by | November 19, 2013 · 12:23 pm

Earnings per share (EPS) 2

EPS is considered to be the single most important variable in determining a companies share price.

Definition:

The portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability.

The most important thing in finance is “time”. When are the transactions going to be paid? That`s because the world it changing, so are the currency and the value of the money.

So, it is very important to compare apples to apples. Otherwise, it will be difficult to make an investment decision. It`s meaningless to compare the price of two different stocks.

It doesn`t make sense to compare the earnings of two different companies either. Why? Because, like I said in my article: “Earnings per share 1”, all the companies have different number of outstanding shares. This is important to know.

Let`s say Company Company A and B both earn $1000, but Company A have 10 shares outstanding and Company B have 100 shares outstanding. See? What company do you want own?

It`s better to compare two different companies by looking at the earnings per share (EPS). A simple tool to use. You calculate earnings per share by taking the net earnings and divide it by outstanding shares.

EPS = Net Earnings / Outstanding shares

In our example, Company A had earnings of $1000 and 10 shares outstanding. EPS for Company A is 100. (1000/10=100).

Company B also had earnings of $1000 but 100 shares outstanding. EPS for Company B is 10. (1000/100=10).

Wow! Buy shares in Company A you say. Maybe, but it is not enough to make that decision only on the basis of its EPS. It`s helpful to compare two companies, assuming they are in the same business, but it doesn`t tell you whether it`s a great stock or not. It doesn`t tell you what the market think of the stock either. We need to look at some ratios.

Keep in mind that there are three types of EPS:

Trailing EPS – last year’s numbers (the only actual EPS)

Current EPS – this year’s numbers (still projections)

Forward EPS – future numbers (obviously projections)

I have tried to make this as easy as possible, but if you want, we can make it more difficult. We need to remember diluted shares, dividende, warrants and so on. I am not gonna write about that today, so hang on, we will discuss that later. I just don`t want to complicate it now.

News today: FED Chairman Ben Bernanke speaks today at 7:00pm.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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by | November 18, 2013 · 2:02 pm

Streaming is the future!

 

Internet changed the world, but we have only seen the beginning. You all know what happend to the print media. Internet relegated the print media to insignificance! Not only have the subscriptions gone, but the ad revenue has dropped dramatically too.

We are now seeing the same with the television. More than 5 million have already “cut the cord”. People ditched ordinary television in favor of online content from the likes of Hulu, Aereo, Netflix, YouTube, Amazon Prime, iTunes video and Goolgle Play. This trend will continue and is accelerating too.

Netflix is growing month after month and the ordinary cable TV subscriptions declines every day. A dramatic change. For every one American who ditched cable TV, we saw two signed up for Netflix. Now, you know what to buy and what to short?

Some investors are talking about a bubble in the technology industry. Is that right? Well, Nasdaq is nearing 4.000, and that is a level we have not seen since September 2000. Just months after the tech market collapsed. All this only a few months after the U.S Government shut down for 16 days early in October this year. This bull market is very odd!

Investors are bearish on gold and this precious metal is now trading at $1284,00. Once again below the support level at $1300. It is heading for the first annual loss since 2000. People do not belive in it anymore.

Gold slumped 23% this year and this is the biggest annual loss since 1981. Gold drops because the inflation everyone is waiting for fails to accelerate and the S&P 500 reaches all-time highs. I think people are bearish before Yellen`statement. She is ready to back stimulus until she sees a great growth in the economy.

News today: TIC Long-Term Purchases at 9:00am, NAHB Housing Market Index at 10:00am (all times: eastern time). Fed chairman Ben Bernanke will speak tomorrow!

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

 

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by | November 15, 2013 · 1:14 pm

Earnings per share (EPS) 1

Don`t look at only the price of the stock. That is not enough. A stock that is priced at $30 can be cheaper than a stock priced at $10. Some people tend to think that a stock price reflects the value relative to other stocks, but that is terribly wrong!

The price of the shares is completely meaningless to investors that is doing fundamental analysis. The market cap is found by multiplying the per-share price times the total number of outstanding shares. This number gives you the total value of the company or stated another way, what it would cost to buy the whole company on the open market.

The per-share price is changing all the time, and that is why we aren`t so concerned about it. All the companies have a different number of outstanding shares, and that doesn`t tell us what the value of the company is. What we are looking for are the market capitalization (market cap).

You can find the market cap by multiplying the per-share price times the total number of outstanding shares which means what investors need to pay for the whole company on the open market.

Let`s say the stock price is $5. Outstanding shares: 10 million. The market cap is $5 x 10 000 000 = 50 000 000. But, what if Company B have a stock price of $2 and outstanding shares is 100 000 000? Market cap is $200 000 000. So, what company do you want`t own? Stock price $5 or $2?

Do not only look at the per-share prices because it doesn`t tell much. Look for a stock compared to another stock that is similar in the same business. Market cap gives you a better picture of the companys value, and the market put the stocks into three categories:

Small Cap under $1 billion

Mid Cap $1 – $10 billion

Large Cap $10 billion+

The most important thing is to understand the comparing companies of similar size in the same business when you are doing your evaluation. Market Cap is better than evaluating per-share price of a stock. How do you find earnings per-share? I will write more about that next week.

News today: Empire State Manufacturing Index & Import Prices at 8:30am, Capacity Utilization Rate & Industrial Production at 9:15am.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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by | November 14, 2013 · 1:57 pm

Price to earnings 2

Margin of safety is very important. It seems to be like that the human psychology is apt to go too far sometimes and it can all end up to throw rational valuation out of the window.

You know that price-to-earnings for Facebook is 12, and 13 for Twitter, and if you are paying more than 15 times the earnings for a company, you need to seriously examine the underlying assumptions you have for the companies profit in the future, and its intrinsic value.

I have seen many stocks trading with much more than 12 and 13x earnings, and if you have bought some of them at that price you would have crushed other investments because the underlying prifits did live up to Wall Streets expectations.

But who is investing in a risky business if they don`t know the business they are in? Do you feel confortable if you have all your money in a risky stock like that if you don`t know the demand, competitors, future drivers and the commodity nature of their product? The company can be wiped out, so does your money, but probably not.

The ideal situation is when you get a great business out of your investments and generates huge amount of money with little capital investments. Sometimes you get a huge profit at a steep discount to intrinsic value. How about Wells Fargo, trading at 5x earnings during the real estate crash 23 year ago?

You have to predict the future and try to imagine how the future will be for the company. How is it today, tomorrow, next year and how does it look in 10 years? Is this business going to grow? Will it be a huge demand for their products? Are they competetive? What about their earnings and profit in the future? Is there any threats?

I know a great company. They are selling cd`s and vinyl records. Everybody knows about the company and the price is low. Are you willing to buy shares in this company? Of course not. Selling vinyl and cd`s is not the future and you know that. The future is streaming and broadband. That is where you are going to spend your money.

It is wise to require a much larger margin of safety before you buy some shares in enterprises. The right definition of ‘Price-Earnings Ratio – P/E Ratio is; A valuation ratio of a company’s current share price compared to its per-share earnings. It is calculated like this:

Let`s say company A is currently trading at $50 a share and earnings (EPS) over the last 12 months were $1,95 per share. Then the P/E ratio for the stock should be 25,6. ($50/$1,95). That`s it. Remember that the average market P/E ratio is 20 – 25 times earnings.

EPS (earnings per share) is taken from the last four quarters (trailing P/E). Sometimes the numbers is taken from the estimates for the next four quarters (projected or forward P/E). Other use the last two actual quarters and the estimates of the next two quarters. Often known as “price multiple” or “earnings multiple”.

It will be wrong to compare price-to-earnings in a technology company (high P/E) to a utility company (usually low P/E) as they have a different growth prospects. P/E tells us how much investors are willing to pay per dollar of earnings. P/E for Facebook is 12, which means that the investors is willing to pay $12 for $1 of current earnings.

Avoid basing a decision on this measure alone, because this numbers is usually not enough. the earnings is based on an accounting measure of earnings that is susceptible to forms of manipulation. It makes the quality of the P/E only as good as the quality of the underlying earnings number. Keep in mind that companies that are losing money do not have a P/E ratio.

News today: Trade Balance & Unemployment Claims at 8:30am, Fed Chairperson Yellen Testifies at 10:00am, 30 Year Auction at 1:01pm.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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by | November 13, 2013 · 1:53 pm

Price to earnings 1

I always look for values, and I tend to be an value investor. That`s why I have been written about Twitter and their IPO share price lately. That doesn`t mean I always look for a low price-to-earnings ratio stocks. I think that is a mistake many investors do when they are investing.

This approach has generated above the average returns over a long periode of time, but it is not the ideal solution to find the right stock. Twitter was trading down -2,33% yesterday, closing at a share price of 41,9. Value investors are selling at the moment. What is the value?

I look for the intrinsic value of all the assets in a company. The important thing is the cash flows that will be generated by that asset discounted back to the present moment at a rate that factors in opportunity cost and infation. You can measure the opportunity cost against the risk-free U.S Treasury.

Different companies deserve different valuations. That is how you understand the intrinsic value. It is difficult to try to figure out how to use this for individual stocks. It depends on the economics, the nature and what business the company are operating in.

You have many different businesses out there. You only need a computer to start a new web building company. Starting a new steel mill requires tens of thousands of dollars in startup capital. What a difference?

The web builder deserve a higher price to earnings multiple because the shareholders doesnt need to spend more money to maintain the property and other equipments. This is why intelligent investors distinguish between the net income figure and true and “economic” profit (Warren Buffet call it: “owner” earnings).

This represent the amount of cash they can spend on other investments by reinvesting it.

Reported net income is not the most important thing, but how many computers the owner can buy relative to his investment is more interesting.

The investors net worth is limited to the return on aquity generated by the underlying company. On the other side; you can hope for another “fool” to buy your share for a higher price or a great bull market, but that is very speculative and seems to be very risky.

As you can see, two different businesses might have identical earnings of $10 million, but Company A may gererate about $5 million and company B, $20 million in “owner earnings”, which means company B can have a price-to-earnings ratio that is four times higher than company A yet still be trading at the same value.

News today: FED chairman Ben Bernanke speaks at 7pm.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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