[Webinar] - Fundamental Analysis Indicators for Successful Investing

Introduction

The host introduces the webinar and explains that they will be focusing on fundamental analysis indicators, specifically cash flow and income statements.

Fundamental Analysis Indicator

• The webinar focuses on using line items from cash flow and income statements to enhance investment performance.

• The dividend discount model is introduced as a way to price stocks based on future dividends.

• Companies that do not pay dividends are classified as pastures or cash cows.

Dividend Discount Model

This section discusses the dividend discount model in more detail.

Understanding the Dividend Discount Model

• The current stock price should be the sum of all future discounted dividends.

• The discounting factor depends on market risk and number of expected dividends.

• Share buybacks were not included in the original model but have become popular since the 1980s due to favorable tax regulations for companies.

Cash Cows

This section explains what cash cows are and how they relate to investing.

Definition of Cash Cows

• Cash cows are companies that do not pay any dividends or reinvest earnings back into their business.

• They are easy to understand and can help classify different stocks and companies.

Apple Stock Example

This section uses Apple stock as an example to illustrate concepts discussed earlier in the webinar.

Analyzing Apple Stock

• Apple's forward dividend yield is low at 1% for the next 12 months.

• However, when factoring in share buybacks, the total shareholder yield is much higher at 7%.

• It's important to determine if this yield is sustainable by analyzing financial statements such as cash flow statements.

Financial Statements Analysis

This section discusses how to analyze financial statements to determine if a company's yield is sustainable.

Analyzing Cash Flow Statements

• Cash flow statements are important because buybacks and dividends are paid in cash.

• Free cash flow can be calculated by subtracting capital spending from cash from operations.

• Apple's free cash flow of 67 doesn't cover its dividend payments, which raises questions about the sustainability of its yield.

Dividend and Buyback Policy

This section discusses the dividend and buyback policy of Apple, which may not last long due to the company selling a lot of investments. The relationship between valuations and growth is also explored.

Shareholder Yield

• Shareholder yield is calculated by adding dividends and buybacks.

• Valuation ratios reflect how much earnings are going to shareholders.

• Fundamental charts are used to explore the relationship between valuations and growth.

Valuation for Companies without Earnings

• Square, an IT services company that provides payment solutions for businesses, has high valuations relative to other companies like Accenture.

• Management is investing directly into the growth of the company instead of looking at earnings.

Sales Expectations and Profitability Factor

This section explores sales expectations and profitability factor using fundamental charts.

Axel or Big Oil Company

• Price-to-sales ratio reflects what the market expects sales to be in the near future.

• There is a strong relation between sales expectations and valuation.

• Profitability factor is going down.

Square

• Valuation reflects expected cash flow going into shareholder hands in the future.

• Price-to-sales ratio reflects different growth rates.

Introduction

The speaker introduces the topic of analyzing different companies and their valuations.

Key Points

• The speaker starts by saying "you".

• The speaker mentions Shopify, an IT company specialized in payments, and notes that its price to sales ratio is high.

• The speaker says that the growth and profitability measures for Shopify haven't changed much.

• The speaker compares Shopify to Square, noting that they have a slightly different approach.

• The speaker suggests that Shopify's valuation could be a bubble.

Financial Structure of Companies

The speaker discusses how to analyze the financial structure of companies.

Key Points

• The speaker addresses someone and points out that price to sales doesn't take into account the financial structure of a company.

• The speaker suggests using a slightly different factor than price to sales, such as enterprise value taking into account debt load and cash equivalents.

• The speaker notes that Exim has a higher debt load compared to assets but also has more cash equivalents, which is handy for the business.

• Having cash on hand shouldn't impact valuation because it's there in case of unexpected events like a shop closing down or finance operations without having to ask for loans or issue bonds.

Comparing Valuation Metrics

The speaker compares different valuation metrics between Amazon ten years ago and Shopify now.

Key Points

• Ten years ago, Amazon had similar sales growth rate as Shopify but half the gross margin.

• Shopify's price to sales ratio is much higher than Amazon's was ten years ago, indicating high expectations for Shopify's future growth.

• The speaker notes that Microsoft's total debt to equity ratio may not be a good indicator of financial strength and suggests looking at net debt ratio instead.

Dividend and Financial Ratios

In this section, the speaker discusses dividends and financial ratios.

Dividend Potential in Microsoft

• The speaker suggests that there is potential for unlocking dividends in Microsoft by changing the financial structure of the firm without taking too much risk.

• The speaker recommends taking off cash when calculating financial ratios such as P/E to get a better valuation of the company.

Profitability Ratios

• The speaker advises not to rely solely on return on equity as a profitability ratio since it can be distorted for some companies.

• Instead, the speaker suggests using return on assets but stripping off cash and equivalents from assets to get a better version of profitability.

Investment Strategy

In this section, the speaker talks about how to put all the discussed concepts into an actual investment strategy.

Ranking System

• The speaker introduces a long ruler ranking system that looks at expected sales growth rate combined with return on asset metric enhanced by subtracting cash equivalent.

• A quick rank is added which is free cash flow divided by enterprise value.

Top 20 Stocks

• The top 20 stocks are selected based on good valuation ratios, expectations for sales growth, and high profitability.

• MasterCard is highlighted as a company with high growth and profitability.

Companies with Favorable Valuation Ratios

In this section, the speaker discusses companies that have favorable valuation ratios and are likely to be around for the next five or ten years. These companies may not have good sales but they distribute a lot of loose cash flows or use it inside the company to generate more earnings.

Characteristics of Companies with Favorable Valuation Ratios

• Companies with favorable valuation ratios are those that have a positive outlook in their respective industries.

• These companies may not have good sales but they distribute a lot of loose cash flows or use it inside the company to generate more earnings.

Limitations of Current Asset Information

In this section, the speaker talks about limitations in current asset information and how some companies do not offer line items for non-current assets.

Non-Current Assets as Securities

• Some companies do not offer line items for non-current assets.

• Switching to Fact Set could provide more line items for better analysis.

• The speaker cites Apple's annual report as an example where most core non-current assets were securities.

Screening Criteria for Companies

In this section, the speaker explains screening criteria used to identify high-performing companies.

Sales Expectation and Profitability Ratio

• High sales expectation is one criterion used to screen for high-performing companies.

• Another criterion is profitability ratio, specifically customer cheese return on assets (ROA).

Free Cash Flow and Enterprise Value

• Free cash flow divided by enterprise value is a standard valuation metric used to screen for high-performing companies.

Debt Analysis

In this section, the speaker discusses debt analysis and how it can be used to assess investor confidence in a company.

Long-Term and Short-Term Debt

• The speaker cites Apple's long-term debt at 91 billion and short-term debt at 16 billion.

• Non-current assets as securities provide leeway for the company to invest more or pay more to shareholders.

Debt-to-Cash Ratio

• The debt-to-cash ratio measures how many years it takes for a company to earn enough to pay off its investors using all available cash.

Introduction

The speaker introduces the topic of analyzing Apple's financial indicators and mentions that investors get weary when the debt-to-equity ratio is high.

Analyzing Financial Indicators

• The speaker agrees with a comment made by someone in the chat.

• The speaker talks about taking a different approach to analyzing Apple's financial indicators.

• The speaker mentions that investors get weary when the debt-to-equity ratio is high, especially for public companies. Private companies can handle higher ratios.

• To do a more in-depth analysis, one should look at net depth position and compare it with margins like gross margin or even better, EBIT margin.

• It's better if a company can pay off its debt in not many years. Net income or EBIT can be used to determine this.

• It's possible to simulate 20 years of data with a special subscription.

Shift in Indicators

The speaker discusses how profitability as a factor didn't work well between 1999 and 2007 but has shifted recently.

Recent Shift in Indicators

• Profitability as a factor didn't work well between 1999 and 2007.

• Valuation and just looking at graphs worked better during that time period.

• There has been a shift in recent years where valuation and just looking at graphs are not working anymore.

Q&A Session

The speaker answers questions from the audience.

Answering Questions

• The speaker apologizes for something.

• In order to see how many trades were winning compared to how many were losing, one has to go to the strategy section.

Conclusion

The speaker concludes the session and provides information on how to contact him.

Wrapping Up

• The speaker shares his contact information and invites people to try a free trial if they don't have a membership.

• He also suggests attending a ranking system tutorial by Paul DiMartino.