dallas better investing 2013_final_v2
TRANSCRIPT
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BEFORE THE BREAK: Mindset
The Elevator of Value, Growth and
Momentum BetterInvesting
FLAG Ratings
AFTER BREAK: Value Value with Catalysts
AGENDA
(and boy do I have one!)
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Mental traps
Anchoring, Recency, Confirmation Biases
Memory (short)
Until 2000, 1973-74 was last collapse (not 87)
NO ONE TODAY HAS INVESTED IN A DEPRESSION
FUTURE IS INHERENTLY UNKNOWABLE
Prepare for it
MIND
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CURRENT SECULAR BEAR
MARKET: Overdue for bear
cycle
56 month bull
39 usual duration
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THE CAPITALISM
DISTRIBUTION
Blackstar Funds pathbreaking study
Individual Stock Returns 1983-2007
Longest bull market
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Russell 3000 Up 900% 1983-2007, YET:
39% unprofitable
64% underperformedthe index19% declined by 75% or more
75% added little to no return
MOST STOCKS UNDERPERFORM
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25% accounted for
100% of the gains
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odds stronglyagainst
you
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SO?
Show mewhere Im going to die,
so I dont go there!
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THE ELEVATOR OF
VALUE, GROWTH, andMOMENTUM
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THE DILEMMA
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DOWN IS BORING
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So its an easy choice
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Where are all these fun people going?
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To profits, skittles and beer!
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Whoopsies! Went a littletoo far
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HOW DOES BORING LOOK NOW?
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POSITIVE
5 YEAR OUTLOOK
CONSISTENT PROCESS
REPEATABLE PROCESS
SMALL AND MID CAPS MAY OFFER GREATER
POTENTIAL FOR APPRECIATION (small investor
advantage)
BetterInvesting
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PROJECTED GROWTH RATE FOR
EARNINGS PER SHARE
EPS is the result of an accountants rendering
for taxes
Same as sales, reversion to the mean
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P = price or market capitalization
Shares * price = market capitalization
It is NOT what the business is worth
Ignores debt and cash
PROJECTED HIGH and LOW P/E
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What will a buyeryou, another company, or
a private equity firmactually BUY?
EV = market cap + debtcash
Two identical businesses, two identical market
caps
One has $1B in debt, $1M in cash
Other has $1B in cash, no debt
ENTERPRISE VALUE isthe value of the
ENTERPRISE!
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Again, accountants rendering for taxes
Free cash flow (market cap/free cash flow)
EBITDA (EV/EBITDA) BOTH ON YAHOO FINANCE! (will have to
calculate market cap/FCF)
E of P/E FLAWED
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PROJECTED LOW PRICE
If all the inputs are suspect, this is too
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PROBLEM WITH ANALYST ESTIMATES
Most sell-side analysts dont read SEC filings,
base their models on what management
spoon feeds them
Spend their time looking to do deals
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In Action: COACH (NYSE: COH)
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COACH (14 YRS):
GROWTH, THEN MOMENTUM
COACH ( Y S) O U S
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COACH (5 YRS): MOMENTUM ENDS;
MEAN REVERSION
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COACH: TWO YEARS
Growth Investors Leaving
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COACH: ONE YEAR
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Buyers bought for growth
Buyers bought for stock momentum
Momentum buyers sold
Growth slowing, growth investors selling
WHO WANTS THE STOCK? LOOK OUT BELOW!
At some point, a value
Where is Coach on the elevator?
OO ?
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Sept issue (8 wks ending July 1)
30 (buy)-21(sell) (8th most active)
Oct issue (ending Aug 1)
21 (buy)-8(sell) (15th most active)
Nov issue (Sept 1)
not listed in 40 most active stocks
WANT PROOF?
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FORENSIC ACCOUNTING ETF
(ticker: FLAG)
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PRINCIPLES
Revenue
Cash Flow
Earnings Quality Expectations
Valuation
Shareholder Yield
4 TOP PREDICTORS OF
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1. Aggressive REVENUE
Recognition
2. Aggressive INVENTORYMgmt.
3. CASH FLOW Warnings
4. Serial ACQUISITIONS
4 TOP PREDICTORS OFTROUBLE AHEAD
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WANTS TO KEEP
POWER
STOCK OPTIONS WORTH $$$$
STOCK PRICE UP
JOB
WHY MGMT. DO THIS?
:
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REVENUES
EPS (earnings per share)
. :WALL STREET WANTS
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Management will do everything it can do
manipulate revenues and EPS
Beat by a penny is a giveaway
Miss by a penny is a bigger giveaway
Relying on sales and EPS is fraught with
danger
Therefore
REVENUES:
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What is it?
Borrows from future Works, until it doesnt
REVENUES:STUFFING THE CHANNEL
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Longer to get paid
Poor customer credit Extended payment terms
Ex.: Deckers
DAYS SALES OUTSTANDING
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45FreeStockCharts.com reprinted by permission
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LOOKS LIKE CASH, BUT CANT LAST
accounts receivable
inventory
accounts payable
lots of stock-based compensation
CASH FLOW WARNINGS
FLAG ANALYSIS:
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Low Scoring, #1,000 of #1,000 as of Sept. 3
Fourth highest on BI website of buy to sell
FLAG ANALYSIS:3D Systems (NYSE: DDD)
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Q&A
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WHAT TO BUY?
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1. Share price < asset value/share
2. Low EV/EBITDA, market cap/FCF (TB uses P/E)
3. Insider purchases4. Significant stock price drop
5. Small market cap
TWEEDY BROWNE
(mean reversion works FOR you here)
*(c) 1992, revised 2009
INDICATORS
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5151 November 2, 2013
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5252 November 2, 2013
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If you buy the same securities as other people, you
will have the same results as other people. It is
impossible to produce a superior performanceunless you do something different from the
majority. To buy when others are despondently
selling and to sell when others are greedily buying
requires the greatest fortitude and pays the
greatest reward. - Sir John Templeton
CONTRARIAN
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P S
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Transocean (RIG) appears on
website as new study stock,
undervalued
Just wrote on the subject
Google Jacobs Fool Rig Operators
P.S.
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And then
SPECIAL SITUATIONS:
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value with catalyst
(Mostly) not screenable
NOTE: Book forthcoming in 6-12 months: sign up
at deljacobs.com.
SPECIAL SITUATIONS:
CORPORATE ACTIONS
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Spinoffs
Buybacks/Leveraged Recaps
Debt paydown virtuous cycle
Out of Bankruptcy
Turnarounds
EXAMPLES
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Spinoff
Debt paydown virtuouscycle
Turnaround
CINCINNATI BELL (NYSE: CBB)
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LONG:FORENSIC ACCOUNTING ETF
(TICKER: FLAG)
SHORT:RANGER ACTIVE BEAR ETF
(TICKER: HDGE) Choose 0%-10% depending on market risk Market Risk? Shiller CAPE
BOOK=WHAT, THIS=HOW
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Go from
this
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To This!
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HI MOM!Sunset and LaBrea,
Los Angeles, CA
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Mental traps: Kahneman, Thinking Fast and
Slow
Special Situations: Greenblatt, You Can Be a
Stock Market Genius
Forthcoming edition and commentary on 1966 SS
path breaker
Value:Tweedy Brown Study John Hussmansweekly column
More Resources
http://www.deljacobs.com/ -
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Facebook/whatsbehindthenumbers?
Twitter: @DELJACOBSCOM
@TOMJACOBSINVEST
Visit www.DELJACOBS.com
mailto:[email protected]:[email protected]://www.deljacobs.com/http://www.deljacobs.com/mailto:[email protected]:[email protected]