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.

Why I don’t give a WACC about Beta

July 29, 2010

One comment I always get when I worry about my financial management exams is: come on, you are an expert on this.

It seems to be a missunderstanding that since I invest and read tons about investing, I must be some kind of guru in all financial matters. Well, this is not true, I don’t get many As on finance, I don’t have a CFA and most likely would do horribly at it since I have a memory span of a fish. This, nevertheless, never stopped me from investing. From my point of view, if for investing I need to do something so complex that I don’t understand it… I don’t invest on it. I go for what I consider easy stuff, why bother if my IQ can’t hit that line? As David Allen very wisely told me: “To be rich, you don’t even need to be smart, just in case that worried you.”

So I knew what WACC was, but I’ve never had to use it. It includes Beta, and I’m mostly allergic to it. I had a conversation with one of my financial profs where I explained why I didn’t believe in Beta. He/she argueed that it was the best thing without any doubt to measure investment risk. When I asked how much he/she had made investing using this method, the reply was: “I believe the stock market is a lottery so I don’t invest.”

Good that he/she teaches it as an investment tool then.

So why I don’t believe in Beta or diversification for that matter? Because long ago I read this and I fully agree. It makes sense and it comes from a very trusted source.
==

The strategy we’ve adopted precludes our following standard
diversification dogma. Many pundits would therefore say the
strategy must be riskier than that employed by more conventional
investors. We disagree. We believe that a policy of portfolio
concentration may well decrease risk if it raises, as it should,
both the intensity with which an investor thinks about a business
and the comfort-level he must feel with its economic characteristics
before buying into it. In stating this opinion, we define risk,
using dictionary terms, as “the possibility of loss or injury.”

Academics, however, like to define investment “risk”
differently, averring that it is the relative volatility of a stock
or portfolio of stocks – that is, their volatility as compared to
that of a large universe of stocks. Employing data bases and
statistical skills, these academics compute with precision the
“beta” of a stock – its relative volatility in the past – and then
build arcane investment and capital-allocation theories around this
calculation. In their hunger for a single statistic to measure
risk, however, they forget a fundamental principle: It is better
to be approximately right than precisely wrong.

For owners of a business – and that’s the way we think of
shareholders – the academics’ definition of risk is far off the
mark, so much so that it produces absurdities. For example, under
beta-based theory, a stock that has dropped very sharply compared
to the market – as had Washington Post when we bought it in 1973 –
becomes “riskier” at the lower price than it was at the higher
price. Would that description have then made any sense to someone
who was offered the entire company at a vastly-reduced price?

In fact, the true investor welcomes volatility. Ben Graham
explained why in Chapter 8 of The Intelligent Investor. There he
introduced “Mr. Market,” an obliging fellow who shows up every day
to either buy from you or sell to you, whichever you wish. The
more manic-depressive this chap is, the greater the opportunities
available to the investor. That’s true because a wildly
fluctuating market means that irrationally low prices will
periodically be attached to solid businesses. It is impossible to
see how the availability of such prices can be thought of as
increasing the hazards for an investor who is totally free to
either ignore the market or exploit its folly.

In assessing risk, a beta purist will disdain examining what a
company produces, what its competitors are doing, or how much
borrowed money the business employs. He may even prefer not to
know the company’s name. What he treasures is the price history of
its stock. In contrast, we’ll happily forgo knowing the price
history and instead will seek whatever information will further our
understanding of the company’s business. After we buy a stock,
consequently, we would not be disturbed if markets closed for a
year or two. We don’t need a daily quote on our 100% position in
See’s or H. H. Brown to validate our well-being. Why, then, should
we need a quote on our 7% interest in Coke?

In our opinion, the real risk that an investor must assess is
whether his aggregate after-tax receipts from an investment
(including those he receives on sale) will, over his prospective
holding period, give him at least as much purchasing power as he
had to begin with, plus a modest rate of interest on that initial
stake. Though this risk cannot be calculated with engineering
precision, it can in some cases be judged with a degree of accuracy
that is useful. The primary factors bearing upon this evaluation
are:

1) The certainty with which the long-term economic
characteristics of the business can be evaluated;

2) The certainty with which management can be evaluated,
both as to its ability to realize the full potential of
the business and to wisely employ its cash flows;

3) The certainty with which management can be counted on
to channel the rewards from the business to the
shareholders rather than to itself;

4) The purchase price of the business;

5) The levels of taxation and inflation that will be
experienced and that will determine the degree by which
an investor’s purchasing-power return is reduced from his
gross return.

These factors will probably strike many analysts as unbearably
fuzzy, since they cannot be extracted from a data base of any kind.
But the difficulty of precisely quantifying these matters does not
negate their importance nor is it insuperable. Just as Justice
Stewart found it impossible to formulate a test for obscenity but
nevertheless asserted, “I know it when I see it,” so also can
investors – in an inexact but useful way – “see” the risks inherent
in certain investments without reference to complex equations or
price histories.

Is it really so difficult to conclude that Coca-Cola and
Gillette possess far less business risk over the long term than,
say, any computer company or retailer? Worldwide, Coke sells about
44% of all soft drinks, and Gillette has more than a 60% share (in
value) of the blade market. Leaving aside chewing gum, in which
Wrigley is dominant, I know of no other significant businesses in
which the leading company has long enjoyed such global power.

Moreover, both Coke and Gillette have actually increased their
worldwide shares of market in recent years. The might of their
brand names, the attributes of their products, and the strength of
their distribution systems give them an enormous competitive
advantage, setting up a protective moat around their economic
castles. The average company, in contrast, does battle daily
without any such means of protection. As Peter Lynch says, stocks
of companies selling commodity-like products should come with a
warning label: “Competition may prove hazardous to human wealth.”

The competitive strengths of a Coke or Gillette are obvious to
even the casual observer of business. Yet the beta of their stocks
is similar to that of a great many run-of-the-mill companies who
possess little or no competitive advantage. Should we conclude
from this similarity that the competitive strength of Coke and
Gillette gains them nothing when business risk is being measured?
Or should we conclude that the risk in owning a piece of a company
– its stock – is somehow divorced from the long-term risk inherent
in its business operations? We believe neither conclusion makes
sense and that equating beta with investment risk also makes no
sense.

The theoretician bred on beta has no mechanism for
differentiating the risk inherent in, say, a single-product toy
company selling pet rocks or hula hoops from that of another toy
company whose sole product is Monopoly or Barbie. But it’s quite
possible for ordinary investors to make such distinctions if they
have a reasonable understanding of consumer behavior and the
factors that create long-term competitive strength or weakness.
Obviously, every investor will make mistakes. But by confining
himself to a relatively few, easy-to-understand cases, a reasonably
intelligent, informed and diligent person can judge investment
risks with a useful degree of accuracy.

In many industries, of course, Charlie and I can’t determine
whether we are dealing with a “pet rock” or a “Barbie.” We
couldn’t solve this problem, moreover, even if we were to spend
years intensely studying those industries. Sometimes our own
intellectual shortcomings would stand in the way of understanding,
and in other cases the nature of the industry would be the
roadblock. For example, a business that must deal with fast-moving
technology is not going to lend itself to reliable evaluations of
its long-term economics. Did we foresee thirty years ago what
would transpire in the television-manufacturing or computer
industries? Of course not. (Nor did most of the investors and
corporate managers who enthusiastically entered those industries.)
Why, then, should Charlie and I now think we can predict the
future of other rapidly-evolving businesses? We’ll stick instead
with the easy cases. Why search for a needle buried in a haystack
when one is sitting in plain sight?

Of course, some investment strategies – for instance, our
efforts in arbitrage over the years – require wide diversification.
If significant risk exists in a single transaction, overall risk
should be reduced by making that purchase one of many mutually-
independent commitments. Thus, you may consciously purchase a
risky investment – one that indeed has a significant possibility of
causing loss or injury – if you believe that your gain, weighted
for probabilities, considerably exceeds your loss, comparably
weighted, and if you can commit to a number of similar, but
unrelated opportunities. Most venture capitalists employ this
strategy. Should you choose to pursue this course, you should
adopt the outlook of the casino that owns a roulette wheel, which
will want to see lots of action because it is favored by
probabilities, but will refuse to accept a single, huge bet.

Another situation requiring wide diversification occurs when
an investor who does not understand the economics of specific
businesses nevertheless believes it in his interest to be a long-
term owner of American industry. That investor should both own a
large number of equities and space out his purchases. By
periodically investing in an index fund, for example, the know-
nothing investor can actually out-perform most investment
professionals. Paradoxically, when “dumb” money acknowledges its
limitations, it ceases to be dumb.

On the other hand, if you are a know-something investor, able
to understand business economics and to find five to ten sensibly-
priced companies that possess important long-term competitive
advantages, conventional diversification makes no sense for you.
It is apt simply to hurt your results and increase your risk. I
cannot understand why an investor of that sort elects to put money
into a business that is his 20th favorite rather than simply adding
that money to his top choices – the businesses he understands best
and that present the least risk, along with the greatest profit
potential. In the words of the prophet Mae West: “Too much of a
good thing can be wonderful.”

From Warren Buffett in 1992 annual report. Full text in:
http://www.berkshirehathaway.com/letters/1993.html

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.