jeff bishop 10 portfolio blueprint - ragingbull.com · 2020-04-16 · jeff bishop | 10 portfolio...

1Jeff Bishop | 10X Portfolio Blueprint


Disclaimer

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IntroductionIf you want to secure your family’s wealth and leave something for the next generation then you must put matters into your own hands.

Putting your money in the bank and saving won’t work.

Low-interest rates and inflation have killed that opportunity for you.

And with the Federal Reserve Bank injecting trillions of dollars in the market in March and April of 2020 to combat the COVID-19 pandemic—it’s a trend which I don’t see changing anytime soon.

In fact, when you look at the numbers it’s scary to be a saver.

Source: https://www.usinflationcalculator.com/

According to the stats, what we used to spend $1 on 20 years ago now costs us $1.50.

Now imagine if you bought shares of Apple in April of 2000 and held it for 20 years. A $10,000 in-vestment would now be worth $746,945.

During that same time period a $10,000 investment would have turned into:

• Exxon Mobil $19,028

• Coca-Cola $35,553

• Johnson & Johnson $59,068

• McDonald’s $81,410

https://www.usinflationcalculator.com/


That’s the power of buy-and-hold investing.

And in this eBook, you’ll learn the strategies you need to find the best set-it-and-forget-it stocks.

I’m going to tell you right now, we have a tremendous advantage over Wall Street.

And I’m going to teach you how to beat them at their own game.

Why am I so confident?

Because we don’t have restrictions on what we can and can’t do.

For example, the typical fund has rules on the type of stocks they can invest, the percentage stake they can take relative to their portfolio, market cap restrictions and so many other factors that make them fat and slow.

We can look at the investment landscape without bias.

Think about it, Wall Street analysts are pressured to sound the same, and to be overly positive because they want the companies they cover to work with the bank.

No wonder most mutual funds can’t beat the benchmark S&P 500.

To beat the market consistently you must be willing to do what others are scared to do.

Which you’ll learn about in detail here.

I’m excited to share my process and give you the tools you’ll need to succeed.

So let’s get started!

You’ll also learn:

• How to build a portfolio from scratch

• How to protect that portfolio against volatility and risk

• How to do your own homework

• How to think like a contrarian

• How to discover value where others don’t see it

• How to make adjustments during the business cycle

• How the market cycle works

• And so much more…


My Take On InvestingFor some reason, when it comes to the markets — many associate investing and trading as a form of glorified gambling. However, to me, investing is completely different from gambling. You see, with investing, I’m able to:

• Control my risk. I choose how much I’m willing to invest on a specific stock based on my goals and outlook. Additionally, I can pick whether I want to be aggressive or conservative on an investment.

• Actually own a piece of the company when I invest. I can also generate passive income (if a company is profitable and rewards shareholders with dividends — more on that later).

○ That means if I’m invested in a company and the stock price goes up, I have unrealized profits.

• Use different techniques to uncover undervalued investment opportunities.

To Me, Investing Is Not GamblingTo me, investing is not just about putting my money into a stock like it’s a game of roulette and mag-ically makes money down the road. It’s about putting myself in a position and uncovering potential investments that will allow me to build generational wealth for my family.

Investing takes skill, the ability to conduct due diligence and manage risk properly.

With that being said, I don’t treat investing as a form of gambling — and I don’t believe those who want to make it as a “stock picker” should treat it that way. Throughout this book, I will reveal the techniques I use to find what I believe are the best investment opportunities to build a potentially time-tested portfolio.

Now, that you understand investing in stocks — to me — is not a form of glorified gambling. I also don’t believe it’s in anyway similar to speculation or trading (even though there are speculative in-vestments out there).

The Difference Between Investing And Speculation (Trading)If you look at the media, sometimes they use the term “investors” to refer to all market participants. However, investing is not the same as trading or speculation, to me. You see, when I invest in a com-pany, I typically don’t care about the short-term price action.

I care more about how the company is growing, whether it’s filling unmet needs, and the viability of its business for decades to come.


With investing, I analyze the company itself to determine whether I want to lay out some money now, to potentially generate a handsome return in the future.

You see, as an investor, I have to think of my portfolio over the long run… and focusing on the daily price action would just drive me crazy. I want to be able to find the next Apple, Microsoft, Amazon, or Facebook.

When I buy a stock for my long-term portfolio, I don’t really care if the stock finishes lower by 5% in a week because I’m looking at the business model, which can produce hefty returns for me in the future.

I know, I know… things get a little muddy when we talk about investing and speculating. However, I think showing you a long-term chart and a chart I would look at if I were to trade a stock to give you a good idea of the true difference between the two.

Here’s a look at a long-term chart of the SPDR S&P 500 ETF (SPY):

Chart Courtesy of StockCharts.com

A typical long-term investor might look at how much value the S&P 500 could contribute over the next decade (or longer). The chart above is the monthly chart between April 1, 2009 and April 1, 2020. As you can see, there are different movements along the way, but the overall trend is up.

On the other hand, a speculator may look at the shorter-term trend to identify potential shifts and profit off them. For example, if I’m looking to trade a stock, I would look at moving averages to see

https://stockcharts.com/


Chart Courtesy of StockCharts.com

Typically, speculators might not care about what the company does… they may just look to a specific indicator.

I like to think of investing as potentially building wealth gradually over time, whereas speculating (trading) involves frequent buying and selling of stocks or options to potentially generate returns over the short-term.

In general, investors can be split up into three different types:

• Long-Term. This type of investor looks to hold onto an investment for at least 10 years.

• Medium-Term. This group of investors looks to hold a stock for anywhere between 3 to 10 years.

• Short-Term. The short-term investor typically does not want to hold onto a stock for more than 3 years.

Now that I’ve got that out of the way, I want to show you why I believe long-term investing can be more advantageous than speculation (trading).

whether a stock could run higher or lower, over the short term.

So the way I see it is speculation is more focused on the price action of the stock, not the company itself. A speculator may place a trade to express their opinion on whether a stock will run higher after a quarterly earnings release, a news event, or a technical pattern.



Why I Believe Long-Term Investing Can Be A Highly Profitable EndeavorI think Albert Einstein said it best when he referred to compound interest as the 8th wonder of the world. So when it comes to investing in stocks, many refer to compound interest as compound returns.

I know what you’re probably wondering, “What the heck are compound returns?”

Basically, you generate compound returns when your investment grows in addition to the original investment amount. For speculators, this typically doesn’t occur over the long-term because they are typically not in a stock long enough to reap the rewards of compound returns.

Let me show you how it works. I love to use blue chip companies as examples, so let’s take a look at Apple Inc. (AAPL).

It might not seem like a whole lot to you at first glance, but let me show you how it works. Keep in mind that, for simplicity, I’ll be using the dollar amount invested and taking into account stock splits over this period.

Let’s say an investor was able to buy $2,500 worth of AAPL in the beginning of 2009. Well, at the end of 2018 (heading into 2019)... that investment would’ve been worth more than $32K!

Data Provided By Yahoo Finance


I don’t think one example does compound interest justice, so let’s take a look at another example.

Let’s assume an investor noticed the potential in Amazon.com (AMZN) at the start of 2010, and was able to purchase $2,500 worth of the stock.

Data Provided By Yahoo Finance

Assuming the investor held for this entire period (between the start of 2010 and then end of 2019), that $2,500 would’ve been worth more than $34K.

Keep in mind, this is just a small sample size, and finding the next AAPL and AMZN does take a bit of skill and experience. However, I believe these examples show the true power of compound returns.

Basically, if I can pick a financially sound company that continues to grow over time, an investment could be worth much more than I would expect over the long haul.

That’s not the only benefit I believe investing in stocks has to offer. There’s also something known as dividends — a payment that well-established companies may offer to its shareholders.

Dividend Reinvestment Can Boost ReturnsThere are companies out there that actually reward investors on top of the returns on the stock price. Now, in a later section I’ll go into the details of dividends and dividend reinvest plans (DRIPs) — I just want to give you a taste of how specific investments can boost returns.


A dividend is a portion of a company’s earnings that the board decides to pay out to a class of its stockholders. There are a plethora of companies that pay out dividends, but for simplicity, I want to show you how it works with the S&P 500.

Investors have the option to collect the cash after every dividend payout or put it back into the compa-ny or exchange-traded fund (ETF).

Instead of collecting the cash after every payout, I believe it can be beneficial to put it back to work by reinvesting that money into the stock once a quarter.

This strategy can not only increase the number of shares owned over time, but it can generate more income, boost your returns, and accelerate wealth growth.

The difference between reinvesting your dividends and simply keeping them is quite incredible. Take a look at this chart in the S&P 500 over the last decade.

S&P 500 TOTAL RETURN VERSUS S&P 500 % PRICE CHANGE (NO DIVIDENDS)

Source: YCharts

https://ycharts.com/companies/SPY/chart/#/?securities=id:%5ESPX,include:true,,id:%5ESPXTR,include:true&calcs=id:level,include:true,,&correlations=&zoom=custom&startDate=01%2F01%2F1990&endDate=04%2F07%2F2020&format=indexed&recessions=false&chartView=&chartType=interactive&splitType=single&scaleType=linear&securitylistName=&securitylistSecurityId=&securityGroup=&displayTicker=false&title=&note=&units=false&source=false&liveData=false&quoteLegend=true&legendOnChart=true&partner=basic_850&useEstimates=false


Source: DQYDJ S&P 500 Return Calculator

As shown above, investors who reinvest their dividends can earn a massive boost to their overall wealth.

The thing is, I don’t just look for investments that offer dividends (and you’ll see why in a later sec-tion — Don’t Fall In Love With Dividend or Growth Stocks).

Now, that I’ve gone over some of the basics of investing, I want to walk you through some of the attributes I believe an investor should have.

The Attributes & Characteristics Of Successful InvestorsWhen it comes to some of the most successful investors in the financial world, I see some common traits amongst some of the titans. Of course, there are different factors that can contribute to an inves-tor’s success, but ones that I deem to be important include:

• A contrarian view.

• The ability to remain realistic.

• Patience.

• The ability to remove emotions from investing.

• A passionate interest in investing and desire to educate themselves.

The thing is, I don’t believe in the school of thought that someone is born with the ability to pick stocks. I believe that you can learn these attributes over time and put yourself in a position to poten-tially become a successful investor over the long run.

https://dqydj.com/sp-500-return-calculator/


Why I Like To Take The Contrarian ApproachAs the Oracle of Omaha once said, “I don’t know to what extent an ability to detach yourself from the crowd is innate or learned, but that’s a quality you need.”

I believe the same thing when it comes to investing. In other words, I love to go against the herd. If you look at the build up into each financial crisis, I think the unwisdom of crowds took over. Just take a look at the months leading up to the global financial crisis between 2007 to 2008.

It was pure euphoria. The market was running higher and the housing market was booming. Everything looked great in the market… until the bubble popped, and fear ensued the heard — leading to panic selling.

Take a look at the weekly chart of the SPDR S&P 500 ETF (SPY) between January 2006 and Decem-ber 2008.

Chart Courtesy of StockChart.com



If you look at the chart above, I believe it depicts why I don’t follow the herd when it comes to investing.

Why?

Well, one of the main reasons that crowd mentality takes over is to put to bed fears, in my opinion. If everyone else is buying stocks, beginning investors tend to follow suit because they feel safe and think they can’t be wrong because so many other investors are in. That’s what I believe typically fuels bubbles, as well as the fear of missing out.

Sure, this strategy may work sometimes — following the herd — but in the long run, I don’t think the strategy is viable.

Think about it like this, imagine you bought shares of stocks when the market was at its peak… then all of a sudden, all your positions take a dive and you exit at the bottom. That’s what I believe crowd mentality can do to an investor.

To me, the herd mentality takes “buy low, sell high” and flips it to “buy high, sell low”.

If you look at some of the investing titans of our time, they tend to follow a contrarian approach and go against the herd mentality.

Basically, when others are selling and panicking, I see potential opportunities and may look to buy stocks if my analysis checks out.

That’s just one quality I think successful investors have. The next is being realistic.

The Ability to Be Realistic When It Comes To InvestingFor some reason, many beginner investors tend to believe they’ll just invest in a few “cheap” stocks and magically make money. In other words, they look to small-cap and micro-cap companies without well-established businesses, thinking they’ll buy shares and the stock will magically shoot up. Sure, that might happen sometimes, but I don’t believe it’s realistic thinking.

It’s rare to buy a portfolio of stocks and all the stocks skyrocket. Investing is a heck of a lot different to me, and I find it’s helpful to have realistic goals and expectations.

For me personally, I know I’m going to invest in a financially sound and stable company that has the ability to expand operations. However, I don’t kid myself and think the market value of the stock will magically increase in a matter of months. I understand it may take years or even a decade to reap the potential reward.


Why Patience Is Key When It Comes To InvestingAs a long-term investor, my time horizon isn’t tomorrow, next week, next quarter, or even next year. My goal is to potentially reap long-term positive returns. Of course, like always in the markets, with-out risk, there’s no reward.

In other words, I’m firmly believe that the market “pays” investors to take risk. If I wanted zero stress, I would just put my would-be investment capital into the bank or Treasury bonds. Of course, to me, those would be least “stressful” ways to generate returns. However, down the road, those returns pale in comparison to what the stock market offers.

When I’m invested in a stock over the long-term, I don’t panic when there are short-term market events that cause shockwaves. For the most part, I try to find companies that will be around for years to come, so I don’t find it advantageous to just head for the doors once there’s a headline that hits the market.

Of course, if I’m invested in a company, I conduct my due diligence and adapt whenever there’s new information. However, I don’t necessarily have to listen to the talking heads on the T.V. harp about the market.

If you just look at times where there were signs of trouble in the market, many who dumped shares of well-established companies and didn’t buy back, missed out on upside potential.

Investors Don’t Get EmotionalWhen it comes to the markets, it’s very easy to get caught up in the emotions, namely fear and euphoria. I believe it’s essential for investors to try to remove emotions as much as possible in order to succeed.

What I mean by this is that the successful investors don’t let emotions overpower their minds. Those who don’t have a good control of their emotions tend to forgo rational thinking and either panic sell at the bottom or buy at the top.

Some investors find it helpful to take a step back to collect their thoughts and revisit the potential investment opportunity before making a decision.

A Passionate Interest In Investing And The Desire To Educate Themselves

When I look at all the great investors, they all seem to be passionate about investing. Not only that, but they have a thirst for knowledge and generally have questions about all investment opportunities.

I believe it’s imperative that investors seek to educate themselves on different types of investment strategies, how sectors operate, and the inner workings of specific companies.


Again, this is just the tip of the iceberg if you really want to become a successful investor. It’s not enough to just have these qualities and attributes, I think it’s important for one to have an investment approach and understand how to analyze companies.

Before I show you some of the techniques I use to find potential stocks to invest in, there’s one factor I need to mention: age.

Why Age MattersI’m not a financial advisor so please don’t take this as advice. But in general, the younger you are, the more aggressive you can be with your portfolio. Now when I say aggressive, I’m referring to owning speculative growth stocks.

For example, you probably don’t want to own a basket of stocks that have the potential to decline 50% or more, if you’re approaching retirement and planning on living off your investments.

However, if you’re young, it makes sense to take a few shots. If it doesn’t work out, who cares, you’ll have plenty of time to bounce back from a loss.

An old rule of thumb has always been to subtract your age by 100 and that will tell you how much of your portfolio should be in stocks.

For example, if you are 40 then you should have 60% in stocks and the rest in other assets like real estate and bonds.

However, I don’t believe bonds really have a place anymore in an investment portfolio given how low yields are. But that’s a discussion you should consider having with your broker or investment advisor.

Now that that’s out of the way, I believe it’s important for potential investors to understand the busi-ness cycle, and it’ll become clear why I need to cover this “boring” section when I show you one type of investment approach.

The Business CycleEconomists use the term business cycle to describe the fluctuations in the economy over time. The economy goes through periods of boom and bust, and during those stages, economists have identified four key patterns.


There are four stages that you should be familiar with. Don’t worry, there is no quiz at the end. But it does help to keep information like this in the back of your mind when you’re making investment decisions.

1. Expansion: Real GDP increases and the job market experiences a low unemployment rate.

During this cycle, an investor can get aggressive and look for more speculative growth stocks to add to their portfolio. When the economy starts to take off you want to be along for the ride.

2. Peak: When output stops increasing and starts to show signs of a decline.

As an investor, it’s important to pay attention to how the market is reacting to the economic envi-ronment because there will be periods of dislocation. For example, bad economic headlines can be swept under the rug while the market continues to soar (and vice versa).

3. Recession: Output is now clearly decreasing and the job market has become unstable with unem-ployment rates rising.

As an investor, this will be some of your best chances to scoop up good quality companies for pen-nies on the dollar. Recessions in the U.S. don’t last long historically and generally offer great buy the dip opportunities.

4. Trough: This is when stocks bottom out and the economy struggles. Months later, buyers finally come in and the economy starts to rebound.

While no one can ever predict when an economy will hit the bottom. Buying stocks during the first stages of recovery is advantageous as you’ll learn when I cover the market cycle.


The Market Cycle As I mentioned earlier, the economy and the market don’t always move together. To make things even more confusing. We sometimes enter a stage where bad economic news becomes good for the stock market.

Why?

Because Wall Street believes the Federal Reserve Bank will step in to support the markets. Which it has done ever since the financial crisis of 2009, and is doing again in 2020, during the COVID-19 pandemic.

That said, the market cycle is all about psychology.

And it’s run by fear and greed.

The Stages Of A Bull Market1. The market has gotten beaten up and became extremely oversold. While there is blood in the street,

only a few savvy investors are willing to step in. The rest are waiting for signs of a recovery, or are too scared to jump in, because they believe it could get worse.

2. The market starts to rally and investors become confident that the bottom is in. Then as the econo-my gets stronger, more and more believers start to pop up.

3. This is pure euphoria. Volatility in the market starts to decline and stocks just keep going higher, regardless of whether the economic headlines are bad or not. People start to believe the market will never go down again.

The Stages of A Bear Market1. When the world’s top investment minds start to speak up and start warning the public that markets

are running hot, and there are some headwinds on the way. It might be something they see in the debt market, oversees, or some other underlying problem which can bring the market down.

2. As more and more people are recognize that the economy is declining and corporations are low-ering their earnings guidance, people start to believe that the market may in fact be ready to go lower.

3. When the bad news has hit everyone like a ton of bricks and the market has been devastated. Firms have gone out of business and the economy looks like crap. It’s so bad that people believe that things will never get better.


As you can see, bull markets tend to last significantly longer than bear markets. And that’s why you shouldn’t panic during a market sell-off or be trying to pick bottoms.

Market sell-offs tend to be hard and fast and can take stocks to extremely oversold conditions. If you’re waiting for a good sign, then you’ll be slightly late to the party.

That’s why it’s important to go back and look at the business and market cycles.

The beauty of investing is that you don’t need to be precise like a day trader to make a lot of money.

With that being said, I want to show you different investment approaches, how to analyze stocks, and key financial ratios that I use to uncover opportunities.

Source: CNBC.com

https://www.cnbc.com/2020/03/14/a-look-at-bear-and-bull-markets-through-history.html


How To Uncover Long-Term Investment Opportunities Poised For High ReturnsBefore I get into some of the tools that I use to analyze investment opportunities and uncover poten-tial opportunities in the market, there’s one area I do need to cover: idea generation. If you think about it, this is the first step when it comes to investing.

There are thousands of stocks to potentially invest in, but finding the right one for me starts with in-vestment ideas.

Of course, at the most basic level, reading is a must. I like to research as much as I can to generate my investment ideas.

The Importance Of Idea GenerationThere are plenty of ways to generate ideas in the market, and there’s a lot of free research to do so. Some sites you may find useful include:

• MarketWatch

• Bloomberg

• CNBC

• The Wall Street Journal

• Reuters

By staying tuned into the market, I find idea generation gets a lot easier. I believe after reading, there are two ways to approach the search for a potential investment: the bottom-up approach and the top-down approach.

With the bottom-up approach, the focus is primarily on the company itself. On the other hand, the top-down approach is looking for opportunities based on a sector or macro theme.

The Top-Down Investment ApproachTo be clear, I believe it’s helpful to use a combination of both to find what could be the best invest-ment opportunities out there. Let me show you an example of the top-down approach.

For example, back during the financial crisis of 2007-2008, the macro theme for a contrarian investor was the Fed, which was most likely going to bail out the banks.


So from a top-down approach, one who came up with that idea would look to the banking sector and drill down into industries to find good investment opportunities.

There are different sector trends that could signal which specific stocks could be around for years to come. For example, e-commerce, technology, the cloud, and social media have been secular themes and the ability to spot those trends has rewarded many investors.

For me personally, I believe it’s important to identify secular shifts in the market because they will eventually shape and mold the future. For example, if you were able to figure out that e-commerce was going to become what it is, and spotted the potential in Amazon.com (AMZN)... you can imagine how profitable that investment may have turned out.

The Bottom-Up Investment ApproachThen, there’s the bottom-up investing approach. Basically, here an investor would look for a com-pany to identify attractive investment opportunities. I think with the bottom-up investing approach, for me, it’s as simple as just observing what’s around us.

Maybe you notice people in your town or city are all buying the new iPhone, or whenever you go to your grocery store, they run out of a specific brand of meat… or maybe you notice.

You never know where or when an investment idea could pop into your mind if you just observe what’s around you. However, it takes practice and time to develop that mindset. For me personally, I like to use a combination of the two, which should become clear to you when I show you how I ana-lyze stocks.

The thing is, having an idea is not enough.

You see, whether you use the top-down or bottom-up approach, you end up finding some potential stock investments, but buying stocks without conducting due diligence would is just gambling in my view.

Not only that, but I think the potential investments should be in line with the goals of the portfolio, and every investor is different. For the most part, I think stocks can be broken down into three differ-ent categories, and thereby investment styles.


What Type Of Investor Do You Want To Be?I think there’s one question that potential investors should ask themselves before they ever purchase a single share of a company: What type of investor do you want to be?

There’s no right answer here, and it all depends on your personality and skill set.

For the most part, I think investors buy stocks with one of three goals in mind:

1. They want to buy stocks that will increase over the long term.

2. They want to generate passive income through dividends.

3. They want to buy stocks that could generate high returns, and collect dividends.

In order to fully understand what type of investor you may want to be, it’s important to know the dif-ferent categories of stocks out there.

Growth StocksYou can probably guess by the name, but publicly-traded companies that are placed in this group are those with immense growth potential. Typically, these companies may be outpacing the overall market or their respective sectors.

Of course, there are growth companies in nearly every corner of the market, but typically, many of these stocks can be found in the technology, biotech and pharmaceutical, and alternative energy sectors.

Generally, many investors view growth stocks as “newer” companies with products and services that could disrupt their sector and impact the overall market.

Income (Dividend) StocksSome investors look to generate income from their investments. If you recall, a dividend is a portion of a company’s earnings that is distributed to shareholders. Now, not all companies reward investors with dividends.

Typically, well-established and financially sound companies offer dividends to shareholders. Howev-er, it’s at the company’s board of directors’ discretion to provide a dividend or not. The board also has the power to cut dividends, or worse, remove dividends.

Let me show you an example of a dividend stock.


As of April 2020, 3M (MMM) has consistently increased its dividend for 61 consecutive years and pays out an annualized dividend of $5.88 per share. This would be attractive to dividend (income) investors.

The Basics Of DividendsNow, dividends are simply a reward paid to stockholders for investing in the company, and they may be paid in the form of cash or stock. If a dividend stock offers a Dividend Reinvestment Program (DRIP), investors can choose to reinvest their dividends into the company in exchange for shares (even fractional shares).

Some investors choose to opt into DRIP (if they’re invested in a stock that offers it) in an attempt to compound their returns (as I mentioned earlier).

When it comes to dividend stocks, there are four important dates to keep in mind:

1. Announcement date. This is the day when the company’s management team lets the public know about dividends, and thereafter, it must be approved by stockholders before they’re paid out.

2. Ex-dividend date. This date is crucial because it lets shareholders know that if they buy shares after this date, they will not qualify to receive the next dividend. Nowadays, shareholders could purchase shares the trading day before the ex-dividend date to be considered for the dividend.

3. Record date. After the ex-dividend date, there’s the record date. Shareholders must be on record for holding the stock on this date to be eligible to receive the dividend.

4. Payout date. This is when the company issues the dividend, and investors must still hold the stock up until this day to receive the dividend.

Keep in mind, a dividend stock’s price can be impacted around dividend announcement and the ex-div-idend date. However, long-term investors do not necessarily care about the short-term price action.

Moving along, the next category is value stocks.

Value StocksYou’ve probably heard the term “value investors”, or someone say a stock is “undervalued” or “over-valued”. When it comes to value stocks, I think it’s quite clear we’re talking about undervalued com-panies here.

A value stock is one that trades at a discount to where it “should” be based on financial ratios, the sta-tus of the company, or even technical indicators. There are different financial ratios that could signal whether a company is undervalued.


I know what you’re probably wondering, “Jeff, what type of stocks do you like to invest in?”

To be honest, I don’t really have a type. I look for opportunities in all areas of the market, whether it be growth, value, or income stocks. For me personally, I don’t think it really matters because different stocks offer different types of advantages for a portfolio.

I think it’s important to not fall in love with either category.

Why?

Well, with income stocks, the dividend could be cut at any point in time. That would be an indication the company may not be financially sound. Consequently, that can scare investors and cause them to dump their shares. Not only that, but short sellers may use that catalyst event to short the stock.

Just take a look at General Electric Co. (GE) which was having financial difficulties in 2018 and forced the board of directors to cut its dividend.

Chart Courtesy Of StockCharts.com

When it comes to growth stocks, you never know when the economy can turn and cause people to sell their shares of these potentially high-flying stocks. With value stocks, you never really know whether a stock will recover over the long-term.



That being said, I like to have a mix of companies in my portfolio.

Now, in order to uncover potential opportunities, I conduct my due diligence and I want to show you some ways to conduct investment analysis.

The Importance Of Due DiligenceWhen I find potential investment opportunities, I don’t just buy all of them and hope they go up and I make money. I actually meticulously dig through the business and financials. I believe due diligence can be broken down into two types: business and financial.

Business Due DiligenceWhen I conduct due diligence on the business itself, I want to figure out the inner workings of the com-pany and how it operates. Some questions I ask myself when it comes to business due diligence include:

• Is the company’s business model sustainable over the long term and has it established an economic moat (an advantage over its competitors)?

• Has the company proven its ability to grow its earnings?

• What’s the company’s core business?

• What risks are posed to the company?

• What problems or unmet needs does the company solve or fill?

That’s the barebones when it comes to business due diligence. If I don’t have a clear answer or am uncomfortable with one of the answers, then I’ll pass on the investment — or put it on a watchlist for the future.

Of course, business due diligence is qualitative and there really is no right or wrong answer here. It’s all based on an investor’s personality and view of the world.

Don’t worry if any of this sounds unfamiliar to you at all, I will show you in a later section how I con-duct my due diligence. That way, you can get an idea of how I think about investments.

I think is equally as important as business due diligence is financial due diligence. However, financial due diligence is more black and white, and is quantitative in nature. If you’re not a math whiz, don’t worry because the basics suffice and there are free tools out that have already calculated some import-ant financials for us.

What’s more important is understanding how to analyze financials.


Financial Due DiligenceWhen it comes to financial due diligence, it all begins with the company’s financial statements. You could find these financial statements in the “Investor Relations” section on a publicly-traded compa-ny’s website. Additionally, there are websites such as Finviz, Morningstar, and Yahoo Finance that house this information as well.

If you choose to use a third-party website for the financials, make sure to double check they’re in line with what the company reports.

Now, when it comes to financial analysis, I think there are some key questions to ask yourself about the company:

• What’s the company’s historical performance?

• What’s the performance of the sector?

• Are the company’s financials healthy?

• Does the company generate earnings and free cash flow?

• How well does the company manage its debt (if any)?

• What are the company’s revenue streams?

Of course, financial statement analysis can be an entire book on its own. However, I want to provide you with some quick notes about analyzing a company’s financials.

I believe there are three important financial statements investors may want to look into:

• Balance sheet

• Income statement

• Cash flow statement

The other two are the stockholders’ equity statement and the statement of comprehensive income (which won’t be covered here because this isn’t a book about accounting).

The Balance SheetNow, the balance sheet provides investors with a snapshot of the company’s financial position at a specific point in time.

The balance sheet includes the breakdown of a company’s assets, liabilities, and shareholders’ equity. The assets include cash, property, plant and equipment, and inventory, and the assets can be broken


down into either current assets or non-current assets.

The total liabilities include current and non-current (long-term debt). The shareholders’ equity in-cludes share capital and retained earnings.

Here’s an example of a condensed balance sheet for Apple Inc. (AAPL).

Source: Apple Inc. Period: Q4 2019

https://investor.apple.com/investor-relations/default.aspx


If you look at the balance sheet above, you’ll notice the total assets equals the sum of total liabilities and shareholders’ equity. From a balance sheet, investors are able to extract pertinent figures to calcu-late key financial ratios, such as liquidity and leverage ratios, which I will discuss shortly.

First, I want to go over the income statement and cash flow statement.

The Income StatementThe income statement shows the company’s revenues, expenses, and profits. This shows you where the company’s revenues and earnings are coming from and provides valuable information into how the company operates. Not only that, but from the figures in the income statement, investors are able to use financial ratios to compare companies to the sector.

Consequently, it can help us figure out whether a company may be undervalued in relation to the over-all market or its sector.

Here’s a look at Apple’s Income Statement. Note, you may see it as “Condensed Consolidated State-ments of Operations” sometimes, but as long as you see net sales or revenues on the left hand side, you’re probably looking at the right statement (if you went to the company website).



This brings us to the last financial statement (in no particular order).

The Cash Flow StatementThe cash flow statement, or statement of cash flows, gives us a look into how much cash the company generates over a specified accounting period. Within the cash flow statement, there is a breakdown of operating activities, investing activities, and financing activities. At the very bottom of this statement, you’ll notice the ending period “cash, cash equivalents and restricted cash, ending balances” typically.

This gives investors an idea of the company’s ability to increase its cash over time. Of course, you could probably guess, the more cash on hand, the more financially sound a company is.

Here’s a snapshot of Apple’s cash flow statement.



Now that I’ve gone over some of the basics of financial statements, I want to show you some key finan-cial ratios… then I’ll get to the fun part and show you how I analyze stocks to potentially invest in.

Why It’s Important To Use Financial RatiosIf you don’t already know, some of the greatest investors in history use financial ratios to analyze companies, such as Warren Buffett.

So what are financial ratios?

Well, they provide actionable information about a company. The best part here is that all of this in-formation is public and can be found in the financial statements, you would just need to know how to calculate and interpret the ratios.

Financial ratios are typically grouped into 5 categories:

• Market value ratios

• Liquidity ratios

• Efficiency ratios

• Leverage ratios

• Profitability ratios

Of course, I don’t believe there’s a one-size fits all ratio, so it’s important to analyze ratios from these categories. When it comes to financial ratios, investors typically use them to compare a stock with its peers, the overall industry or sector, and the changes in the financial ratio over time, to name a few.

Now, I won’t bore you with all the nuances of these ratios, but I believe it’s important to know how to calculate and interpret a few key ratios. For me personally, I don’t necessarily look at all the financial ratios out there, just the ones that I find are important.

Key Ratios To Keep In Your Back PocketThese ratios are important to investors because it directly impact the return on investment and could potentially uncover investment opportunities. The first financial ratio is Earnings Per Share (EPS), this can typically be found on the income statement. This is an indication of a company’s profitability.

For the most part, a strong company will be able to grow its EPS over time. Keep in mind, companies may buy back shares of their stock to reduce the number of shares outstanding to artificially boost EPS. That said, make sure to stay up to date of any corporate actions, namely buyqbacks if you want to use this ratio.


The dividend payout ratio is another important financial metric. For companies that pay dividends to shareholders, it’s important to know how much of a company’s net income is distributed in dividends.

This ratio is calculated by dividing the dividends over a specified period by the net income for the same period. If a company’s dividend payout ratio continues to rise over time, and reaches more than 100%, it should definitely throw up some red flags.

Dividend yield indicates how much a company pays out in the form of dividends in relation to its share price at a specific point in time.

Debt ratio is calculated as the total liabilities divided by total assets. If a large portion of a compa-ny’s total assets is made up of liabilities (debt), it may be an indication the company is not financially sound. However, keep in mind, one ratio does not paint the entire picture of a company.

Debt to equity ratio measures a company’s financial leverage. Basically, it tells us how much debt a company is using at a specific time to finance its debt, relative to its shareholders’ equity.

Gross profit margin gives us an indication of how profitable a company is… the higher the figure the better. This ratio tells us the percentage of total revenue that actually became a profit for the company.

Of course, the list goes on and on for financial ratios. However, I believe these ratios can be sufficient to conduct due diligence for my portfolio. Of course, if you’re interested in financial ratios, by all means feel free to research the financial ratios because that can potentially help you become a better investor.

There are other factors that go into my decision-making process, such as technical analysis and other fundamentals.

The thing is, I can continue to bore you with the details of financial statements, all the financial ratios, and go through different chart patterns. However, I don’t think it will benefit you a whole lot. Instead, I want to show you how I find potential investment opportunities and analyze them.

But first, I want to show you how to build a portfolio for generations to come.


Building A Portfolio For Generations To ComeNow that you understand some of the basics on analysis, I want to show you how to construct a port-folio. First things first, I believe it’s imperative to talk to your broker or financial advisor before you go out and put money in investments.

That being said, there’s one important factor to understand when it comes to portfolio construction: diversification.

The Right Balance Of DiversificationI’m sure you heard the term, “Don’t put all of your eggs into one basket” before. Of course, I think many beginner investors take this step a bit too far and end up buying a bunch of random stocks and exchange-traded funds (ETFs) to try to diversify their risk.

Sure, in theory, buying stocks in different sectors can help to mitigate some risk. However, too much of a good thing can actually be bad (we’ve all heard that saying before), and I believe that it’s true… because there is such a thing as over-diversification.

Take a look at the trailing returns for the Vanguard Total Stock Market ETF (VTI).

Source: Morningstar

This fund holds 3,551 stocks and aims to track the performance of the CRSP U.S. Total Market Index, and it holds small-, mid-, and large-cap stocks across growth and value styles. When you look at the long-term average annual return (over the past 15 years, as of April 13, 2020), it’s only 8.13%.

https://www.morningstar.com/etfs/arcx/vti/performance


However, when you take a look at an ETF like the Technology Select Sector SPDR ETF (SPY) — an ETF that tracks tech stocks in the S&P 500 Index, the long-term returns actually outperform that of VTI.

Source: Morningstar

I’m not saying that I concentrate my investment portfolio into one sector, I’m just using these two ETFs for a demonstration that an extremely diversified portfolio is not always better.

Again, don’t get it twisted, I do believe that diversification is necessary to an extent, but that doesn’t mean I’m going out and loading up my portfolio with hundreds or thousands of stocks. When there are so many holdings, it actually becomes difficult to outperform the market.

What Exactly Is Diversification?Now that I’ve shown one of the drawbacks of diversification, I want to show you some benefits. As many investors agree, diversification is necessary to try to minimize loss over the long run. Basically, when I want to diversify my portfolio, I’ll look to spread my investments across various sectors or industries (ones that don’t necessarily trade with each other).

The reason why diversification to an extent is important is due to the fact that not all industries and sectors move in tandem. If I mix it up in my portfolio, I won’t necessarily see a big drop in my portfo-lio value if a specific sector or stock takes a hit due to a catalyst.

There’s one thing to keep in mind, no matter how much one diversifies their portfolio, risk can never be eliminated. However, it does help to reduce single-stock risk.

So what’s my take on diversification?

https://www.morningstar.com/etfs/arcx/xlk/performance


I try to find stocks that can be game-changers over the long run, these can be considered growth stocks. In addition, I’ll look to value stocks, as well as dividend stocks. The stocks I want to hold in my portfolio are not concentrated within one sector — because I tend to look at all areas for potential investment opportunities.

I think diversification can be achieved with 10 to 20 good companies that are uncorrelated in terms of returns, and you’ll see how I analyze different stocks to construct a portfolio when I discuss my investment philosophy.

Now in order to properly “diversify” your portfolio, it’s crucial to consider your appetite for risk. Dif-ferent stocks entail different levels and types of risk, and your financial adviser or broker can help you determine what your risk tolerance is.

Once that’s figured out and you understand the risks involved with investments, you can start to look at the different types of stocks out there.

Why It’s Necessary To Balance Risk And ReturnAs you may already know, the greater the risk, the greater the financial reward. Stocks with low levels of investment risk typically produce lower returns. For example, dividend stocks are generally considered financially sound and well-established companies that reward investors through the form of payments of its earnings.

On the other hand, stocks with higher levels of investment risk can potentially produce high returns. These would be growth stocks.

Next, there’s another important factor to take into account when constructing a portfolio, and I briefly touched upon it before.


Find Uncorrelated StocksAs mentioned earlier with diversification, I think it’s helpful to select uncorrelated stocks. Now, there are free tools out there to let you know whether a group of specific stocks are correlated or not.

Keep in mind, this is based on historical prices and returns, and sometimes… it doesn’t necessarily matter and stocks may move over a specified period of time in tandem based on other market forces. However, it’s a good tool to keep in your back pocket in my opinion.

Here’s a look at a stock correlation matrix. Don’t get scared off by this term, because you can just en-ter the tickers you have in mind and then look at the correlation between those stocks. For this specific matrix, I put in AAPL, MSFT, Exxon Mobil (XOM), Verizon (VZ), and Wynn Resorts (WYNN).

Copyright © 2020 Richard A. Howard. Source: Buyupside

This is the correlation matrix between April 2009 and April 2020. Basically the ones in the diagonal line are the stock’s “correlation” with each other. A correlation of 1 indicates two stocks move with each other. What matters are the numbers below the diagonals.

For example, MSFT is heavily correlated with AAPL (the closer the number is to 1, the more the stocks move with each other). On the other hand, XOM isn’t correlated with MSFT (the number is 0.3134, and the closer the number is to 0, the less the stocks move together).

So if you think about it, you can actually do this with a bit of common sense. An oil company (XOM) is typically not going to move in lockstep with a tech company (MSFT). Additionally, WYNN (a casi-no company) probably won’t have the same performance as a tech company like AAPL or MSFT.

https://www.buyupside.com/calculators/stockcorrelationmatrixcompute.php?symbol0=AAPL&symbol1=MSFT&symbol2=XOM&symbol3=VZ&symbol4=WYNN&interval=daily&start_month=04&start_year=2009&end_month=04&end_year=2020&submit=Calculate+Coefficient


When it comes to constructing my portfolio, I try not to look for too many stocks that move with each other… that way if a sector sells off hard for an extended period, my portfolio is less likely to lose a large chunk.

Of course, you’re probably wondering, “This is great and all Jeff, but how do you actually find these potential investments and actually construct a portfolio?”

That said, it’s the moment you’ve been waiting for… my investment philosophy and how I analyze potential investments.


My Investment PhilosophyBefore I reveal to you how I look for potential investments with three examples, there’s something I believe is important that all investors must understand: risk management techniques.

With that being said, I broke down what I believe is a powerful and simple way to hedge a portfolio.

Hedging Your Portfolio With OptionsThe Stock Market was at all-time highs back in February of 2019, but it only took 19 days for it to go into a bear market.

Although the COVID-19 pandemic is widely accepted as a “black swan” event, there were steps in-vestors could have taken to protect their portfolios in advance.

One of the best ways to hedge against downside risk in a portfolio is by utilizing options.

There are several ways you can achieve your hedging goals, but for the case of simplicity, I’m going to walk you through the three most basic methods.

Married PutA married put is a strategy that utilizes stock and and a put option.

For example, let’s say an investor is long 1,000 shares of Micron Technology at $41.22.

Theoretically, this investor has $41,220 worth of risk on—unlikely, but mathematically possible.

During the market sell-off in 2020, several oil stocks fell by 80-90% because of a botched oil deal between the Saudi’s and the Russians.

Even bluechip stocks can go under pressure.

However, if an investor buys a put option against their long stock position.

It reduces their risk, and even defines it.

For example:

The investor could buy $35 puts expiring 286 days out, for $4.75.

What does this do?


The trader is long from $41.22, the put protects them for nearly a year.

How much does it protect them?

We take the strike price and subtract it from the premium ($4.75)

$35 minus $4.75= $30.22

In this case, the investor would not lose a dime beyond $30.22.

They also maintain their upside.

A married put position has the same risk profile as a long call option.

Married Put

Benefits: Reduces and defines risk; allows you to maintain your upside potential.

Cons: It can be expensive, and cut into your potential gains.

When you purchase a hedge, there is a cost to doing business.

For example, if the investor paid $4.75, they would need the stock to trade above ($4.75 plus $41.22) = $45.97 before they can start earning money.

Buying a put option against your stock holding can be expensive if volatility in the options are expensive.

One alternative is to buy near-term puts expiring, and then simply roll them over to the next contract, until you see volatility and options begin to cheapen.

You don’t have to buy long-dated options to hedge, this was simply an example.

There is a cost to doing business, the more you hedge, the more it will eat away at your potential prof-its. And vice versa. No hedge at all leaves you completely exposed.

There are several ways you can establish a married put hedge.

If you go further out-of-the-money, it will cost you less, but also give you less protection.


Covered CallFor some traders, married puts are just too expensive and cut way into potential profits— they are not the number one hedging choice.

Instead, they’ll choose a partial hedge strategy, like a covered call.

I’ll tell you why I call it a partial hedge, but first let me explain to you how the strategy works.

Let’s say, an investor is long 100 shares of Microsoft at $153.83. And the investor wants to protect themselves against a slight downside move.

So they decide to sell out-the-money calls, the $160 calls expiring in 20 days, and collect a premium of $4.15.

Let’s see what this does:

The investor puts $415 in their pocket. Which now serves as their downside protection.

You see, if the investor collects $4.15 per share, the stock can drop to $149.68 and they still haven’t lost a dime.

What they lose in the stock position, they make from the call premium.

Sounds great, right?

Hold that thought.

By selling the call against their stock, the investor has given up their upside.

For example, if the stock were to skyrocket to $180.

They would make $2,617 from being long 100 shares.

However, they would lose $1,585 from being short the $160 calls.

Altogether, their profit is $1,032.

So that is one of the clear downsides of covered-calls, giving up your right for unlimited profit potential.

But again, if you’re applying this strategy as a hedge, you are more concerned about your risk than the profit potential.


Covered-Write or Covered-Call

Benefits: Acts as a partial hedge. You get paid to put on the position. If the stock trades range-bound you’ll profit from the premium collected.

Cons: Limits upside gain. Does not fully protect the investor against a large decline in the stock.

This position has the same risk-profile as a naked put.

This is a great strategy to apply in low volatile markets where you don’t believe there is much upside in the underlying stock, as it offers you a partial hedge.

However, if you’re concerned about your risk exposure then this is not the strategy that will protect you.

Collar SpreadThe collar spread is what you get when you merge the covered call with the married put.

The collard put includes a long stock position, a long put position, and a short call position.

In other words, to bring the hedging costs down, the investor sells calls to finance their put purchase.

In some cases, this hedge can be done at no cost.

Let’s say an investor holds 100 shares of Exxon Mobil (XOM) at $39.21.

They want to hedge because of an upcoming OPEC meeting, so they decide to buy the $37 puts expir-ing five days from now for $0.80. To help bring down their cost, they sell the $42 calls for $.70.

Altogether this trade costs the trader $0.10 per share.

Let’s see how it helps them hedge.

If the OPEC deal goes south, and XOM goes to $20, how much does the investor lose?

They would only lose $231.

Here’s how:

They bought the $37 put, so they are protected from $36.90 down.


Because the spread cost $.10, we subtract that from the $37 strike and come up with $36.90.

If XOM goes to 20, the investor loses money on their long stock position. But gains from their short call, as well as their long put option.

Which in this case, the hedge saves them $1,690.

The Collar

Benefits: Cheap way to fully hedge your investment. It’s cheaper than the married put, and offers greater protection than the covered write.

Cons: Limits your upside potential.

This position has the same risk-profile as a long call spread.

Hedging ThoughtsThe key to hedging is keeping costs low. That’s why the collar strategy is perfect if you’re worried about a market sell-off.

However it does eat away at your upside.

Also, do you want to hedge each stock position or is there something easier that requires less time management?

You could also consider buying deep out-the-money puts in an index ETF like the SPY, DIA, QQQ, or even IWM— whatever you feel best represents your portfolio.

This can also be a very viable approach to hedging.

But at the end of the day, hedging is an art-form.

And something even the pros struggle with.


The bottom line: you should know the steps to take to protect your portfolio.

Analyze where it’s vulnerable and take the necessary action.

Now that I showed you some things I think can help with risk management, let’s take a look at my investment philosophy. When it comes to selecting potential investments for my portfolio, I look for stocks that have good management, are leaders in an industry (or I believe they’ll become one), are financially sound, and may be undervalued at their current price.


How I Analyze Stocks To Potentially Invest InOf course I can continue to go on and on about my investment philosophy, but I believe it would be more useful to see my analysis of some companies I believe will be around for decades to come.

Keep in mind, these are not stock recommendations, they are simply my analysis of the specific compa-nies at that point in time. I just want to provide you with the method I use to find potential investments.

Apple Inc. (AAPL) — The World’s First $1T Publicly-Traded CompanyNote - I conducted my due diligence on AAPL during the first week of April 2020

This is one stock everyone and their brother probably knows about.

After all, it was the world’s first publicly-traded companies to reach $1T in market value and they have a global footprint like no other. If you just look around, so many people have Apple products, and that’s where the idea came from.

That being said, this is one of my favorite investment ideas for the long term.

If you don’t already know, Apple was founded in 1976 by Steve Jobs, Steve Wozniak, and Ronald Wayne… and just a few decades later, Apple became the world’s first trillion-dollar company.

The reason?

The company’s ability to innovate the technology industry and provide consumers with sleek, state-of-the-art computers, mobile devices, as well as software and services.

Of course, if you just look around, you’ll notice many consumers own either an iPhone, iPad, Mac, or airpods.

Not only that, but if you ask around chances are they use iMessage, iCloud, mac, iTunes, Apple Pay and the app store.

With such strong brand loyalty and name recognition, I don’t think Apple is going anywhere anytime soon, and there are many factors that prove the company has staying power.

Here’s a fun fact: Apple stands as the largest technology company by revenue, as well as market capi-talization at the time of this writing.

Just take a look at how diverse Apple’s revenue stream is:


Apple Still Has Growth PotentialOf course, Apple does have some stiff competition out there.

However, Apple has proven its ability to take market share and outperform some of the most influen-tial and innovative companies.

That signals to me Apple is a resilient company and will continue to grow its brand for years to come.

Source: Strategic Management Insight

When it comes to due diligence, I like to see what areas a company is dominant in.

This allows me to assess the growth potential.

Right now, Apple has a majority of the market share in the U.S.

Source: StatCounter Global Stats

https://strategicmanagementinsight.com/swot-analyses/apple-swot-analysis.html

https://gs.statcounter.com/os-market-share/mobile/united-states-of-america


However, its presence in the smartphone market outside of the U.S. is not so prominent.

In February 2020, Apple had about 26% market share of the smartphone operating systems worldwide.

Source: StatCounter Global Stats

I don’t see this as a weakness because if Apple is able to take just a few more percentage points in the global smartphone market, that would equate to billions more in revenues and net earnings.

You see, although Apple dominates with its products in the US, its foreign revenues have been declin-ing over the years.

The reason this is happening is because of the high price point on iPhones. The vast majority of mo-bile phone sales are under $316 while the average iPhone costs $758.

However, Apple is showing promise as it’s looked to tackle this problem by slating rollout of its latest iPhone in Spring 2020 — which is expected to retail around $400.

Not only that, but Apple has started to slash some prices on its luxury phones, such as the iPhone 8 and iPhone XR.

The company generates a majority of its revenue from the sale of iPhones (61% of total revenue). Which should see a decline this year.

Subscription Services on Fire.

Apple’s subscription services business should continue to provide strong revenue for the company.

It grew by 16.5% in fiscal 2019.

And even in this environment, App Store, Apple Pay, Apple Music, and AppleCare should thrive.

This side of the business generated about 18% of the firm’s total sales in fiscal 2019.

Apple Dominates The Wearables Market

Another fast growing segment for Apple has been wearables. Its wearables revenue grew by 44% in fiscal 2019.

https://gs.statcounter.com/os-market-share/mobile/worldwide


The AirPods and Apple Watch have pushed Apple to be the leader in the wearables market—com-manding a 36.5% market share.

Of course, the story and headlines of what Apple is doing to innovate aren’t the only factors I analyze.

I like to look at the long-term chart, then dig deeper into the fundamentals.

The Technical ViewFor the most part, I like to look at the overall trend of a stock, and here’s a look at the weekly chart in Apple.

As you can see, the stock is still in a long-term upward trend. However, the coronavirus has caused the stock to pull back from the $320 area.

There are key areas in which the stock looks extremely attractive — around the 50-period moving average and 200-period moving averages on the daily and weekly charts. Keep in mind, these levels do change over time.

However, those moving averages tend to be key support levels. In other words, there are investors willing to step in and buy the stock, and therefore, “supporting” the stock at those prices.

Of course, it’s beneficial to know where AAPL is currently trading, but I also love to look at the finan-cials to give me an inside look at how the company is doing.


Apple: Inside The BooksApple has a phenomenal management team, and I believe it does its best to inform and reward investors.

For example, during the start of the coronavirus pandemic, Apple was among the first companies to come out, back in February 17, to announce that it would be missing its quarterly guidance due to COVID-19 concerns.

Although the company is predicting a decline in its iPhone sales volume, I believe that is just a short-term bump in the road. You see, analysts at some of the largest investment banks are still projecting year over year growth in Apple’s revenues and earnings per share.

Please take the numbers below with a grain of salt. The COVID-19 pandemic is ongoing, and it’s caused a lot of economic slowdown.

When it comes to conducting due diligence on investment ideas, it’s beneficial to compare the num-bers to the industry standard. If you look below, Apple has some relatively attractive values.

For example, look at the price to earnings (P/E) — one of the most widely used financial ratios out there.

Apple trades at about 20 times its earnings, which is below the industry average.


Not only that, but if you compare the relative price performance during one of the worst quarters, Apple was able to outperform the industry, as well as the S&P 500.

Moreover, Apple has proven its ability to grow year over year, according to the profitability metrics below.

Source: TradeStation

Source: 2019 10-K filing



Why Apple For My Portfolio

• Flight To Safety Play

Pension funds may buy stocks over the coming month. Apple is held in over 121 ETFs. And is a member of the Dow, S&P 500, and Nasdaq 100.

• Strong Balance Sheet

According to its Q1 2019 earnings report, Apple had more than $245B in cash on hand. It has plenty of cash on hand to overcome any temporary disruption it’s currently facing.

• High Margins On Products and Services

One of Apple’s shining stars recently has been its subscription service business which includes Apply Pay, AppleCare, and Apple Music.

The firm disclosed last summer that it had a 62.8% profit margin from its services business.

• Strong Demand for 5G Should Boost iPhone sales in 2021.

Analysts at JPMorgan are expecting a strong demand for 5G, as its current forecast for 2021 remains at 208 million units of iPhones sold.

• Value

The stock is trading 27% off its highs, and pays its investors a cash dividend of $4.83 per share.

Let’s take a look at my investment analysis on another stock I believe will stick around for years to come.

AT&T (T) — A First Mover In Its IndustryNote — This investment analysis was conducted during the first week of April 2020

AT&T Inc. (originally named Southwestern Bell) was founded in 1877 by Alexander Graham Bell after he patented the telephone. So, the company has history to it, and chances are (to me), it will stay that way.

AT&T has established a network of subsidiaries in the U.S., Canada, Latin America, and the Asia Pa-cific. For a while, it was a monopoly and the world’s largest phone/telecommunications company.


Today, AT&T is a holding company with four business segments, including:

• Communication – provides wireless and wireline telecom, video, and broadband services to con-sumers. Its business units include Mobility, Entertainment Group, and Business Wireline.

• WarnerMedia – develops, produces, and distributes feature films, television, gaming, and other content over various physical and digital formats. Its business units include Turner, HBO, and War-ner Bros, and its portfolio includes cable channels like TNT and CNN.

• Latin America – provides entertainment services in Latin America and wireless services in Mexico. Its business units include Viro and Mexico.

• Xandr – provides advertising services.

AT&T has made some bold moves to continue to take market share from its competitors, including that controversial merger with Time Warner.

The old-school phone giant faces competition in the Telecom Services industry from firms like Veri-zon, Spectrum, COX, Cricket, Comcast, CenturyLink, & Dish — and that’s not to even mention the newly created two-headed monster of T-Mobile and Sprint.

But AT&T is nimble and innovative. It stands at the forefront of one of the hottest tech trends in 2020:

The deployment of 5G servicesSince 2010, the majority of smartphones have run on 4G. That was a groundbreaking technology a decade ago. For the first time, we could engage in lightning-fast video streaming, conference calls, and other video services into the palms of your hands.

But 5G – being deployed right now – is up to 200 times faster and smoother than its predecessor.

Now, there are a lot of ways to tap into 5G. Investors can buy into network developers, chip manufac-turers, and software designers.

Personally, I want to go where the money is – in the consumers’ pockets. The U.S. economy is 70% consumer-driven, and they will flock to 5G services.

And some of the world’s leading companies will look to partner with AT&T.

In March 2020, the company officially partnered with Google Cloud to use its 5G edge computing technologies.

I expect AT&T to completely dominate this industry and build on its existing market share. At the end of Q3 2019, AT&T owned nearly 40% of the wireless subscription market.


Source: Statista

And while the merger of T-Mobile (TMUS) and Sprint (S) create a larger competitor, the consolida-tion of the two companies will likely lead to higher – not lower – prices across the industry.

AT&T May Be Financially Sound in a CrisisI’m not at all concerned about the recent downturn in AT&T stock. In fact, I think that a lot of big institutions will be kicking themselves for dumping this company.

AT&T was trading at $27.46 per share, as of 4/3/2020. It has struggled during the past decade to break out of resistance at $45.

Source: finviz.com

https://www.statista.com/statistics/199359/market-share-of-wireless-carriers-in-the-us-by-subscriptions/

https://elite.finviz.com/quote.ashx?t=t&ty=c&ta=2&p=w


The company has a $219.49B market cap. It offers a dividend yield of 6.97% (or $2.08 per share). It has consistently paid and grown the dividend for over 36 years straight. That means investors who hold T are entitled to $2.08 per share, as well as the upside potential in the share price.

Now, AT&T used a lot of leverage to make acquisitions during the past five years. On December 31, 2019, the company had a Total Debt of $220.22 billion. The Total Debt to Equity ratio is high at 88.56, though it’s comfortably lower than the industry average of 194.11.

Overall, its financial statements are steady, with only single-digit changes over the past few years.

Source: AT&T 10-K - FYE 12/31/2019

https://www.sec.gov/ix?doc=/Archives/edgar/data/732717/000156276220000064/t-20191231.htm


By 2022, T plans to grow adjusted EPS from $3.57 to $4.60 with a dividend payout < 50% and mod-est annual dividend increases. It’s also on a path to grow free cash flow from $29 billion in 2019 to $32 billion in 2022.

Overall, AT&T’s stock price is poised for a breakout with its launch of HBO MAX in 2020, capitaliz-ing on merger synergies, deleveraging, and operational efficiencies.

Here are additional reasons why I expect AT&T to succeed in the months and years ahead.

Why AT&T For My Investment Portfolio

• Leader in The Industry

AT&T is the second-largest telecommunications service company with a market cap of $200B. The company proved its ability to innovate and poach market share when it be-came the first carrier to offer 5G. Look for it to continue adding new best-in-class partners like Google in the future.

• Diversified Revenue Stream

The company operates in four primary business segments and doesn’t need to rely on one area to generate income and reward shareholders. This allows us to lock into a dividend sitting at roughly 7% today, and that is going to richly pay off in the future.

• Income & Growth Play

AT&T is known for rewarding its investors. The company grew its dividend for 35 con-secutive years and currently offers an annualized payout of $2.08 per share. The company expects to grow its EPS to $4.60 by 2022, from $3.57 in 2019.

Now, let’s move onto one last investment analysis in a well-known casino company.

Wynn Resorts (WYNN) — A Potential Value PlayNote — My investment analysis on WYNN was conducted during the first week of April 2020

I know that Las Vegas has largely shut down due to the coronavirus pandemic.

So have the shimmering casinos in Macau, China, the world’s largest gambling market. These tempo-rary closures have fueled a sharp downturn in casino stocks… and some investors have been dumping gambling stocks left and right.


So, I’m looking for the ones that will survive this downturn.

When the dust settles, I believe a few survivors will gobble up market share and return to all-time highs.

The ones that cater to high-end gamblers are the best bet to rebound first, given that wealthy travelers typically can afford to take a vacation.

Wynn Resorts (WYNN) is my favorite to bounce back much faster than second-tier hotel operators who cater to lower-income visitors.

Let’s talk about Wynn.

Founded by casino pioneer Steve Wynn in 2002, the firm offers extravagant hotel rooms and top-of-the-line amenities. In fact, Wynn Resorts has received more five-star awards than any other company in the world.

The company’s global reach and ability to cater to a wealthier clientele — the ones shielded from an economic downturn — put it in the best position for maximum gains in the long term.

The company operates luxury five-star resorts and casinos in four developed properties:

• Wynn Las Vegas

• Encore Boston Harbor

• Wynn Macau

• Wynn Palace, Coati

We can look at Wynn against its top competitors. Those rivals are Caesars Entertainment, Las Vegas Sands, MGM Resorts, Marriott, Mandarin Oriental, Hilton, Eldorado Resorts, Penn National Gaming, Boyd Gaming, and Kempinski Hotels.

So, why is Wynn a better buy than the rest of these companies?

There are a few simple reasons.

First, the sharp pullback makes it extremely attractive from a long-term perspective.

Second, the company has a very rare economic moat in its largest market that will help it dominate over the next few years.

Finally, it has an ace in the hole (for those poker players reading). This one attribute that separates it from its competitors could unlock billions of dollars for long-term investors.


Financial Highlights

Source: Finviz.com

Right up front, the chart shows that it’s been a rough two years for Wynn Resorts.

In 2018, shares took a hit after founder and CEO Steve Wynn’s company sexual allegations.

Before the coronavirus shutdowns, WYNN had been trading in a channel for a year and a half be-tween $100 - $140. It is now trading at a steep discount at just $60.85, as of April 7, 2020.

As you can see in the chart, this is the lowest it has traded since a sharp pullback in 2015.

It has a market cap of $6.56 billion, an average volume of 4.7 million, and offers an excellent divi-dend yield of 6.5%.

Wynn has a modest $2.35 billion in cash and cash equivalents to weather the coronavirus storm, com-pared to its $10 billion of debt.

Wynn has four business segments, broken down by location.

In Macau, a vast majority of revenues come from its casino segment.

However, the company has been investing in multiple projects that will increase revenue in the other Macau segments, aimed for completion in Q4 2019. The total project cost is $125 million for hotel renovations, two new specialty restaurants, and retail store developments.

The Las Vegas properties bring in revenues across all segment categories. This is because the compa-ny has been focused on creating an incredible all-around customer experience. The luxury hotel rooms

https://elite.finviz.com/quote.ashx?t=wynn


draw customers from all around. Also, its high-end restaurants and catering menus get some of the highest reviews in all of Las Vegas.

Annual Revenues by Segment (in thousands):


Wynn expects revenues to increase over the next few years as many expansion and renovations proj-ects were completed in 2018 and 2019.

Although the company made over $4.5 billion in revenues, its high operating expenses caused it to have a low net profit margin of 1.9% in 2019.

https://wynnresortslimited.gcs-web.com/sec-filings?items_per_page=10&page=1



Macau gaming data just showed that gambling revenues plunged 79.7% in March 2020 as the world’s largest casino hub shut its doors.

On April 1, Wynn announced that amid its coronavirus shutdowns, it would continue to pay all its employees in North America through May 15.

There is a fair amount of risk involved here, but much of it is already priced in.

As the company opens back up and demand returns, these state-of-the-art facilities will be ready to rock and roll.

Income Statement (in thousands):

https://wynnresortslimited.gcs-web.com/sec-filings?items_per_page=10&page=1


The Technical ViewTo get a sense of how rapid and irrational this selloff has been, pay close attention to the technical metrics below. With a relative strength index (RSI) of 42.33, the stock has rebound from oversold territory, where it spent the better part of March.

Shares have plunged from the 200-day moving average of $116.16 and just pressed back above its 20-day average of $60.01. (as of April 7). In the short term, there is fair reason to expect the stock to move much higher on up days for the market.

However, the longer-term outlook has largely been dismissed by institutions and shareholders who rushed to cash over the last month. History has proven time and time again that companies like Wynn won’t stay down forever.

Which brings me to the biggest reason why the stock is poised for a great run in the future.

The Opportunity AheadThe significant opportunity for Wynn Resorts lies in Asia, where coronavirus concerns have been fading. While certain areas remain on lockdown, this Asian casino market is likely to rebound long before Las Vegas does.

In 2019, its Macau property represented 76% of the company’s EBITDA. This five-star property is the only resort in the world to earn eight Forbes five-star awards since its inception.


Many analysts anticipate that Macau — the gaming capital of China — will experience a significant boom in traffic due to government infrastructure spending and projects to address the congestion in the region.

This includes the new bridge from Hong Kong in 2018, the recent light-rail system implemented last year and reclaimed land development over the next five years. Given Wynn’s contributions to growing the Macau market, the company should easily renew one of only six gambling licenses in the Macau market.

At this price, the economic moat for this company is extremely undervalued.

And remember how I mentioned an “Ace in the Hole” for Wynn?

Well, unlike its competitors MGM and Caesars Entertainment, Wynn owns its properties across the world. MGM and Caesars sold their properties to REITs in recent deals that allowed them to cash out on their properties and focus solely on their casino operations.

Recent deals have included MGM’s $4.25 billion deal to sell the Bellagio casino at a stunning metric of 17.3 times rent.

Wynn still owns its properties with far greater land and individual rooms than the massive Bellagio property. The company could still use this card to boost its cash position and pay down debt. This is a major opportunity that will allow it to add billions of dollars to its balance sheet and consider a number of alternatives. They include selling those properties and returning capital to investors.

The firm could also pay off debt, fund new projects in nations like Japan (a potentially massive mar-ket in the years ahead), or even boost its dividend for shareholders.

Why Wynn Resorts Can Be A Good Investment For My Portfolio

• Massive Real Estate Holdings

The company has billions in real estate assets that it can sell to a real estate asset trust or alternative asset firm, which could boost its stock price by a significant amount.

• Massive Growth Potential in Asia

Wynn is a leading player in the Macau markets and generates 76% of EBITDA from the world’s largest casino market. The firm is turning its attention to Japan, which could soon become the second-largest casino market in Asia after policy changes.


• Economic Moat

Wynn owns one of the six casino licenses in Macau. It remains unlikely that China will expand those limited and coveted licenses. The firm will easily renew this license in 2022 thanks to its dramatic investment in the local casino market.

• Value

Shares of Wynn are trading well under their 50-day and 200-day averages and traded in “over-sold” territory in March. Forced selling by institutions and a rush to cash creates a unique opportunity to invest in the company best-positioned to dominate the gambling sector.

From these examples of my investment analysis, you should have a good understanding of my ap-proach to finding stocks for my long-term portfolio. As you can see, my approach is not concentrated on a specific sector, and that allows me to diversify my return stream.

If this doesn’t make sense to you at first, that’s okay. Re-read and study the areas that may seem un-clear to you, and overtime, things might start to click for you — just as they did for me.

Yes, It’s Possible To Beat The MarketThe market can be beaten. And you don’t need fancy research or tools to do it.

In fact, focusing on fundamentals like book value and earnings can help you find good companies..

Paying attention to a company’s debt levels, cash-flow, PE multiples, and other factors are great ways to filter.

The best investors in the world are contrarian.

They see opportunities where others don’t.

They don’t wait for good news before they start buying stocks.

And instead of buying the hottest stocks in the market, they’re looking for companies that have fallen out of favor with low risk.

Think about it, let’s say you have a business that is crushing earnings, has high profit margins, and consistently grows.


Competitors will notice and start to mimic what it does, and new businesses will enter the space too.

On the other hand, a beaten down stock has very little upside in the eyes of Wall Street.

Expectations are low and any good news can send its shares higher.

And despite the stock looking weak, one could argue it’s less risky than say buying a high flying blue-chip stock.

The ideas laid out in this eBook are designed to get you thinking about long term buy-and-hold opportunities.

It’s meant to give you confidence that yes, you can do this.

But most importantly, YOU MUST.

Because at the end of the day, we can’t rely on 401Ks, pensions, or the banks to help us.

We have to take matters into our own hands.

By making it to the end of this eBook, I believe you’re ready.

If you’d like to stay in touch, then I highly recommend you get access to RagingBull Investor. It’s my free newsletter where I

cover my buy-and-hold ideas and plays.

https://ragingbull.com/raging-bull-investor/?utm_source=irbjb2riv&utm_medium=c&utm_campaign=rivproductweb&utm_content=10x-portfolio-blueprint&utm_term=npsw

jeff bishop 10 portfolio blueprint - ragingbull.com · 2020-04-16 · jeff bishop | 10 portfolio...

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