Archive for the ‘Principle Investing’ Category

What’s coming?

September 12, 2011

I’m going to risk a bit of market timing although I’ve always sucked at it. This is what I predict in the very short term:

1) This week iPhone 5 is coming out. Spring was already organizing sales for October and there is no way that Apple can ship devices to them on time unless they begin doing it right now. Aside from that, I’m already on 2 final betas of iOS products, which I cannot make public due to EULA but I can say that they are final. I doubt we hit friday without iphone 5 out, and since Steve Jobs is gone, i’m expecting they try to make a big splash on it. Maybe add the famous NFC to it?

2) Greece is gone. They’ve just hit a 60% interest rate on their 2 years note and 20% on their 10 years. No country whatsoever can handle that level of debt for an extended period of time, and they’ve been on that range for close to a year. I don’t think Europe would let them “just default”. It would be majorly stupid and a huge risk to the system. My guess is that they will schedule an orderly debt restructure in a way that they can protect their financial institutions. What’s next? who knows. I would set my eyes on Portugal, but with Greece out of the way I think the EU could have more leverage for bailouts on other countries.

3) European fiscal union. This won’t happen overnight, but I think we are setting the stones for it. We do want Eurobonds, but they can’t do so because we are all fiscally independent. On the other hand, while publicly saying that it’s not possible, if you pay attention all countries are adding fiscal restrictions to their constitutions. I think the govts are laying the ground work bit by bit on a fiscal union, so that after whatever happens to Greece, they are better prepared for the next one.

4) The fed will do “Operation Twist” on sept 21. What this means is that the FED will buy longer term Tresuaries to try to bring down the yield on the 20/30y bonds. They are already at record lows, but they want them lower to promote long term lending. I wouldn’t be surprised if they even bring back the 50 year bond. In any case, this is a safe strategy with almost no cost to the fed, so “Operation Twist” is practically a done deal.

5) US and the EU will give some kind of stimulus package. This can be on the form of Obama’s last idea, or a QE2.5 or QE3 or whatever. They are not going to let their economies collapse when they are so close to steady recovery.

6) Rafael Nadal will win the US Open today. Just because he is cool like that.

How to fix Europe.

August 19, 2011

Note: I’ve originally wrote this in Spanish but I decided to rewrite in English since it’s the main language of this blog.

The market keeps going down and although I’m optimistic and I’m buying, things are not looking good with nothing in sight to improve it. The problem is with Europe, there is no central leadership able to fix the economic mess over here. These are my suggestions to fix what we are going through:

1) Create Eurobonds. The faster the better. This means Europe has to become not only a currency union but also an economic and fiscal union. It does not make sense to have each country taking independent actions, following independent policies and playing like independent entities when we all share the same currency. This provokes that a few governments who are financially neglect can bring down the whole European Union. Unify it, create a central institution that manages it and removes power from political parties. Create a path to allow for Eurobonds.

2) Restructure debt. Greece cannot pay its debt. It’s mathematically impossible that any country paying close to a 20% interest for an extended period of time can pay its debt. This is not a credit card, it’s a country. We need to allow for a debt restructure, Greece cannot raise more taxes or ask anything more from its citizens without getting the government killed. At this point we either allow Greece to restructure its debt or they will be forced to leave the euro. They would need to print their own money and devaluate their currency, with all the trouble it would cause to the whole EU. This brings me to point 3.

3) Devaluate the Euro. It’s amazing, I remember when I lived in the US that the dollar/euro was about 1 to 1. Right now it’s 1 to 0.69, meaning that even after all this mess, the Euro is practically 50% stronger than a few years ago. It only makes sense because the US has been printing crazy amount of money, but still, only up to a point. We could let the Euro devaluate 20% without a problem, help exports and aliviate the debt for Greece. We either do this voluntarely or the market will force devaluation eventually.

4) Lower interest rates. In Europe with all the troubles we are having we had the wonderful idea to raise the interest rates, not once, but twice, just because we were worried about inflation. Inflation is the least of our problems right now. With high unemployment, lower cost of energy and slow GDP growth, inflation is a dormant beast. We also have the advantage that interest rates can be adjusted relatively fast, so even if inflation shows up, we can change the rates in no time. Meanwhile, we can lower the interest rates, lowering our borrowing costs, helping Greece and all countries in trouble and making our currency less attractive which would help with #3 and #2

The problem is that we either move fast or if things get out of hands they will explode on our face with not much room to maneuver.

Stock panic. Yet… wait, didn’t I just write this?

August 4, 2011

August 4, 2011. Interesting week and day “Stocks Sink Amid Global Economic Woes; Dow Plunges More Than 500, Worst Drop Since 2008” on the main page of Yahoo Finance. Worst 9 days in 2 years and it was about to become the worst losing period since 1978.

I’m not here to give advice to anyone and I’m not going to tell you what you should do. I just do what I say and what my principles dictate me: I buy.
And I buy because I’m a value investor. Warren Buffett’s quote “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” sums it up like only him and Ben Graham could. Buffett published this piece on the New York Times right in the midst of the Financial Crisis: http://www.nytimes.com/2008/10/17/opinion/17buffett.html Some people thought he was insane. The fact that after the piece was published the stock market went down some 20% more, didn’t help either. Nowadays his holdings are up between 70-100% in 2 years.

So just like him, I have no clue what the stock market is going to do tomorrow. But I see fear, lots of it. Some of it makes sense and lots not.
This is the situation. On March and April of this year, I was posting on my facebook account saying that the stock market was going up way too fast. It just did not make sense. If you remember, during that period there was the “Arabian Revolution”, Lybia, Egypt, the whole nine-yards going practically on civil war. Oil was skyrocketting. European crisis unfolding. Then Japan earthquake and following nuclear crisis. It would affect all sales, manufacturing and distribution of the auto and tech industries for months to come. What did the stock market do meanwhile? It went up more than 15% in a few months. THAT was insane. Everybody knew that nothing on that list was good for the economy. The projections for growth were hammered, the earnings projections trimmed. Stocks kept waving up and down. With every up day, there was some “finally this seems over” article, and with every down day, there was some “this is only the beginning” article. In short, noise, lots of it. But you have to focus, on macroeconomic news, did it make sense that the stocks were up 15% for the year? No. If the market had only factored in the real news.

So after the “crash” that we are seeing today, people are freaking out that the economy is going to go back on recession and everything is going to collapse. Possibly we are also going on food stamps!… where are we after all? We are exactly at the same level than on January 2011 (or close to May 2010 slide).

So I’m here to tell you: relax. Check the big picture, literally:
Dow Jones Graph

That’s the Dow Jones graph for 2 years. Can you sincerely say looking at the graph that we are on bad shape? I mean, the stock market has just gone through a correction. That’s it. Plain and simple. They happen constantly. Check again that graph. Look at Feb 2010, then May 2010, then March 2011, then May 2011 and then August 2011. They do happen const-ant-ly (spelling and syllable spliting was never my strength on english).

Should you buy then? I don’t know. I’m buying. I have no clue whether the stock market will fall another 10% or go up 30% tomorrow. The stock market is a moody jerk. But from my point of view, today things are way cheaper than yesterday. And way cheaper than 3 months ago. I see no surprise on the numbers at all, this was expected: stagnant growth after everything that has gone on for months. All the problems take 2 to 3 months to make its way through the earning reports. No biggie. Surprisingly 78% of all the S&P500 companies beat the earnings estimates. Things were actually better than expected.

What’s my take on this? I believe that in a few months, probably 2 or 3, with current oil prices down, interest rates near zero, no more supply disruptions, Europe taking care of the crisis, likely a QE3 of some kind and current horrible expectations for growth, companies will most likely post earnings way better than expected. I may be wrong, and I suck at timing the market, but with companies like Morgan Stanley at 70% book value, Wells Fargo at less than book value and Foster Wheeler at 50% discount even after beating estimates by a wide margin, I think I can take my chances.

In any case, remember, we are in a better situation today than yesterday. You can buy the same value cheaper!

But if you can’t handle another 10% drop… then you should probably not be investing, because ups and downs of 20% are the normal on the stock market. My suggestion is to plug some classic music into your ears and look at the numbers without reading the news. Do they look cheap? If not, no need for the news, you are out, if yes, check the news to see whether something that really has an effect on your numbers is being said. Most likely that Congress raised the debt ceiling is not going to have an effect on my chocolate or diet coke intake. Both seem like safe investments.

My latest stock comments

June 13, 2011

I haven’t posted on a long time since I’ve been more busy with the personal blog. Check http://www.joaquingrech.com to see what I’ve been up to.
Nevertheless, I figured it’s not a valid excuse to be busy to not update my blog. Not much of a blog if I don’t post entries right?

After a pretty “relaxing” 2010 on the stock market (by relaxing I mean it went mostly up), now we are back into panic mode. I enjoy these periods because they are usually the best for picking up undervalued great companies. I love in particular one index, the IBEX-35. I’m from Spain and live in Spain, the IBEX-35 is the spanish index of 35 biggest companies. Nobody likes Spain’s economy nowadays, but most importantly, nobody even in Spain thinks this is going to improve at any moment. I believe this is a great buying opportunity. For a long time I didn’t like the IBEX, it just didn’t make sense that with the economy on a 20% unemployment we almost had a correlation of 1 to 1 with the S&P500. The US stock market was up 50% and so was the IBEX, but clearly our economy was not even close to that level of improvement. What did happen? The IBEX has tanked for most of 2010 and fell out of favor. It’s currently at the 9,991 level at which great companies such as Banco Santander, BBVA, Telefonica and Iberdrola are at almost their 52 weeks low while providing dividend payments of 5% and above.

I own all those companies and I’m also buying EWP, which is the Spanish index from iShares. 5% dividend payment while growing with the Spanish economy as a whole. Will I be wrong? who knows, but I just can’t bet against Spain when the fear of collapse is so high and the economy has tanked for such a long period of time. To me it seems to be completely overdone at this point with armageddon already priced in.

What other picks did I comment on during the year?

First, let me say that I almost never short stocks, so eventhough if I mention that a stock is horribly priced, the most I usually do is buy put options on it. Risk/rewards are not good for short sellers on most occassions. Having said so, my latest comments at Fool.com:

China Biotics, CHBT. Recommendation: Sell. Recommendation at $7.57, current price $4.26. (profit so far 45.84%)
“Already 2 serious sources indicate this to be fraud. You can see the stock price just keep going down the more reports come out.
So far nobody has been able to identify their customers. The list of customers that they made public, were contacted by researchers and none were able to confirm operations with them. The company states to have about 400 employees but visits to their offices were not able to see more than 30-50 people.
All in all, it seems that although operational, they have vastly overstated production, income, earnings and most other important figures.”

TBS International, TBSI. Recommendation: Sell. Recommendation at $1.53, current price $0.93. (profit so far 39.22%)
“I was majorly hurted by this purchase. I went into it without even reading the 10k just based on what other people was saying. Biggest mistake of the year, i’m down 50% on real $. I took the time to pull out the 10k and analyze it in detail before deciding to sell/buy it and this is my conclusion:

This company is burning cash, way too fast. The issue is that due to a slowdown in the sector they are not generating cash flow. To finance themselves they’ve pulled a bunch of loans but what they used to be long-term debt are not short-term debt. To give you an idea they ended 2010 with $332mm debt due this year and only with $18mm cash and total current assets of $80mm. Basically the only way to raise the cash with their income is to begin selling assets quick. You know that’s not a good sign already.

If they are able to raise some cash to survive this year, they might be able to not go kaput, but as an investment that’s highly speculative. Looking at the debt, assets and market cap, the company is worth more dead than alive, and I don’t feel it can beat the market at this moment.

I’m flipping my outperform (wihout analysis) to underpeform (after looking at it myself). Conclusion, do your own reseach so at least when you get burned you learn something from your mistake.”

Rino International, RINO.PK. Recommendation: Sell. Recommendation at $2.00, current price $0.54. (profit so far 72.95%)
“seems to be on the way to bankruptcy”

JBI, Inc. JBII.PK. Recommendation: Sell. Recommendation at $0.65, current price $3.90. (lost so far 496.17%)
“wow, i have a negative 400s score on this one… that’s why i almost never short stocks on real life.
In here though, I have the time to be proven right without going bankrupt and I just don’t see the numbers adding up for this company.”
I will write more about this stock in next post since it’s a perfect example of why not to short stocks. This stock reminds me of Wicked’s soundtrack “Defying gravity”: http://www.youtube.com/watch?v=0eF06fNK3Ng
Even if I’m proven right later, imagine a 5 times your investment lost. It would have wiped out all your gains from previous investments.

Kraft Foods, KFT. Recommendation: Buy. Recommendation at $25.05, current price $34.15. (profit so far 36.80%)
“valuation”

SunTrust Banks, STI. Recommendation: Buy. Recommendation at $26.63, current price $25.40. (lost so far 4.38%)
“valuation”

US Bancorp, USB. Recommendation: Buy. Recommendation at $22.96, current price $24.28. (profit so far 6.06%)
“valuation”

General Electric, GE. Recommendation: Buy. Recommendation at $14.68, current price $18.40. (profit so far 25.54%)
“valuation”

Johnson & Johnson, JNJ. Recommendation: Buy. Recommendation at $53.81, current price $66.22. (profit so far 24.04%)
“valuation”

Pfizer Inc, PFE. Recommendation: Buy. Recommendation at $14.24, current price $20.52. (profit so far 44.08%)
“valuation”

Becton, Dickinson & Company, BDX. Recommendation: Buy. Recommendation at $64.87, current price $84.98. (profit so far 31.40%)
“I trust Buffett” (not exactly the best analysis, but hey, at a P/E of 10 with Buffett backing it… I kiss it blindfolded).

And that’s all for a quick summary.

A Year After a Cataclysm, Little Change on Wall St.

September 12, 2009

http://www.nytimes.com/2009/09/12/business/12change.html?_r=1

The article and the video at the left is great.

A new paradigm… for those who don’t study history

May 31, 2009

During the current crisis, I often read or hear people talking about how we are in a “new era”, living a “paradigm shift” or “the end of wall street as we know it”. People have short memory span and although never exactly the same, history does rhyme, or as the saying goes, the more things change, the more they remain the same.

Please, play with me this little game. Let’s see whether you are able to identify the time of this happenings and whether you find similarities with anything in the past:

“As the long bull market was reaching its final peak in XXXX another mistake ocurred. To understand what happened it is necessary to recreate the psychological fever which gripped most investors in technological and scientific stocks at that time. Shares of these companies, particularly many of the smaller ones, had enjoyed advances far greater than the market as a whole. During XXXX and XXXX only one’s imagination seemed to cap the dreams of imminent success for many of these companies. Some of these situations did have genuine potential, of course. Discrimination was at a low ebb. For example, any company serving the computer industry in any way promised a future, many believed, that was almost limitless. This contagion spread into instrument and other scientific companies as well.”

Can anyone approximate the year?

What about this one?

“Incompetent, dishonest, and fraudulent behavior by corporate executives, boards of directors, auditors, investment bankers, security analysts, and other market participants. They exaggerated revenues, embellished earnings, and concealed debt, all to make the company’s financial performance look better than it was. The payoffs for the executives were higher share prices that allowed them to turn their stock options into gold. For the auditors and financial firms doing business with these companies, the payoffs were lucrative consulting contracts and underwriting fees. The exposure of the chicanery left large parts of the investing public without faith in the honesty and fairness of financial markets and with less inclination to participate in the future. The guardians failed to do their jobs. The bubble market made many forget about the riskiness of the stock market, and the collapse of the bubble made many exaggerate it, helping to delay recovery.”

Game on.

The Snowball: an ethical masterpiece

April 3, 2009

I’ve just finished: The Snowball, Warren Buffett and the Business of Life, by Alice Schroeder.

It should be required reading for every MBA student and entrepreneur. It’s an ethical masterpiece.

Hopefully Mr. Buffett allows for a continuation narrating the current and coming years.

I bought the book at Amazon and shipping to Spain was surprisingly cheap.

Eaton Corp: My first public stock analysis

February 25, 2009

This is my first public stock analysis. You are more than welcome to correct me on my calculations and assumptions.

Eaton Corp. (ETN)

History:

I first came across Eaton upon reading Berkshire’s new purchases in the last quarter of 2008. At first glance it seemed a great company and BRK bought it in the $45 – $50 range. ETN is currently trading at $37. I decided to see if this is bargain opportunity.

Company summary:

Eaton Corporation designs, manufactures, markets, and services electrical systems and components worldwide. It offers electrical products for power quality, distribution, and control; fluid power systems and services for industrial, mobile, and aircraft equipment; intelligent truck drivetrain systems for safety and fuel economy; and automotive engine air management systems, powertrain solutions, and specialty controls for performance, fuel economy, and safety. For more info about the company and its cool products check: ool products check: http://www.eaton.com and http://finance.yahoo.com/q/pr?s=ETN

1) Does the company have an identifiable consumer monopoly or brand-name product?

70% of Eaton’s revenue comes from hydraulics and electrical products. 30% from automotive and truck segment (it is the world’s leading manufacturer in this segment). Eaton’s used to focus in the automotive/truck business and it was very dependent on it but the past few years diversification into a more profitable hydraulic/electrical manufacturing business has provided them with a wider diversification against economic downturns and cyclical businesses. Although it does not have an exclusive monopoly, any competitor will encounter significant headwinds to create the factories and equipment and acquire the contracts required to provide similar products and services.

2) Do you understand how it works?

Want to buy a golf club? Eaton is the world’s largest producer of golf club grips.

Need breaks for your truck, factory equipment or a huge boat? Eaton’s Airflex technology is there.

Eaton designs, manufactures, stress-tests, installs, maintains and finally trains your staff on location.

From Oil & Gas excavations, to army/navy, grinding, paper, metal working and mining. These guys are everywhere!

Most importantly, once a product is installed, the customer doesn’t go shopping around for new updates. After all, you can’t change the hydraulics of a dam every week. Customers do keep signing maintenance contracts and buying new pieces for broken machinery.

Eaton’s strategy since Sandy Cutler took charge in 2000 has been to utilize the revenue from its truck and auto business to fund investment in more profitable ventures. It has paid out handsomely and they continue to follow the same strategy.

3) Is the company conservatively financed?

Year 2008 in millions:

Long-term debt:

$2,921

Other LT liabilities:

$2,565

Earnings:

$1,253

It can pay off its debt in: 4.38 Years

4) Are the earnings of the company strong and do they show an upward trend?

Year

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

EPS

$2.97

$3.26

$1.65

$2.19

$2.67

$4.22

$5.38

$6.39

$6.76

$6.65

Growth:

9%

annual rate from 1999 to 2008

Growth:

22%

annual rate from 2001 to 2008

Earnings were affected by the crisis in 2001 but we can see that Sandy Cutler did an excellent job after he took office. Eaton grew earnings at a 22% annual rate.

5) Does the company allocate capital only to businesses within its realm of experience?

Yes.

6) Has the company been buying back stock?

Yes and no. They bought in 2005 and sold in 2008.

I’m looking for the filings but it seems they bought in 2005 at around $65 and sold in 2008 at about $95 which would be all good.

In any case, this is not a major point in favor or against Eaton but with Berkshire on the board, things can improve considerably.

7) Does management’s investment of retained earnings appear to have increased shareholder’s
value?

Year

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

EPS

$2.97

$3.26

$1.65

$2.19

$2.67

$4.22

$5.38

$6.39

$6.76

$6.65

Dividends

$0.88

$0.88

$0.88

$0.88

$0.92

$1.08

$1.24

$1.48

$1.72

$2.00

Dividends growth:

9.55%

Earnings from 1999 to 2008:

$42.14

Earnings Growth:

$3.68

Dividends paid:

$11.96

Retained earnings:

$30.18

Earnings grew from $2.97 to $6.65 ($3.68 growth) thanks to $30.18 in retained earnings.

This translates to:

12.19%
A 12.19% annual rate of return. Pretty good but not fantastic.

If we look at the performance after the 2001 crisis:

Earnings from 2001 to 2008:

$35.91

Earnings Growth:

$5.00

Dividends paid:

$10.20

Retained earnings:

$25.71

Earnings grew from $1.65 to $6.65 ($5.00 growth) thanks to $25.71 in retained earnings.

This translates to: 19.45% annual rate of return. Good.

Either way, it’s a good number during and after the crisis.

8) Is the company’s return on equity above average?

Year

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

ROE

16.70%

15.90%

9.40%

13.70%

12.90%

18.40%

21.90%

23.80%

19.70%

16.50%

Eaton’s Average:

16.89%

ROE

USA Average:

12%

Most importantly. Eaton has consistently earned above average ROE.

9) Does the company show a consistently high return on total capital?

Year

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

ROTC

11.10%

9.50%

6.20%

8.80%

9.30%

13.10%

15.50%

17.40%

14%

12.50%

Eaton’s Average:

11.74%

USA Average:

12%

This is pretty close to American corporations’ average. Nothing to be excited about but nothing horrible either.

10) Is the company free to adjust prices to inflation?

It’s more dependent on manufacturing costs but they do raise contract prices on inflation.

11) Are large capital expenditures required to constantly update the company’s plant, equipment and products?

No. Once a product line is built, it stays the same. In the case of custom built products, they are financed by the customer.

12) How does it rank in Earnings Yield and Return in Capital? (Joel Greenblatt’s Magic Formula)

Playing around with Value Line and Excel, I found that ETN ranked 184 out of 1822 when using 2008 data. If I use the estimated 2009 information, it ranks 148 out of 1822. While not in the top 30, it’s definitely above average.

Conclusion:

I don’t see anything clearly negative so far. I would be happier with a higher ROTC but it’s not a deal breaker either.

Eaton Corp: Price Analysis

1) Compare Eaton to a 10yr government bond:

In 2008:

Estimated 2009:

Eaton’s Earnings:

$6.65

$4.18

10yr Bond:

2.81%

2.81%

Eaton’s relative value:

$236.65

 

$148.75

This means that if you paid $236.65 (or $148 if you use the estimate) a share for Eaton, you’d be getting the same return than a 10 year gov bond.

At today’s price:

$37

Earnings:

$6.65

Return %:

17.97%

 

17.97% return on your investment if earnings don’t fall, which of course, high chances they will this year.

A look at the earnings growth for the past 9 years: 9% for the low range (22% for the high range)

Means that if you bought Eaton today at $37, you’ll be getting the equivalent of a bond paying a 17.97% yield that increases the coupon payments at 9% annually.

Since earnings will most likely fall due to the crisis, the current earnings estimate
for 2009 is $4.18. Doing the same calculation:

Return %:

11.30%

on your investment if you bought it today at $37

and expect it to grow at 9% annually.

2) Eaton as an equity/bond

Equity value per share:

$35.42

book value

If Eaton can maintain its average annual return on equity of 16.89% over the next 10 years and continues to retain a historical 71% of that return, then the per share equity value should grow at:

Retained earnings:

71%

ROE:

16.89%

Growth rate of per share equity:

11.99%

In year 2019:

$109.94
Equity per share value

Growing at 16.89% earnings per share should then be:

$18.57

and if it’s trading at its low P/E of 10, it should be trading at:

$185.70

but if it’s trading at its high P/E of 18 it should be trading at:

$334.25

Projected earnings:

Dividends are growing at 9.55%

Year

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

EPS at 9%

$4.18

$4.56

$4.97

$5.41

$5.90

$6.43

$7.01

$7.64

$8.33

$9.08

$9.90

EPS at 22%

$4.18

$5.10

$6.22

$7.59

$9.26

$11.30

$13.78

$16.81

$20.51

$25.03

$30.53

Dividend

$2

$2.19

$2.40

$2.63

$2.88

$3.16

$3.46

$3.79

$4.15

$4.55

$4.98

Total dividends paid:

$36

If in 2009 it’s trading at its low P/E of 10, it should be trading at:

$98.96

but if it’s trading at its high P/E of 18 it should be trading at:

$549.60

Therefore Eaton should be trading between $98 and $549 in 2019 and paid out $36 in dividends. If you bought shares today at $37:

Lower end return:

14%

annual return

High end return:

32%

annual return

You are beating the market. Still, I think it's better
to use a EPS growth rate of 16% (value line suggest 17%)

In that case:

Year

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

EPS at 16%

$4.18

$4.85

$5.62

$6.52

$7.57

$8.78

$10.18

$11.81

$13.70

$15.90

$18.44

Dividend

$2

$2.19

$2.40

$2.63

$2.88

$3.16

$3.46

$3.79

$4.15

$4.55

$4.98

If in 2009 it’s trading at its low P/E of 10, it should be trading at:

$184.40

but if it’s trading at its high P/E of 18 it should be trading at:

$331.92

Therefore Eaton should be trading between $184 and $331 in 2019 and paid out $36 in dividends. If you bought shares today at $37:

Lower end return:

20%

annual return

High end return:

26%

annual return

 

Also to add margin of safety, a suggestion is to consider a doomsday scenario
where last years earnings are cut in half. Instead of assuming a EPS of $4.18
for 2009 as is the current consensus, I take half of the EPS in 2008: $3.32 and
then set earnings growth flat until 2012:

In that case:

Year

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

EPS at 16%

$3.32

$3.32

$3.32

$3.85

$4.47

$5.18

$6.01

$6.97

$8.09

$9.38

$10.88

Dividend

$2

$2.19

$2.40

$2.63

$2.88

$3.16

$3.46

$3.79

$4.15

$4.55

$4.98

If in 2009 it’s trading at its low P/E of 10, it should be trading at:

$108.84

but if it’s trading at its high P/E of 18 it should be trading at:

$195.92

Therefore Eaton should be trading between $108.84 and $195.92 in 2019 and paid out $36 in dividends. If you bought shares today at $37:

Lower end return:

15%

annual return

High end return:

20%

annual return

A great investment any way you look at it at the current price as long as it can keep up its growth prospect as well as it has done during the past 10 years.

Oh Berkshire

February 19, 2009

I’ve been courting Miss Hathaway for three years. We were introduced by a common friend and I developed an instant crush. I’m not sure her father would approve, but every few months I manage to get the guts to arrive with flowers to her door.

She has hardly noticed me. The always beautiful and refined Berkshire moves in higher circles surrounded by majesty, hedge fund managers and famous CEOs. She is in the A list of every major club. I watch her flirt with Mr. Cola and go out with Miss Eaton and Miss Ir to chic restaurants. Jealousy is killing me. Her status hasn’t deterred me from trying to impress her. I’ve saved money, I’ve let her known about my business education plans and I’ve even written a letter to her father complimenting his work raising her. All I managed to achieve was to take her out for dinner where she gave me a few B-kisses before dropping her back at home. It was a very expensive night with little results.

But times are changing. Her latest flings are provoking envy among her friends. They say she is uptight, that she is expending money unwisely and confident in her status-quo as the most desired lady in town. Some of her closest friends are turning their back on her. They are just jealous of her success. All the while I’m here waiting for her to notice me, enjoying Eaton’s company in private. But my heart belongs to you Berkshire. I hope one day you look down and bring me up to your A list.

Oh Berkshire, when will you notice me?


Berkshire Hathaway lives in Omaha with her adoptive parents Warren Buffett and Charlie Munger. She’s currently offering her services at $80,000

Principle Investing – Introductory Post

December 25, 2008

“Our method is very simple. We just try to buy businesses with good-to-superb underlying economics run by honest and able people and buy them at sensible prices. That’s all I’m trying to do.”1 – Warren E. Buffett

Since this is the first entry of the blog, I feel compelled to introduce myself and talk a bit about the purpose.

My name is Joaquin Grech Gomendio.2 I was born in Madrid, Spain, the same day that Viking 1 landed on Mars.3 I’m oddly proud of my birth date. During my childhood, I seem to have developed a talent for problem-solving and somehow that drove me to write computer programs at a very early age. In 2003, I graduated from New York University with a double major in Computer Science and Latin American Studies. I had never studied finance.

In 2005, committed to a serious relationship, I realized I needed savings to plan for the future. The financial industry is where the money was; therefore I joined a Wall Street firm to help develop its fixed-income & derivatives software.4 I had always found conversations about finance as appealing as going shoe shopping,5 but I was quickly drawn in by the challenge. I realized that most fixed-income instruments were out of my reach and I started focusing in equities (stocks) during my free time. It wasn’t long before I became infatuated with value investing and began torturing my colleagues with long financial ramblings.

While reading investing material, I found a common pattern among great investors. They all had a set of rules or principles that they adhered to without letting emotions take over. That’s how the title of this blog came to be. In addition; there is nothing better than writing to clarify and organize your thoughts. The purpose of this blog is for me to better exteriorize my passion for finance while trying to keep it entertaining. I’ll try to avoid bombastic or technical language, first and most obviously, because I lack vocabulary and second, because I would bore everyone to death without adding any substance.

One thing that I loved about investing is that it’s simple. Not easy, but simple. Anyone regardless of his or her background can do it. We tend to reward complexity even if it lacks usefulness, but in investing the simplest solution is often the best solution. You just need to remember that you are trying to buy $1 for less, or putting it another way, selling 50 cents for a dollar. It does happen quite often in the stock market.

I am by no means a financial expert. I just enjoy investing and sharing my thoughts. I tend to avoid giving advices at this stage of my financial knowledge but I do always give one:

Avoid learning from your mistakes; learn from other people’s mistakes. Most people don’t learn from history; try not to be one of them. Read Benjamin Graham, Warren Buffett, Philip Fisher, Peter Lynch, Bruce Greenwald, Joel Greenblatt, Jeremy Siegel, Jim Jubak6 and any other known fundamental investor. Read their biographies, find out about their investing partners, and study their investing principles. Study the people that inspired them. There are a lot of great investors alive, even if they can’t be your personal mentor you can interact with them at conferences, meetings or by email.

On a final note, I’m a fundamental investor.7 I believe technical analysis8 (predictions made based on price/volume/charts) is equivalent to predicting a woman’s intelligence by the way she looks: you may be right but you wouldn’t bet your house on it.

And with this…

I declare inaugurated Principle Investing.


1. “A Tribute to Ben Graham” [speech] December 6, 1994 at the New York Society of Financial Analysts.
2. In Spain we inherit one family name from each parent.
3. Viking 1 landed on Mars exactly seven years after Neil Armstrong set foot on the Moon.
4. Wikipedia description: Fixed-income and derivatives.
5. Explanation about the shoe shopping fact.
6. Benjamin Graham, Warren Buffett, Philip Fisher, Peter Lynch, Joel Greenblatt, Jeremy Siegel, Bruce Greenwald and Jim Jubak
7. Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets.
8. Technical analysis is a security analysis technique that claims the ability to forecast the future direction of prices through the study of past market data, primarily price and volume.