to know, but I am smart enough know how to read the best paper in the world for investors, the Wall Street Journal.

A multibillion dollar company with over 30 years being publicly traded with dividends since 2003 and increasing that dividend since 2012 with a PE ratio no more than twice the sector average (and a PEG ratio no more than twice the sector average) PLUS massively increasing revenues in a whole new market space with only one other major competitor (Hello, Amazon!) so far.  

Sign me up for a (currently) well run company with a growing dividend and riding a secular trend with massive implications for the future any time.

Along with that, the money that was put in was not the most ($2,500 each for Microsoft and Facebook versus $5,000 for Apple) and would still allow to capture the advantages of Microsoft particularly since it will dollar cost average into more and more shares of a great company (provided you set up a DRIP from the start) with increasing shares leading to increasing dividend payouts leading to even a further increase in shares in a glorious upward spiral (I guess I am a bit of an investing evangelist).    

Again, that’s what I’d do with where I am at in my investing life and with my risk tolerance (and my love for stock picking and seeing if I got a good deal and a great investment years later). THIS DOES NOT MEAN YOU SHOULD DO THIS FOR YOURSELF AND/OR YOUR FAMILY.

That is all.   

I hope that helps…even and especially for your haters out there.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Never forget these two axioms:

Money frees us, but its pursuit enslaves us.

It’s not how much you have at the end; it’s how much you could have made.

Where we last left off, we discovered the range of PE ratios between some famous tech stocks (Microsoft/MSFT=51.01, Apple/AAPL=19.87, Facebook/FB=23.84) and will use that metric to determine which to purchase in a hypothetical $10,000 purchase. (Just like med school, let me set up a hypothetical that is unlike real life and make you stick to it. In this case, that means all $10,000 must go into only one stock rather than splitting it up into two or even all three companies.)

Before we dive into the comparison analysis, let’s review the PE ratio as a number and what it means. So, as you (hopefully) saw from last time, the PE ratio of the S&P 500 has essentially been between 15-25 for the past 15 years or so (with the major exception being in 2009 as noted last time). Thus, our evaluation has been pegged to PE ratios in this range.

***Note that in all future posts, if I refer to a low PE ratio company, it’s below this range (or at the lower end of this range) or a high PE ratio company would have one greater than 25.***

A low PE ratio company is considered “cheaper” regardless of its actual stock price and how much you have to pay for the same number of shares as a company with a higher PE ratio. This is part and parcel of the school of thought known as “value investing” (though they are other metrics used to determine what is a value purchase among stocks) which is what made this guy rich and famous.

A high PE ratio isn’t necessarily a bad company however. A high PE ratio for a company means that the stock price is high when earnings are relatively low.

Sarcastic Reader: Why in the world would that be? Wouldn’t the stock price be low if the earnings are low?

Dr. Scared: This is it! This is how they screw you!!

Dr. Unwise: Low earnings, but a high stock price? That makes no sense at all!  

A high PE ratio means that analysts/institutional investors (maybe even retail investors) expect earnings to take off in the near future (a totally and purposefully arbitrary and vague time period) based on…something…like a new product launch, a new division, a new acquisition, etc. How much that is worth may be subjective and it is up to you as in individual investor to make that call particularly if the PE ratio in question is multiples of that of the S&P 500.

Keeping all that in mind, let’s do some comparison shopping.

From purely a PE ratio, the “cheapest” company is good old Apple with Facebook as a close second and Microsoft a distant third.

Sarcastic Reader: So Apple is the best one to get right?

Dr. Unwise: I feel like there’s a catch here somewhere.

Dr. Scared: This is it! This is how…Aah, you guys know where I’m at with all of this…

PWT: Yes. Apple is the best company to buy into from a purely a PE ratio. There is no doubt about it. But, there’s something else—if not other things—to consider…

Sarcastic Reader: Oh boy, Here we go…

One other thing you need to consider when thinking of buying a stock is if it pays a dividend and what is the company’s dividend history if it does pay one. Facebook does not pay any dividend. Both Apple and Microsoft do pay dividends. Microsoft paid 0.42 per share of stock you own and will pay $0.46 per share starting in November which is a dividend yield of 1.7%. (Think of dividend yield as interest gained on the money you put into that particular company. That plus how much the stock price goes up [AKA capital appreciation] along with how much the company keeps increasing the dividend payout {if they do at all} will determine how well you do with that individual company.) Microsoft, for example, began paying out dividends in 20003 and has steadily increased its dividend every year since 2009 from 13 cents/share to 46 cents/share starting next month.

Apple, on the other hand, pays 73 cents/share with a dividend yield of 1.4%. Apple has increased its dividend every year since it re-started one in 2102. It had a dividend in 1988-1995 and none before that or since then until 2012.   

So, Apple has a more inconsistent dividend history in that it had one and suspended it previously. The counter argument here (by Apple fanboys) is that the company has a pile of cash that even Croesus would envy and will continue the dividend ad infinitum if not increase it occasionally.  Moreover, it has a far lower PE ratio (19.87) than Microsoft (51.01).

Sarcastic Reader: So…Apple…then?

Dr. Unwise: Please…please. I’m begging you in all the name of the holy, say Apple or nothing else makes any sense right now.

Dr. Scared: This is it! This is how you they screw you!!

PWT: In this contrived hypothetical, I’d pick Apple. This is where you get into investor biases and recognizing what your biases are.

Dr. Know-It-All: OK, smart guy. What are yours?

PWT: Hey, not welcome back, but long time no see. I had no idea where you went. My biases are clear: I am a value investor and always seek a good company with a long history whose business model I can understand and even more so if they have a good dividend history (ie, long history of paying out dividends consistently and best yet if the company keeps nudging the dividend up year after year without fail). The only other company types I look hard at are the ones that will be increasingly important given future needs/trends such as social media, cloud computing, 3D printing, technology, and—believe it or not—even water.

Apple checks all those boxes. In practice, however, you could easily split your money into $5,000 into Apple, $2,500 into Microsoft, and the remaining $2,500 into Facebook, betting on all three for the long term future and capturing the dividends of the former two while waiting patiently. And the dividends should then be set up to buy more shares of the stocks you already have evaluated as good buys which sets you up to keep buying more stock for no more money out of your pocket(s) ever again. This is the cheapest way in the world to dollar cost average and accumulate wealth over time.

Dr. Know-It-All: Um…thanks…

Dr. Spend-It-All: I’d just make the dividends come to me. So I can buy some jet skis for the lake.

Dr. Unwise: SOme? One isn’t enough.

Sarcastic Reader: Wait a damn second, Professor! We went through this whole exercise based on the fact that you could only pick one stock and not all three just like in medical school when they ask a question with all good options, but say there’s only one best choice. And then finally after a lot of flim flam you give the answer kind of and then tell us that “Oh, yeah, by the way, I’m changing all the rules now and would buy all three in real life.” What gives?

PWT: Welcome to medical school where students never win. Same with residents and fellows.

Dr. Unwise: Damn. So true…

Dr. Scared: This really is how they screw you!

OK.

Enough.

I’ve tortured everyone here long enough.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Never forget these two axioms:

Money frees us, but its pursuit enslaves us.

It’s not how much you have at the end; it’s how much you could have made.

Sorry for the delay recently, Once again, life got in the way, but back into it we shall go. We last left off talking about the PE ratio in its definition, how to interpret it, etc. Now that we did the theory work, let’s do the practical part (just like med school—Ugh).

Let’s keep using Microsoft (MSFT) as an example and then we can do some comparison shopping amongst the tech stocks.

Microsoft currently has a PE ratio of 51.01 with a stock price of 108.66. The current PE ratio of the S&P 500 is 22.60 (estimated as of 10/19/18) and was 24.97 on 1/1/18. (If you peruse the table at the other end of the link, you will see the PE ratio of the S&P 500 has steadily been rising since 2012—from 14.87 to over 20 today. This keeps cycling up and down as you can see in the table.

The highest PE ratio of late was the incredible 70.91 as of 1/1/09—as the market as a whole was sinking and wouldn’t find bottom for ten more weeks in mid-March. Everyone was focusing on how much stock prices were dropping, but earnings were plummeting even further thus making the PE ratio [remember that stock price is your numerator, but your denominator is the earnings—who know all that elementary school math would bubble back up in your adult life?] at the time spike up. You can then see as the market recovered the PE ratio fell back to normal human heights 20.7 by 1/1/10.)

So, what exactly does all this mean in terms of evaluating MSFT as a potential buy?

Comparing apples to apples (even if they are Red Delicious [a misnomer for sure] versus Gala—7,000!?! Wow. Who knew?), the MSFT PE ratio is 51.01 versus that of the S&P 500 (current estimation) of 22.60 meaning that MSFT is 2.257 times more “expensive” than the average stock in this market. Maybe that’s OK though. Purchasing is a matter of not only price, but value. You don’t get a 4,500 square foot house in the best neighborhood in town for the same price as a 1,200 square foot place in the sketchy part of the same town. We all buy the same things at very different prices and feel (are sure?) that we are getting a good value for the money we are parting with.

But, to compare with MSFT with the average stock in the market isn’t quite fair. If you’re car shopping and say that a Mercedes is far more expensive than a Kia, you’re absolutely correct and also stacking the deck in a ludicrous argument. You need to compare your Mercedes to other luxury vehicles (BMW, Audi, etc.—yeah, I like German cars). The same is true with stocks.

So, MSFT needs to be compared with the other well know multibillion technology stocks out there not the Proctor & Gambles  and Coca-Colas of the world.

So, in terms of PE ratio (rounding to the nearest whole number), MSFT is 51, Facebook is 24, Amazon is 140, Apple is 20, Netflix (a technology company of sorts) is 119, and Google (never Alphabet in my view) is 47. These are the famous so-called FAANG stocks.

Sarcastic Reader: Hey fella, Apple at 20 and Facebook at 24 is way cheaper in terms of this PE ratio thing. Why not just buy one or both of them instead of Microsoft?

Dr. Scared: This is it! This is how they screw you!!!

PWT: Great point. Let’s compare MSFT vs Facebook  vs Apple as far as if you have $10,000 and want to put it all on one stock all at once right now…next time.

Dr. Unwise: Damn it! This guy is getting good at the tease!

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Never forget these two axioms:

Money frees us, but its pursuit enslaves us.

It’s not how much you have at the end; it’s how much you could have made.

When evaluating individual stocks, much is made of the dreaded price earnings ratio (AKA PE ratio) which makes the eyes of many glaze over and nod in silent hopeless agreement. Defining what it is is far easier than how to interpret it.

PE Ratio=A company’s stock price/earnings per share

This is typically calculated by the four past quarters of earnings divided by the annual earnings per share. This is defined as the trailing P/E (or PE) ratio.

For example, if a publicly traded company has a stock price of $20 and the earnings per share is $2 over the past year, then the P/E ratio is 10. (I like simple math.) Note that the PE ratio is not in dollars or foot pounds or some such thing. It’s just a number and that’s it.

So what? What does this mean?

Who cares?

So what exactly does this number signify?

This number tells you how much you are willing to pay for a company’s stock. Think of it this way. In the above example, it means you would be willing/you will be buying a piece of a company at ten times what they earn for each of those shares you purchased. You can compare this PE ratio of company A to either other companies in the same sector (eg, pharmaceuticals, energy, utilities, etc) or even the whole stock market. If the company in question is way out of scale with either its sector or the market as a whole, it should give you pause and make you figure out why should you be paying so much more for this stock as opposed to others (whether in that sector or in another completely different one). If you cannot definitively prove (at least to yourself and your significant other) why this stock is worth so much more than many others, then don’t buy it. I completely agree with the Warren Buffet maxim of “Buying a great company at a good price is much better than buying a good company at a great price.” (I’m paraphrasing the Oracle of Omaha, but it captures the essence of what he was getting across.)

The caveat to this is ensuring you’re getting at least a good price, if not a great one. (More on that later.)

Due to the fact that company earnings only come out quarterly and the stock price changes daily, the trailing PE ratio keeps moving daily. Therefore, many investors pay heed to the “forward” or “leading” PE ratio which is calculated with the same methodology, but using projected future earnings (essentially always estimated over the next 12 months).

Now you have two PE ratios competing against one another for each stock that exists.  

Sarcastic Reader: OK. Here we go. This is how the flim flam starts.

Dr. Scared: This is it! This is it!! This is how they screw you!!

Dr. Unwise: Just once i’d like to finally find out who ‘they” is.

PWT: Umm…let’s just…keep moving…on…

If the leading (or forward) PE ratio is lower than the trailing PE ratio is, it means analysts are anticipating the company’s earnings to increase over the next 12 months.

However, if the leading (or forward) PE ratio is higher than the trailing PE ratio is, it means  analysts are anticipating the company’s earnings to decrease over the next 12 months.

To further confuse the issue, there is something called a PEG ratio (price to earnings growth ratio) which is the company’s trailing PE ratio divided by the growth rate of the company’s earnings for some specified time period (again, typically a year). PEG ratios themselves can be categorized as trailing or leading/forward depending on whether historic growth rates or estimated future growth rates respectively.

The instance where PEG ratios are often used is when you seem to have a “steal” in a low PE ratio (“cheap”) stock to see if that is truly the case as the PEG ratio accounts for the growth a company is undergoing as it is moving along which may indicate not where it is now, but what you want to know most—where it will be in the future. (More on this later.)

The companies that do not have any positive earnings have either a negative PE ratio (my preference), just arbitrarily assigned a PE ratio of zero, or even more ambiguously the PE ratio is unassigned and noted to be uninterpretable since some argue the PE ratio cannot be used to compare this company to any other. (More on this later…I hope we have time for all of this later stuff.)

Now that we have defined the PE ratio and its variants, let’s go thorough an example of a stock and run it through an analysis of how they should be viewed through the prism of PE ratios.

Good thing there’s always another week coming up…

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Never forget these two axioms:

Money frees us, but its pursuit enslaves us.

It’s not how much you have at the end; it’s how much you could have made.

I’m back after a fun filled fabulous family vacation. (That’s for all of you who enjoy alliteration!) Let’s just jump into it.

Let’s assume you want to get into individual stock buying yourself either without a financial advisor or on the side of your financial advisor. Also (and always a good idea), you could just want to check the stocks your advisor has selected for your portfolio.

Let’s start with the basics.

My bias: When I look at a stock that I am mulling over, I start with Yahoo Finance. It’s concise, easy to read, readily accessible, and has the basic statistics needed for at a minimum first blush impression of the equity.

Most importantly, you can’t beat the price point.

It’s absolutely free for life!

There are many many other stock research sites you can use and some will convince they are the best and even try to seduce with a freemium model where if you just only spend a few measly dollars a month, even more information like “quantum data” or some such thing will be unleashed for just smart people like you.

Here is how Yahoo Finance is set up for individual stocks.(I’ll use Microsoft [MSFT] as an example though this could be any stock.)

Sarcastic Reader: That’s as we say in the biz…a shit ton of numbers…

Dr. Scared: This is it! This is how they screw you!!

Dr. Unwise: Exactly what business are you in that a “shit ton” is actually a unit of measure?

PWT: Uh…guys…FOCUS!

One by one, let’s discuss the above statistics.

The company name along with its stock symbol is listed. The stock exchange where this stock is traded is also listed as you can see in this case is our old friend, the NASDAQ,

It also is noted that the prices you see is in US currency.

The current price is pretty obvious (I hope) with how much it went up (YAY!) or how much it went down (Boo!) as well as the percent increase (or decrease) corresponding to the number of dollars and cents the stock moved.

Believe it or not, there is after hours trading (but not for mere mortals like you and me) that causes (generally speaking) small fluctuations and a difference between what the stock in question closed at and what price it will open at the following morning. Along with this again is both the percent increase (or decrease) corresponding to the number of dollars and cents the stock moved.

Previous Close: This is what price the stock closed at just before trading started today (ie, the day you are looking at the stock’s info)

Open: This is what the stock price is at the open of the trading day which can be quite different than what the closing price was depending on what happened between those points in time Remember that any event in the world at any time may affect a company’s stock—a scarcity of a needed mineral, a civil war, a strike starting at midnight after failed last minute negotiations, etc, etc.

Bid: The highest price that buyers of the stock are willing to pay for the stock

Ask: The price at which sellers of the stock are willing to sell it at

Day’s Range: Easy peasy lemon squeezy. This is the top price of the day along with the lowest stock price of the day which just means the range of prices that you could possibly have purchased or sold at. Realize that the closing price or opening price does not have to be either the top or bottom price of this range, just somewhere within this range.

52 week Range: Just as easy as the above. This is the lowest stock price and the highest stock price over the past year (ie, 52 weeks) to give you an idea of where the current stock price is relative to its (fairly recent) highs and lows

Volume: the number of shares traded during a given period of time (usually in a day if not stated differently otherwise) Volume typically does not affect stock price directly. However, a  very lightly traded stock (not likely any companies you have heard of and not any you would invest in until you have a critical mass of core holdings already and become a more savvy [and bolder] investor) may fluctuate significantly with an unusually high volume of trading. Also, if you see volume change significantly (higher or lower) for any stock, it may be indicating something about the company that should you pay attention. Stop looking at the key statistics of the stock and just put the company’s name into a search engine and see what news is out there about the company. ALWAYS REMEMBER: YOU’RE INVESTING IN COMPANIES, NOT JUST STOCKS.  

Average Volume: the number of shares traded in any given time period divided by that unit of time which can be recorded as daily, weekly, etc though it is often daily and in some stock sites it is then denoted as “Average Daily Trading Volume (ADTV)”

Market Capitalization: the stock price times the number of shares available for sale (ie, the number of outstanding shares) This can be misleading in terms of saying this is how much a company is worth given the fact that it doesn’t account how much debt the company may be carrying and the fact that it also doesn’t account for all the shares the company doesn’t put out for public sale among many other factors not to be discussed here

Beta: a stock’s sensitivity to the overall market

A beta of 1.0 means the stock moves (up or down) in perfect alignment with the overall market whereas a higher one means it moves higher or lower than the market’s same direction. For example, a beta of 1.10 means that this particular stock will move (up or down) 10% greater than the overall market does. A lower beta means that the stock in question will not move (up or down) as readily as the overall market does. Ideally, your stock has a beta of 1.0 since it is predictable relative to the market. If you have a high beta stock and the market has a downturn (and it will happen as sure night follows day), then your stock will likely get crushed.

(For you sadists who need to know how beta is calculated [no one is talking to you Dr. Scared or Sarcastic Reader], this is how it works in a thumbnail sketch. Believe it or not, the company’s monthly earnings over the past five months versus the returns from a major index {usually the S&P 500 which is serving as the surrogate of the overall market} who then undergo a statistical regression analyses [don’t ask me details people, I’m no mathmagician] and, voila, your greatly desired beta pops out.

Now imagine doing that for every publicly traded company every month.   

PE Ratio (TTM): the current share price divided by the EPS (earnings per share) This is a way to figure out the pricing of a stock relative to the overall market  and also other companies’ stocks especially if in the same sector (eg, comparing two tech companies or even more relevant [since tech companies are widely diverse—Google vs Netflix anyone?] two car companies). TTM=twelve trailing months—all numbers are based on what the company has done over the 12 months prior to the time you’re viewing these statistics.

EPS (TTM): Earnings per share The company’s earnings over the past 12 months divided by the number of shares of the company’s stock available for trading (AKA outstanding shares)

TTM=twelve trailing months—all numbers are based on what the company has done over the 12 months prior to the time you’re viewing these statistics

Earnings Date: The date at which the earnings of the company in question are publicly revealed This is done quarterly at least and can significantly change a stock’s price. People have bribed their way into getting that data early and invest accordingly—and then go to jail for insider trading

Forward Dividend & Yield: Forward dividends are exactly what they sound like—payments that are expected to be paid out in the future Trailing dividends are the ones that have already been paid and can be cataloged given that they have already been paid and are well known. There’s no speculation in trailing dividends, just forward ones. Estimating forward dividends is an art, not a science. If you have a company with stable dividend payments without any fluctuation for years or even decades, then the forward dividend estimation is easy. However, that’s rarely the case and then you need to look at the forward dividends with a skeptical eye. In either case, all dividend calculations are based off a time period of 12 months.

Dividend rate is the total amount of dividend payments paid over 12 months (forward or trailing). Dividing this dividend rate by the price of the stock and then multiplying that by 100 is the dividend yield. Think of the dividend yield this way: For every $100 invested in the stock in question, the dividend yield will tell you how much money will get paid out to you each year. (For example, a dividend yield of 3.35% will mean you as an investor will get $3.35 for every 100 dollars invested in that stock for that year.)

Ex Dividend Date: The date by which an investor will not get the next dividend Buy before this date and you will own the stock as short as possible to still get the dividend. If you’re going to buy a dividend paying stock anyway, the least you can do is buy it so you get your first dividend ASAP which makes a giant difference over the next 20-25 years.

1 Y Target Est.:To quote Yahoo Finance itself, “The 1-year target price estimate represents the median target price as forecast by analysts covering the stock. Data is provided by Thomson Reuters. More detailed target estimate data can be found by clicking a company’s “research” link.” In a practical sense, this is largely worthless given the fact it is updated only every 6 months or so.

Here are a few more statistics that Yahoo Finance doesn’t have featured prominently, but that other stock websites do.

Sales short:the total number of shares that are being sold short (ie, shares that are borrowed with the hopes that the company’s stock will go down in price) This gives you an idea of how some large experienced or even institutional investors view the stock if there is a high number of “shorts” betting against the stock. They may be wrong, but it should be heeded when many people are betting against the stock. What do they know that you don’t? It should give you pause as to why so many people are betting against it and why.

Short Interest: percent of outstanding shares that are being sold short In other words, of all the shares that are available for public sale, how many are betting that the stock will be going up versus how many are betting that the stock will be going down. It’s a general (though only one) indicator of investor sentiment which alone can drag down or elevate stock prices.

Ok….tons of info thrown out at you in one not-so-little blog post. Now that we’ve learned how to read through key statistics of a company’s stock, we can build on that next time.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…