3 ways to invest in trend without paying a high price.
A) Look for non trend companies that indirect benefit from the trend (offshoot of the old picks and shovels strategy).
B) Free trend play. A business relating to the trend is embedded in another business with real earning and a reasonable stock price.
C) Tangential benefits, where an old fashioned brick and mortar business benefits from using the trend to cut costs and streamline operations.
If you own a retail company, another key factor in the analysis is figuring out whether the company is nearing the end of its expansion phase, whether shake shack has established itself in 10% of the country, it’s a far different prospect than having stores in 90% of the country.
You have to keep track of where the future growth is coming from and when it’s likely to slow down.
The six categories
The slow growers -Expected to grow slightly faster than the GDP. Generally pay dividends. Avoid them. If growth in earnings is what enriches a company, what’s the sense of wasting time on sluggards.
The stalwarts - are expected to do 10-12% annual growth earning
You have to consider taking profit more readily than you would with a high growth. Stalwarts are stocks that you generally buy for a 30-50% gain then sell and repeat
Beware of possible diworseification that may impair value
See how the company has fared during previous recessions and market drops
The fast growers-small aggressive new enterprises that grow at 20-25% a year.
These upstart enterprises learned to succeed in one place and then duplicate the winning formula over and over, mall by mall, city by city. Look for the ones that have good balance sheet and are making substantial profits. The trick is figuring out when they will stop growing or does it still has room to grow and how much to pay for the growth.
One mistake to avoid, does the idea work elsewhere? Wait to see if the good idea from the city, would actually succeed someplace else. There’s no point buying the stock until the company has proven that the cloning works
If a fast grower embark on acquisition, pay attention as the fast growth might be over. In the growth phase, it would have invested all its money in its own expansion.
Track whether the expansion is speeding up or slowing down
Cyclicals- Do not mistook it with the trusty stalwarts.
You have to be able to detect the early signs that business is falling off or picking up
Keep a close watch on inventories
Turnarounds
Look at perfectly good company inside a bankrupt company
Look at minor tragedy perceived to be worse than it was, and in minor tragedy, there’s major opportunity
Stay away from the tragedies where the outcome is unmeasurable
How is the company supposed to be turning around? Has it rid itself of unprofitable divisions?
The asset plays- a company that’s sitting on something valuable that you know but Wall Street has overlooked.
-tax loss carryforward, cash, land holdings
Spin offs
A month or two after the spinoff is completed, check to see if there is heavy insider buying among the new officers and directors
Take note of institutional ownership. The lower the better
Prefer low growth industry, especially boring ones. There would not be competition or potential rivals.
-This allows the market leader to continue to grow and to gain market share from weaker rivals
Prefer investing in companies that does steady business ie soft drinks, drugs, razor blades as compared to fickle purchases such as toys.
Prefer companies that is a user of technology
Prefer companies that the insiders are buyers
- at a minimum, the company will not go bankrupt in the next six months
-when management owns stock, rewarding the shareholders becomes a priority.
- it’s more significant when employees at the lower level add to their positions.
-In normal situation, insider selling usually means nothing, they may need to pay tuition, satisfy a debt but in rare cases, where the stocks has rise substantially and 9 officers are selling majority of their shares. Do take note.
Stock to avoid
- avoid the hottest stock in the hottest industry
- avoid diworsefication- acquirer that overpaid for company that beyond their realm of understanding-from an investor’s point of view, you can find turnaround opportunities among the victims of diworseification that have decided to restructure
- it’s not always foolish to make acquisitions. It’s a very good strategy where the basic business is terrible, for instance if Warren Buffett had stuck to textiles.
Future Earnings
-Even though you can’t predict future earnings, at least you can find out how a company plans to increase it earnings, then you can check periodically to see if the plans are working out.
Inventories
-with a manufacturer or a retailer, an inventory buildup is usually a bad sign, when inventories grow faster than sales, it’s a red flag
-on the bright side, if a company has been depressed and the inventories are beginning to be depleted, it’s the first evidence that things have turned around
On profit margin
-the company with the highest profit margin is the lowest cost operator and the low cost operator has a better chance of survival if business conditions deteriorate.
When to sell
All the evidence tells you it’s going higher, and everything is working in your direction do not sell
Try to review the reason why you bought it in the first place
When to sell a stalwarts, the stock has a substantially higher pe, while similiar quality companies are much lower
When to sell a cyclical, is that inventories are building up and the company can’t get rid of them, which means lower prices and lower profits down the road.
Union contracts expiring and labour leaders are asking for restoration of wages
Best time to sell a turnaround is after it’s turned around. All the troubles are over and everybody knows it.
No comments:
Post a Comment