Concentrating on a few companies is a great way to learn investing

You want to start investing, but you have no idea of where to start. Where do you begin to learn investing?

Blue picture with text about following a handful of companies

In the beginning it can seem overwhelming.

Should you invest in bonds, stocks or a combination of both?

If you begin with equities should you start with bigger companies or smaller?

How do you pick the stocks in which you want to invest in the first place?

The default option is to invest in an index fund – I’ve been talking about that solution before.

There is a small problem with that solution though and that is that it is boring.

Therefore I suggest that you choose three to five stocks that are publicly traded and you begin to follow them.

The good news is that you only need to look at this four times a year.

Set up a spreadsheet where you track key numbers like Price, Earnings, Current/Total Assets and Current/Total Liabilities.

You can do it like this:

Key numbers of a hypothetical company, ABC Corp., for the four quarters of 2017.

Figure 1. Key numbers of a hypothetical company, ABC Corp., for the four quarters of 2017.

With just these five indicators you will be able to draw conclusions about the financial health of the companies that you are following.

Have they had an exceptionally bad/good quarter and why is that?

Then after a few quarters you will understand the Balance sheet better.

You will know how the companies are making their money and you will be able to calculate ratios like Working capital (Current assets – Current liabilities), Equity (using the Fundamental accounting equation) and the Price to earnings ratio.

Conclusion:

One of the best ways to start investing is to follow a handful of companies. In the US companies traded on the stock exchange are required by law to submit a financial report every quarter.

Just keep track of the companies’ earnings, their assets and their liabilities and you are on your way to become a financial analyst.

 

 

 

McDonald’s

Fundamental analysis of McDonald’s (MCD), June 24, 2017

White picture of McDonald's logo with McDonald's text

Description:

McDonald’s is not a small-cap stock, but nevertheless a value proposition that fits into this article.

The company is one of the world’s leading fast food chains with more than 36,000 restaurants around the world.

 

Valuation:

McDonald’s is not cheap at 28.4 times earnings. Average earnings of the past three years come in at 5.02 which gives a P/E ratio of 30.8. Because of the high Goodwill, the Book value is negative. The company has $1.4 billion in Working capital which means that it is able to pay its short-term bills.

 

Balance sheet:

The company has a negative equity which in theory means that a shareholder owes money to creditors if the company goes bankrupt. This does not look good.

 

Free cash flow and dividend:

McDonald’s has a Free cash flow of $4.2bn which allows the company to pay out a nice dividend of $3.61 per share. Furthermore, the company is part of the Dividend Aristocrats which means that they have paid out uninterrupted and increasing dividends over the past 20 years. The dividend yield, on the other hand, is low at 2.3%.

 

Conclusion:

At $154.64 the McDonald’s stock is too expensive for me.

 

 

 If you would like to learn more about fundamental analysis you can do that here.

Technical analysis

Today I want to look at technical analysis of precious metals and other commodities.

Orange picture of graph with text about technical analysis

Technical analysis of crude oil, July 19, 2017

This is a weekly chart of crude oil:

Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white.

Figure 1. Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

Description:

The chart is extending its right shoulder in a head-and-shoulders pattern. The chart looks heavy and I believe it will go lower from here.

 

The bullish scenario:

In the bullish scenario prices defy gravity and go up from here. I would give this a low probability of 5 per cent.

 

The bearish scenario:

In the bearish scenario prices go down from here. Given that the chart looks heavy I would give this a high probability: 95 per cent.

 

Conclusion:

The chart looks poised to go lower with a head-and-shoulders pattern developing.

Technical analysis of crude oil, July 13, 2017

Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white

Figure 1. Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

Description:

The chart looks heavy with a left shoulder, a head and a right shoulder. This is usually a sign of the chart going lower from here.

Furthermore, prices are being pushed down by the 100-week moving average.

 

The bullish scenario:

In the bullish scenario prices defy gravity and edge higher from here.

I would give this a probability of 15 per cent.

 

The bearish scenario:

In this scenario prices are indeed being pushed down by the 100-week moving average.

Given the current shape of the chart, I would give this a probability of 85 per cent.

 

Conclusion:

My reading of the crude oil chart is that it is likely to go lower from here.

 

 

Technical analysis of gold, July 6, 2017

This is a weekly chart of gold:

Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white.

Figure 2. Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

Description:

The chart is caught between a descending trend line and a rising 100-week moving average.

 

The bullish scenario:

In this scenario prices are pushing up against the descending trend line and then through it.

Given the chart pattern I give this a probability of 65 per cent.

 

The bullish/bearish scenario:

Here prices are advancing up but then they go down at the trend line.

I would give this scenario a probability of 20 per cent.

 

The bearish scenario:

In this scenario prices are inexplicably going down from here.

I would give this a probability of 5 per cent.

 

The bearish/bullish scenario:

Here prices fall just like above, but when they reach the ascending trend line they change direction and head up.

I would give this a probability of 10 per cent.

 

 

Technical analysis of crude oil, July 1, 2017

This is a weekly chart of crude:

 

Weekly chart of crude oil (XOIL.X) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white.

Figure 3. Weekly chart of crude oil (XOIL.X) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

Description:

The chart is getting squeezed between two opposing trend lines. The one above is descending while the one below is lateral.

If we wait a couple of weeks we may see head-and-shoulders pattern forming.

 

The bullish scenario:

In the bullish scenario prices continue on their upward path that began this week (I didn’t believe that it would).

I would give such a scenario a low probability of 10 per cent.

 

The bearish scenario:

In this scenario prices are being pushed down the 100-week moving average.

I would give such a scenario a high a probability: 90 per cent.

 

Conclusion:

The chart looks bearish. We’ve tested the lateral trend line several times the past six months and in my opinion it will fall. The question is how deep.

Technical analysis of gold, June 26, 2017

This is what a weekly chart of gold looks like:

Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white

Figure 4. Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

Description of chart:

Prices are now sitting on a declining 50-week moving average. If they go up from here they will face overhead resistance in the form of a descending trend line and if they fall they are likely to be caught by the ascending 100-week moving average below.

 

The bullish scenario:

In this scenario prices are being saved by the 50-week moving average that will act as support. After that they will then continue through the descending trend line.

This is an unlikely scenario because of the nature of the chart pattern.

I would only give this scenario a probability of 10 per cent.

 

The bullish/bearish scenario:

This scenario is as the one above with the difference that prices stop at the descending trend line and go down from there.

I give that scenario a probability of 30 per cent.

 

The bearish scenario:

In this scenario prices go down all the way through the 100-week moving average and the ascending trend line.

This is unlikely to happen but nevertheless I give it a probability of 5 per cent.

 

The bearish/bullish scenario:

In this scenario prices first fall but are then caught either by the ascending 100-week moving average or the ascending trend line below in the chart.

I would give such a scenario a probability of 55 per cent.

 

 

Technical analysis of crude oil, June 21, 2017

This is a weekly chart of crude oil:

Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white

Figure 5. Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

Description:

The chart has been in a pennant until a few weeks ago. Now all the resistance in the chart is gone.

 

The bullish scenario:

In this scenario prices neglect gravity and head up from here without sensing any downward pressure.

While this scenario is not impossible, I don’t consider it likely.

I would give such a scenario a probability of 1 per cent.

 

The bearish scenario:

In this scenario prices go down because there is no resistance left in the chart.

At this juncture this is the likely scenario.

I would give such a scenario a probability of 99 per cent.

 

Conclusion:

It seems likely that we are going to fill up our cars cheaply this summer.

 

Technical analysis of gold, June 19, 2017

This is a weekly chart of gold:

Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white

Figure 6. Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

Description:

The chart is in a pennant, currently on its way down, and once it breaks out of the resistance or the support, the move will be violent.

The bullish scenario:

In this scenario prices head up from here and break out of the resistance that is weighing on the upside.

Its not an unlikely scenario, but I would only give it a probability of 20 per cent.

The bearish scenario:

In this scenario prices go down from here. This is the more likely scenario given how prices have moved lately.

I would give such a scenario a probability of 80 per cent.

Conclusion:

In the short-term prices are likely to continue down, but in the medium-term it looks as though they are moving up. The reason why I say this is because prices have been knocking on the upper resistance zone at least twice recently. It would surprise me if they did not succeed to go through at some point.

 

 

Technical analysis of gold, June 12, 2017

This is what a weekly chart of gold looks like:

Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white

Figure 7. Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

Prices sit just at the descending trend line and depending upon where they move from here will determine their movement for a long time.

 

The bullish scenario

In this scenario prices are slowly edging their way through the descending trend line.

If the resistance is gone prices have no immediate thing stopping them from much higher.

In favor of this is the fact that we are above both the 50-week and the 100-week moving averages.

Given the lower high made in February, I’d still give such a scenario a probability of 40 per cent.

 

The bearish scenario

In this scenario prices are headed lower from here.

The arguments for lower prices are the same as above.

I would give such a scenario a probability of 60 per cent.

Technical analysis of crude oil, June 09, 2017

This is a weekly chart of crude oil:

Daily chart of the crude oil index (XOIL.X). 50-day moving average is in blue and 100-day is in turquoise. Ascending and descending straight trend line are in white.

Figure 8. Daily chart of the crude oil index (XOIL.X). 50-day moving average is in blue and 100-day is in turquoise. Ascending and descending straight trend line are in white. Chart: FreeStockCharts.com

Summary:

Prices have now come down again and are now pushing against the ascending trend in the Figure 1.

 

The bearish scenario:

I will begin with the bearish scenario. This is where prices fall down through the ascending trend line and then continue down. At this point I would give such a scenario a probability of 65 per cent.

 

The bearish/bullish scenario:

In this scenario prices first go down but then rebound once they hit the trend line below. This is not implausible and I give such a scenario a probability of 30 per cent.

 

The bullish scenario

This is where prices shoot straight up from here. Given recent trends I don’t consider it very likely and I would give it a probability of 5 per cent.

 

 

 

Technical analysis of gold, June 05, 2017

This is what a weekly chart of gold looks like:

Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white

Figure 9. Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

What we are seeing is that prices are coming up towards the descending trend line.

The bullish scenario

In this scenario prices are going through the declining trend line and then continue up beyond.

Given that the 100-week moving average is slightly ascending, I would give such a scenario a probability of 70 per cent.

 

The bearish scenario

In this scenario prices are going down from here.

While a distinct possibility, I only give such a scenario a probability of 30 per cent.

 

 

Technical analysis of gold, May 29, 2017

This is what a weekly gold chart looks like:

Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white

Figure 10. Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

The bullish scenario

Prices are now coming up against the declining trend line and in the bullish scenario they go through the trend line and continue up afterwards.

Because of the rising 100-week moving average I do consider this a probable scenario that I would give a probability of 30 per cent.

The bearish scenario

In the bearish scenario prices go up to the declining trend line, but then they stumble and fall.

Given the lower high in February and the potential of a head and shoulders-pattern in the chart (Figure 2), I give this a higher probability of 70 per cent.

If the Head and shoulders-scenario plays out, then we are potentially looking at prices around $1,080.

Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Potential Head and shoulders-pattern is in white

Figure 11. Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Potential Head and shoulders-pattern is in white. Chart: FreeStockCharts.com

 

 

 

Technical analysis of crude oil, May 26, 2017

This is a weekly chart of crude oil:

Daily chart of the crude oil index (XOIL.X). 50-day moving average is in blue and 100-day is in turquoise. Ascending and descending straight trend line are in white

Figure 12. Daily chart of the crude oil index (XOIL.X). 50-day moving average is in blue and 100-day is in turquoise. Ascending and descending straight trend line are in white. Chart: FreeStockCharts.com

Prices are now just between the descending and the ascending trend lines.

Where they go from here is not clear, but I would give it a slightly higher probability of going lower rather than higher (60:40).

 

 

 

 

Technical analysis of the gold bugs index, May 25, 2017

This is weekly chart of the HUI:

Weekly chart of the HUI Index from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white

Figure 7. Weekly chart of the HUI Index from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

Prices are stuck between the 100-week and the 50-week moving average.

Chances are about 50:50 that they go up or down.

The bullish scenario

In the bullish scenario prices are lifted by the 100-week moving average and go higher through the descending trend line.

I would give such a scenario a probability of 40 per cent.

The bearish scenario

In the bearish scenario prices are being pressed down by the declining 50-week moving average.

Given the lower high in February I would give such a scenario a probability of 60 per cent.

Technical analysis of platinum, May 24, 2017

This is a weekly chart of platinum:

Weekly chart of platinum (XPLT) from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white.

Figure 8. Weekly chart of platinum (XPLT) from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

The bullish scenario

In the bullish scenario prices are going through both the 100-week and the 50-week moving average.

Because I don’t think that this is likely I give it a low probability of 20 per cent.

The bearish scenario

In this scenario prices are being pushed down by the descending 100-week moving average and then they are being pushed down through the vertical trend line.

I give this a probability of 30 per cent.

The bearish/bullish scenario

This resembles the one above with the only difference that prices are bouncing off the vertical (or slightly ascending) trend line.

I give this a probability of 50 per cent.

 

Technical analysis of silver, May 23, 2017

This is a weekly silver chart:

Weekly chart of Gold (XSLV) from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white.

Figure 9. Weekly chart of silver (XSLV) from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

The chart is stuck between the ascending and the descending trend lines.

Where it will go from here is anybody’s guess.

It can go up and it can go down. Nobody knows for sure.

 

Technical analysis of gold, May 22, 2017

This is what a weekly chart of gold looks like:

Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white.

Figure 9. Weekly chart of Gold (XGLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

What we see in the chart is that we are now pushing up against the 50-week moving average.

Prices seem to be getting squeezed between the 100-week and 50-week moving average.

The bullish scenario

In this scenario prices go through the 50-week moving average and continue up through the descending trend line.

Because of the lower high in February I give such a scenario a low probability of 20 per cent.

 

The bullish/bearish scenario

In this scenario prices are first going up until they reach the descending trend line and after that they go down.

I give this a slightly higher probability than the one above: 40 per cent.

 

The bearish scenario

In the bearish scenario prices are simply falling down from where they currently are.

Given the current nature of the chart I give such a scenario a low probability of 10 per cent.

 

The bearish/bullish scenario

In this scenario prices are first going down and then rebounding at the ascending trend line.

If we ignore the reasons why the chart would fall in the first place, I would give such a scenario a probability of 30 per cent.

 

 

Technical analysis of Randgold Resources (ticker: GOLD), May 21, 2017

This is weekly chart of Randgold:

Weekly chart of Randgold Resources (GOLD) from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white.

Figure 10. Weekly chart of Randgold Resources (GOLD) from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

The bullish scenario

In the bullish scenario prices are being pushed up by the ascending 100-week moving average.

Because prices are now above the 50-week moving average it is not at all implausible.

I would give such a scenario a probability of 0 per cent.

 

The bearish scenario

In this scenario prices are being pushed down by the declining 50-week moving average.

I would give such a scenario a probability of 30 per cent.

 

Technical analysis of Wheaton Precious Metals Corp (ticker: WPM), May 20, 2017

(note: the company was formerly known as Silver Wheaton.)

This is a weekly chart of Wheaton Precious Metals Corp:

Weekly chart of Wheaton Precious Metals Corp (WPM) from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Horizontal lines describing the potential Head and shoulders pattern.

Figure 1. Weekly chart of Wheaton Precious Metals Corp (WPM) from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Horizontal lines describing the potential Head and shoulders pattern. Chart: FreeStockCharts.com

The bullish scenario

In this scenario prices are following the ascending trend line upwards.

In favor of this is the rising 100-week moving average, but that’s about it.

I would give such a scenario a low probability of 20 per cent.

 

The bearish scenario

There is possibly a head and shoulders pattern forming in the chart.

What this means is that the downside of the chart is the ten points that the “head” is higher than the right “shoulder”.

This means that prices may drop all the way back to ten.

I would give such a scenario a probability of 80 per cent.

 

 

Technical analysis of crude oil, May 19, 2017

This is a weekly chart of crude oil:

Daily chart of the crude oil index (XOIL.X). 50-day moving average is in blue and 100-day is in turquoise. Ascending and descending straight trend line are in white.

Figure 1. Daily chart of the crude oil index (XOIL.X). 50-day moving average is in blue and 100-day is in turquoise. Ascending and descending straight trend line are in white. Chart: FreeStockCharts.com

It is obvious from the chart that we have two opposing trends working.

Eventually one of them will win, but I do not know which.

I would however put a slightly higher probability on a bearish scenario, but it would not surprise me if the outcome instead was bullish.

 

Technical analysis of the gold bugs index, May 18, 2017

This is a chart of the gold bugs index:

Weekly chart of the HUI Index from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white

Figure 1. Weekly chart of the HUI Index from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

The bullish scenario

In this scenario prices go up and through the declining 50-week moving average.

Given the nature of the chart I give this scenario a low probability of 20 per cent.

The bearish scenario

In this scenario prices are going down and continue through the ascending trend line.

Given the lower high achieved in February I give this scenario a probability of 30 per cent.

The bearish/bullish scenario

In this scenario prices first go down and then bounce up once they have hit the ascending trend line.

I give this scenario a probability of 50 per cent.

 

 

 

Technical analysis of gold, May 15, 2017

This is a weekly chart of gold:

Weekly chart of gold (XGLD) from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white.

Figure 1. Weekly chart of gold (XGLD) from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

The bullish scenario

In the bullish scenario prices obviously go up from here. They not only go up but through the 50-week moving average as well as the descending trend line.

Given the downward pressure exerted by the upper trend line I give such a scenario a low probability of 20 per cent.

 

The bearish scenario

In this scenario prices are going down through the 100-week moving average and continue down.

Given the lower high in February I give this scenario a high probability: 80 per cent.

 

 

Technical analysis of IAMGOLD Corp., May 14, 2017

This is a weekly chart of IAMGOLD:

Weekly chart of IAMGOLD Corp from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white

Figure 1. Weekly chart of IAMGOLD Corp from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

The bullish scenario

It looks as thogh prices are being lifted by the ascending trend line and that they are continuing up at least until the descending trend line.

I would currently give such a scenario a high probability of 70 per cent.

 

The bearish scenario

Of course I can also argue for a bearish outcome where prices tumble from here.

In favor of this argument is the lower high that we reached in February.

I would give such a scenario a probability of 30 per cent.

 

 

Technical analysis of Yamana Gold Inc., May 13, 2017

This is a weekly chart of Yamana:

Weekly chart of Yamana Gold Inc (AUY) from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Horizontal lines describing the potential Head and shoulders pattern.

Figure 1. Weekly chart of Yamana Gold Inc (AUY) from the end of 2014 until now. 50-week moving average in blue and 100-week moving average in turquoise. Horizontal lines describing the potential Head and shoulders pattern. Chart: FreeStockCharts.com

The bearish scenario

The chart looks heavy and I prefer to write about the bearish interpretation first.

We are beginning to see a head and shoulders pattern develop in the chart.

Where that will lead us is difficult to say for sure, but the text book reading of the Head and shoulders is the following:

The High point in the head = $6

High point of right shoulder = $3.60

Difference: $6 – $3.60 = $2.40

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Tesla, Inc.

Light blue picture of sedan with text about Tesla Motors

Update, July 3, 2017

Description:

Tesla, Inc. is in the business of manufacturing and selling electric vehicles, solar panels and energy storage solutions in the United States. It is based in Palo Alto, California.

Valuation:

Since we last visited with Tesla on February 23, 2017, the stock has advanced another $100 and now sits at $361.61.

Now, there are obviously reasons for this price – bullish analysts tend to focus on the future for electric vehicles and that the potential market for EV:s is immense – but if you are looking at the current value that you are getting for those $362, it is not much at all.

In fact, I would say that you getting nothing at all.

Balance sheet:

The company has a Debt to equity ratio of 2.83 which is exceedingly high.

I would not touch such a risky asset even with a ten foot pole.

Having said that, Tesla’s Working capital is $434 million which seems reasonable but the ratio between the Working capital and the Operating expenses is only 0.2 which is very risky.

What it means is that the company needs to raise cash sometime during the year.

Free cash flow and dividend:

Tesla does not have a positive Free cash flow and it goes without saying that it does not pay any dividend.

Conclusion:

There may be a great future ahead of Tesla, but the stock is not for me.

Thursday, February 23, 2017

 

The reason for this is that I’ve recently been watching a Youtube channel called Now You Know that show a lot of news about Tesla Motors.

So I thought that I should look into the hype and see for myself if there was anything to it.

What I did was that I went to Tesla’s website and I downloaded their financial reports.

The numbers are shocking.

Tesla has been in business for almost ten years and in none of those they have made any money.

Granted, the loss last year was less than the year before, but still the second largest loss out of these ten years.

Looking at the balance sheet it’s very much the same story.

Its total debt is a staggering 16.8 billion dollars and the free cash flow is a negative 1.4 billion.

No wonder that the stock is losing more than 5 percent as I write this.

Who in their right mind would want to invest in something like that?

It’s clear that if you buy Tesla stock you hope that the earnings will materialize in the future.

At $259 those hopes are very expensive.

Elon Musk may be an excellent visionary, but his abilities as a CEO of Tesla Motors are not as good.

If you would like to learn more about fundamental analysis you can do that here.

Treatt plc

Monday, March 13, 2017

Today I would like to look at fundamental analysis of one the best ran british companies, Treatt plc.

Valuation

As always I prefer first to look at the valuation numbers and here it becomes clear that the stock is expensive.

You have to pay a hefty 28.8 times the trailing earnings for the stock.

When you look at the average three preceding years, the stock is even more expensive at 32.7 times trailing earnings.

Already here I would hesitate, but it gets worse. At these market prices, you are paying 5.2 times Book Value which obviously is not cheap.

Balance Sheet

The Balance Sheet looks far better. The Debt to Equity ratio is 0.9 and the Working Capital to Debt is 1.1.

The ratio between Current Assets and Current Liabilities is 3.3 which is very good.

Treatt Plc. has a Net Working Capital of £21,000,000 which equates to about 40p per share.

Dividends

The dividend history looks good with more than 15 years of non-interrupted and increasing dividends.

The current dividend yield is only 1.3 percent which obviously is a reflection of the high price.

Conclusion:

If you already own Treatt Plc. by all means keep the stock, but if you do not I wouldn’t buy it at these prices.

The Balance Sheet looks very good, but I would not buy the assets at this price.

The company has a good dividend history, but the feeble yield is a reflection of the price.

 

If you would like to learn more about fundamental analysis you can do that here.

Fundamental analysis

Fundamental analysis of Target Corporation, July 17, 2017

Description:

Target Corporation operates a household retail business in the United States. It is based in Minneapolis, MN.

 

Valuation:

Given the strength of its business, the company is reasonably priced at 11.5 times earnings. Average earnings over the past three years are low with one year of loss.

Price to book value is high at 2.9.

 

Balance sheet:

The company’s current liabilities are greater than its current assets so the net working capital is negative.

The Debt to equity ratio is 2.4, a number which usually is associated with high risk.

 

Free cash flow and dividends:

The company last year had a Free cash flow of $3.9 billion which equates to $6.70 per share. Of this they are paying out a dividend of $2.36 (2.8%).

 

Conclusion:

Because the company is reasonably priced, I’m tempted to dip my toes in the company. The only problem is the high debt levels.

Fundamental analys of Nucor, July 15, 2017

Description:

Nucor is an American steel producer that sells steel and steel products in the United States and internationally. Their headquarters are in Charlotte, North Carolina.

 

Valuation:

At $60 and 24 times trailing earnings, Nucor is expensive. When looking at an average of the past three years’ earnings the P/E ratio comes in at 37 which is a lot of money.

The Price to book value is also high at 3.6.

 

Balance sheet:

The Balance sheet of course looks good. In the end, this is what the market is paying for. Their Debt to equity ratio is 0.8 which is considered low risk and their Working capital is $4.1 billion which at least means that they can pay their short-term bills.

 

Free cash flow and dividend:

Last year Nucor had a Free cash flow of $1.1 billion which equates to $3.50 a share. Of this they are paying a dividend of $1.49 which means that the current yield is 2.5%.

 

Conclusion:

If the share had been 30 per cent cheaper I would have been a buyer. Now it is too expensive for my tatste.

Fundamental analysis of Pepsico, July 10, 2017

Blue picture with Pepsico icon

Update:

The day after publishing this we figured out that the company presented their earnings.

The earnings came in better than anticipated and we can now make estimated guesses for next year’s earnings.

We think they will come in around $4.50 per share which equates to a forward P/E of 25.3.

That is still far too expensive for my taste.

Yesterday interestingly the share went down 0.5 per cent to $113.74.

Valuation:

At $115 and a trailing P/E value of 26.5 the PepsiCo share is expensive. Over a period of three years, the P/E ratio is even higher at 28.2. Because of their high degree of intangible assets the Book value is negative so a measure like Price to book does not make sense.

 

Balance sheet:

PepsiCo has a Working capital of $6 billion but the Working capital to debt is low at only 0.1. The Debt to equity ratio is extraordinarily high at 5.6.

In all, PepsiCo’s balance sheet could look better.

 

Free cash flow and dividend:

The company has a Free cash flow of $7.4 billion which equates to $5 per share. Of this they both buy back outstanding shares and pay a good dividend of $2.96 (2.6 per cent). The earnings look stable.

PepsiCo has been paying out uninterrupted and increasing dividends for more than 25 consecutive years.

 

Conclusion:

At 26.5 times trailing earnings PepsiCo is too expensive for my taste. At these prices I would call it a SELL.

 

 If you would like to learn more about fundamental analysis you can do that here.

 

Get rich slowly

To get rich slowly is both easy and difficult.

Blue picture of dollar coins with text "get rich slowly"

Today I want to talk about getting rich, but not in the sense of winning the lottery, but rather the kind where you are stacking one brick on the other and see your wealth accumulate over time.

We all know that investing requires a good amount of patience.

It’s not for everyone.

Some people are naturally inclined to bet everything they own on just one horse – and that is perfectly fine – while others prefer to save their money.

We could not all be savers. Not only would that be boring, but also the economy needs some of us to spend while others can save.

If you want to get rich slowly you need to be able to stay calm when the wind blows and you see your securities tumble in value.

Investors vs. speculators

To put this into perspective, there are two different categories of people in the market: the investors and the speculators.

While the speculators are betting their money on a particular stock very much like people do on the racetrack, an investor is taking action from conclusions and hard numbers.

He or she is not moved by flings or hypes about a certain business idea or technology that may or may not be founded in reality.

To an investor what matters are the fundamentals.

It’s those that make investing such an interesting endeavor.

Legendary investor Benjamin Graham defined what investments are like this in his book Security analysis from 1934:

An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.

That definition is still valid today.

So what is investing all about?

The essence of investing is to compound the interest paid.

What this means is that you want to reinvest whatever yield you are getting back into the stock.

The goal is of course to see your capital grow, but it really grows much faster if you are compounding the interest.

To illustrate my point, let me show you an example:

Let’s say that we have 100 shares of a company, ABC Corp, and each share costs $100.

If the shares are increasing in value with 5 per cent a year then after five years they will be worth:

Screenshot of Microsoft Excel showing growth of 5 per cent a year of 100 shares that initially are worth $100.

Figure 1. Screenshot of Microsoft Excel showing growth of 5 per cent a year of 100 shares that initially are worth $100.

After 2 years the value of the stocks will be $11,025 and you’ve made a profit of $1,025.

On the other hand, if we reinvest the dividend in the same stock it will look like this instead:

Screenshot of Microsoft Excel showing compound growth of 5 per cent a year of 100 shares that initially are worth $100.

Figure 2. Screenshot of Microsoft Excel showing compound growth of 5 per cent a year of 100 shares that initially are worth $100.

If we then compare the numbers for Year 2 we can see that in Figure 1 our shares are worth $11,025 whilst in Figure 2 they are worth $11,466.

Depending on how much of your money you invest and the size of the growth these numbers will of course fluctuate. But if you buy back more stock you will compound your interest quicker.

This is in essence what investing is all about.

 

 

 

Walgreen Boots Alliance

Fundamental analysis of Walgreen Boots Alliance, July 7, 2017

Description:

Walgreen Boots Alliance is an American pharmacy chain with many business areas in the health sector.

 

Valuation:

At $78 and a trailing P/E of 20.3, the company is expensive. Looking at an average of the past three years’ earnings, the P/E comes in at 23.7 which is not better. Because of their intangible assets the Price to Book value is also very high at 19.0.

 

Balance sheet:

The company has a Debt to equity ratio of 1.4 and a Working capital to debt ratio of 0.2 which is OK, but not extraordinary. The Net working capital is $8.9 bn which of course is a lot of cash.

Last year, the Return on equity was 14 per cent which was OK, but not extraordinary. A high Return on equity usually correlates with a high Free cash flow.

 

Free cash flow and dividend:

Last year Walgreen Boots had a Free cash flow of $6.5 bn which allows them to buy back a lot of the expensive shares that they have issued.

It also allows them to pay a dividend of 1.46 (1.9 per cent). The dividend has been uninterrupted and increasing for at least 25 years.

 

Conclusion:

The company is too expensive at these prices. Ideally I would like to see them fall by 50 per cent before dipping my toes.

There is nothing wrong with the company, but it is simply too expensive.

 

 If you would like to learn more about fundamental analysis you can do that here.

When is the market overvalued?

As an investor you have a certain responsibility towards yourself as to not buy stock of overvalued companies.

Blue picture of declining stock index with text about overvalued markets

Where does that lead us today when the market on all metrics is overvalued? Do you sell your stock and miss out on the spectacular gains of the final blow-out phase or do you buy more on the assumption that there will always be a greater fool to whom you can sell if things go wrong?

It may seem as though we have left the old paradigms about value behind us, but at the same time we cannot seem to work out a new one either.

The first thing that we need to conclude is that past performance is a very poor guide for the future. Just because the market has been going up with 270 per cent since the depths of the financial crisis there is nothing guaranteeing that this will continue. If you believe this, you also believe that the market will continue up indefinitely, for ever, and that all the declines in the market are just temporary.

Now, it is obvious that if a company repeatedly is showing good financial results, they are likely to continue. That is because a good financial result over time equates to a certain business advantage or “edge” in the market in which it operates. Thus, a good financial result is likely to engender higher prices of the stock.

In fact, the opposite is true. The longer the market has advanced, the higher the probability of it crashing down eventually. We all know that sooner or later this is what happens when prices fall spectacularly.

The second point about an overvalued market is that it matters. The assumption that the price of the general market is irrelevant is wrong. That assumes that you always be able to find cheap, bargain stocks, no matter what the price level of the market is. That is obviously not true. There are times when the market is so highly priced that it’s a fool’s errand to look for cheap value stocks.

Most Wall Street pundits are talking about the advance of the market since the depths of the financial crisis, they don’t mention that those advances have been from extremely depressed levels. That is another reason not to expect the market to continue up.

Another way of looking at the valuation of today’s stock market is to say that the nature of bull runs and subsequent crashes has not changed. In fact this has been the pattern throughout history and there is little to argue for that this situation has changed.

There are many people talking about the current price level of the market who are concluding that the current price of the market is a direct consequence of low interest rates and global central bank policy.

There may be policies that indirectly affect the market, but in the long run the market is a weighing machine that is at least trying to get things right.

The mere idea that the market was undervalued in March of 2009 and is overvalued now tells me that the probability of huge price gyrations are great also in the future.

So this is the take home message: The likelihood of huge swings in the market is always there and it is due to human nature.

 

This article is very much inspired by the wisdom of legendary investor Benjamin Graham and a talk he gave in San Francisco in 1962.

 

 

 

Johnson & Johnson

Fundamental analysis of Johnson & Johnson, June 30, 2017

Blue picture with red soap bottle icon and text about Johnson & Johnson

Description:

Johnson & Johnson is an American healthcare company that researches, manufactures and sells various products in the health care field.

 

Valuation:

The company is expensive at a cool 22.4 times trailing earnings. When looking at an average over the past three years’ earnings, the P/E ratio is almost the same at 23.2. Because the company has a lot of intangible assets the Book value is only $7.50 a share which obviously makes the Price to Book value very high.

 

Balance sheet:

The Balance sheet looks very stable with a Working capital of $38.7 bn and a Working capital to Debt ratio of 0.5. The Debt to Equity ratio is 1.0 and its current Return on Equity is 23 per cent which are solid numbers.

 

Free cash flow and dividend:

Johnson & Johnson has a Free cash flow of $15.5 bn which allows it to pay out a dividend of $2.95 which equates to a yield of 2.2 per cent. The company has been paying out uninterrupted and increasing dividends for 25 years.

 

Conclusion:

Johnson & Johnson is a very well run business with steady earnings and a good cash flow. The only problem is the valuation where you are paying too much for what you get. Had the company been 30 per cent cheaper I would be a buyer. Now it’s a HOLD.