squiffy
12-19-2003, 06:32 PM
Since you seem to be into the numbers, maybe you can teach me something about your approach.
Here is the kind of basic analysis I do for a stock. Nothing fancy. But just a little bit I picked up from very basic reading about value investing.
First I look at the chart and compare various highs and lows, say 10 year, 5 year, 1 year, etc. If a stock is at a 10 year high I am very leery of it. If it is at a 5 year low, I am interested, but want to make sure it is a temporary stumble, and not a permanent problem that will bring on bankruptcy.
I want to bet on Michael Jordan (in his prime) with a sprained ankle. I know he has to sit out a few games. But when he gets back on the court, he's going to put up some big numbers and put some baskets in, maybe 30 points a game.
So ODP is trading now at 16.35. Friday's close.
This years median predicted earnings were $1.03 per share according to Ameritrade. Next year projected earnings $1.20 per share.
Now the problem is, just looking at Ameritrade data or Yahoo data, you have no idea what this projection is based on or the track record of the person putting up these numbers.
So with a retailer, just the fact that they have a certain number of brick and mortar stores, gives me comfort. This is very different than whether or not a company is going to come up with the next huge blockbuster movie, toy, or cancer cure.
All I have to be confident of is that ODP has, say 10,000 stores and sells paper and office supplies. Very boring, but much more predictable and reliable.
So I look at historical highs and lows for the stock going back 5-10 years (realizing of course that the economic climate may be very different)
With ODP you have to be careful to realize that it is probably in a mature phase and not growing at the rapid rate that it did when it first got started, opening tons of new stores. So very different than say a StarBucks or BBY that may still be growing.
I also compare high and low PE going back 5 to 10 years, to see how low it may go when undervalued, and how high it might go when overvalued.
Currently assuming a share price of 16.35 and current annual earnings of $1.03, PE is 15.87.
That is not a great PE. I would much rather buy ODP at a price of $10. But I like the fact that ODP had taken a huge drop from about 18 to 14 or 13. I feel a lot more comfortable buying in after a huge drop, assuming the drop was not due to a long-term permanent problem.
As far as I can tell, ODP still has let's say 1000 stores in 40 states (I am going off old data). So there is at least some kind of floor. They are absolutely not going to quadruple in value, but they are not going broke overnight either, barring accounting fraud.
Actually I bought ODP at 15.76 so assuming earnings of 1.03, I bought at a PE of about 15.3 to 1.
So I invested $15 to earn an annual profit per share of $1.
If profits next year really do increase to $1.20 per share, then my forward looking PE is more like 13.13 to 1.
As if I had invested $13 to earn $1 in profit.
If annual earnings really do increase by 20%, I can expect a jump in the stock price. Though I am not sure how you can predict or quantify that expected increase.
I suppose if $15 per share is fair value, and a PE of 15 to 1 is fair value, then if earnings increase to $1.20 per share, that would justify a share price of $18 per share, as 18/1.20 = 15.
However, we all know from reading Warren Buffett, Fischer, and Graham that the stock market is manic/depressive.
So if and when ODP starts reporting improved earnings, the market will likely rush in and overpay for ODP and analysts will start to tout ODP, after the fact and upgrade it. When it is upgraded the stock will jump up 5 to 7% in one day.
So when it hits 18, 19, or 20, it will probably be overvalued, and I should sell.
Of course, it is impossible to be precise about these numbers without studying a balance sheet. But these are rough approximations.
And if you look historically at ODP, a 15 PE is traditionally on the low end for ODP and the high end PE is closer to 20, 30, or even 40.
I doubt a 40 is likely for ODP, given that it is no longer a hot growth stock. But historically 15 is probably not a peak PE.
And it has traded as high as 22 or so within the last year or two, and as high as 18 or so, within the last 6 months or so.
Again, there may be thousands of stocks that offer a better return than ODP. I just am not aware of them.
But ODP is a stock I am familiar with, they have a simple business model. They seem to be highly cyclical and volatile. They have a strong and recognizable brand name. And they have a reliable foundation of brick and mortar stores.
They don't need to be inventing cutting edge software and technology to keep making a profit, like say a MicroSoft or Intel.
I also check the debt ratio to make sure the company does not have too much debt, which can be dangerous, of course, if their profits decline during a downturn and they are.
Whoops. GOt to get back to work. More numbers later.
Here is the kind of basic analysis I do for a stock. Nothing fancy. But just a little bit I picked up from very basic reading about value investing.
First I look at the chart and compare various highs and lows, say 10 year, 5 year, 1 year, etc. If a stock is at a 10 year high I am very leery of it. If it is at a 5 year low, I am interested, but want to make sure it is a temporary stumble, and not a permanent problem that will bring on bankruptcy.
I want to bet on Michael Jordan (in his prime) with a sprained ankle. I know he has to sit out a few games. But when he gets back on the court, he's going to put up some big numbers and put some baskets in, maybe 30 points a game.
So ODP is trading now at 16.35. Friday's close.
This years median predicted earnings were $1.03 per share according to Ameritrade. Next year projected earnings $1.20 per share.
Now the problem is, just looking at Ameritrade data or Yahoo data, you have no idea what this projection is based on or the track record of the person putting up these numbers.
So with a retailer, just the fact that they have a certain number of brick and mortar stores, gives me comfort. This is very different than whether or not a company is going to come up with the next huge blockbuster movie, toy, or cancer cure.
All I have to be confident of is that ODP has, say 10,000 stores and sells paper and office supplies. Very boring, but much more predictable and reliable.
So I look at historical highs and lows for the stock going back 5-10 years (realizing of course that the economic climate may be very different)
With ODP you have to be careful to realize that it is probably in a mature phase and not growing at the rapid rate that it did when it first got started, opening tons of new stores. So very different than say a StarBucks or BBY that may still be growing.
I also compare high and low PE going back 5 to 10 years, to see how low it may go when undervalued, and how high it might go when overvalued.
Currently assuming a share price of 16.35 and current annual earnings of $1.03, PE is 15.87.
That is not a great PE. I would much rather buy ODP at a price of $10. But I like the fact that ODP had taken a huge drop from about 18 to 14 or 13. I feel a lot more comfortable buying in after a huge drop, assuming the drop was not due to a long-term permanent problem.
As far as I can tell, ODP still has let's say 1000 stores in 40 states (I am going off old data). So there is at least some kind of floor. They are absolutely not going to quadruple in value, but they are not going broke overnight either, barring accounting fraud.
Actually I bought ODP at 15.76 so assuming earnings of 1.03, I bought at a PE of about 15.3 to 1.
So I invested $15 to earn an annual profit per share of $1.
If profits next year really do increase to $1.20 per share, then my forward looking PE is more like 13.13 to 1.
As if I had invested $13 to earn $1 in profit.
If annual earnings really do increase by 20%, I can expect a jump in the stock price. Though I am not sure how you can predict or quantify that expected increase.
I suppose if $15 per share is fair value, and a PE of 15 to 1 is fair value, then if earnings increase to $1.20 per share, that would justify a share price of $18 per share, as 18/1.20 = 15.
However, we all know from reading Warren Buffett, Fischer, and Graham that the stock market is manic/depressive.
So if and when ODP starts reporting improved earnings, the market will likely rush in and overpay for ODP and analysts will start to tout ODP, after the fact and upgrade it. When it is upgraded the stock will jump up 5 to 7% in one day.
So when it hits 18, 19, or 20, it will probably be overvalued, and I should sell.
Of course, it is impossible to be precise about these numbers without studying a balance sheet. But these are rough approximations.
And if you look historically at ODP, a 15 PE is traditionally on the low end for ODP and the high end PE is closer to 20, 30, or even 40.
I doubt a 40 is likely for ODP, given that it is no longer a hot growth stock. But historically 15 is probably not a peak PE.
And it has traded as high as 22 or so within the last year or two, and as high as 18 or so, within the last 6 months or so.
Again, there may be thousands of stocks that offer a better return than ODP. I just am not aware of them.
But ODP is a stock I am familiar with, they have a simple business model. They seem to be highly cyclical and volatile. They have a strong and recognizable brand name. And they have a reliable foundation of brick and mortar stores.
They don't need to be inventing cutting edge software and technology to keep making a profit, like say a MicroSoft or Intel.
I also check the debt ratio to make sure the company does not have too much debt, which can be dangerous, of course, if their profits decline during a downturn and they are.
Whoops. GOt to get back to work. More numbers later.