Valuation #1: EXPEZ
Happy Thanksgiving Everyone!
By the time you read this, I assume you've already had some turkey, yams, stuffings and the works. Unfortunately for me, I could not have any of the above due to my mouth sores. As soon as my mouth gets better, I am getting me a big plate of turkey. I've lost about 4 pounds in last week. I weigh about 136 lbs now. Not good.
Urologist meeting: The doctor has decided to put in a plastic tube in my left kidney. Well, to be precise, the line that connects kidney to the bladder. Although I'll be asleep during the procedure, the idea of small camera and the tubes entering through my penis does disturb me quite a bit. But you know what? You got to do what you got to do. Thanks for the concern.
My thoughts on stock valuation:
Logically my thought process ask three step questions: 1. Purpose of investing 2. Why stocks? 3. Which stock? (all three are very important questions).
1. Purpose: There's only one purpose - to gain maxium profit with minimum risk. Understand that all investments comes with risk, whether you perceive it or not.
2. Why stocks: There are many forms of investments: Bonds. Stocks, Real Estate, Buying a business etc. Over the long term, stocks offer highest relative return on your money with highest liquidity. Buying and running a business may be more profitable but this requires much of your time and expertise. Real estates are nice (especially due to leverage) but it is not liquid and trading costs are very high. Stocks are my main vehicle for investments.
3. Which stock?: Now that we have an eye on stocks in general, which one? This is the ultimate question that I will try to answer. Since most people have no clue as to how to value the stock, let me use an easy example to illustrate this. First, understand that a stock is simply a small portion of an entire business. Thus, you can not value a stock without valuing the entire business itself. Second, realize that the only purpose of a corporation, is to generate profit. To me, profit is profit, I do not particularly care where the profit comes from as long as it is legal. Do you care if the profit comes from selling pizza or computer chips? I don't discreminate money.
Valuation methods: Follow me on this carefully - let's assume you want to buy an apartment for investment purpose. You already own a house to live in, this is simply going to be for an investment purpose. This two bedroom apartment, if you were to buy it and rent it to others, will produce $1,000/month rent income to you. So annually, this investment will produce $12,000 (1,000 x 12 months) of earnings. What are you willing to pay for this apartment (investment)? If you were to pay $120,000 then you just paid 10x earnings (P/E of 10). If someone pays $240,000 for this apartment, then he just paid 20x earnings (P/E of 20). Do you now understand the PE concept? Where ever you live, if you're paying rent, calculate to see how much PE your apartment is going for.
BTW, if you pay 20X earnings for above example, you just invested $240,000 for this apartment while getting $12,000 of annual income, which comes to 5% return on your money. For simplicity, we are not including other expenses of owning an apatment and we are assuming you paid it in cash (no mortgage). 5% in a year? You can almost get that in your bank CD without the hassel of buying a property. Would you really buy this apartment for $240,000 as an investment? Now you know why the prices of real estates will be heading down.
Autually, there are many reasons why I might pay $240,000 for above partment. 1. If I thought that the rent will go up 20% to $1,200/mo. next year and to $1,400 the year after, I don't mind paying 20X current earnings. I am actually paying 14X next year earnings (not bad). 2. The rent might not go up next year, but you happened to know that there will be buyers who are willing to pay maybe $275,000 - $285,000 next year (high demand). 3. You knew that there will be a new shopping mall being built near your apartment within the next few years. There are many more possible reasons as you can see.
Price-to Sales: Now that you know the PE concept, please always look for the PS ratio. This is very simple - if the business generated 1 million in sales last year, while the company is selling for 1 million, then PS ratio is 1X sales. Why is PS ratio relevant? Accounts can easily play with the earnings numbers (legally of course) but no one can fudge the sales numbers (I mean legally). Besides, I never wish to invest in a business that sales are going down. You can simply fire employees to save cost and raise the earnings short term, but you can not suddenly raise sales unless you have a new product or services. I always look at the relative PS numbers.
Historically, stocks commend about 17X-20X PE (on average) and you want no more than 1.5X -2.0X PS unless it is in a special situation where sales are growing much faster than other companies.
Example: RICK
Sales: $26M (06'E) $15M (05'A) $14M (04'A)
EPS: 2006 estimate: $0.50-$0.55 (year ending Dec.)
Bottom line: RICK is now going for about 13X PE and about 1.5X PS. For a company growing this fast, this valuation seem quite fair. RICK's growing curve is just now beginning. As the stock price get higher, they can afford to aquire more businesses, easier. More importantly, almost no institutions have joined RICK yet. Once this company grows to $100 million mark, many will try to jump in. That's when we intend to sell. Hold on tight to your shares.
This series will continue...
Traders: BIDU short was quick and sweet. I still hold half of BIDU shorts. The market is really near the short term top. Trade with down side bias...
P.S: Acetrader sold half of EXPEZ at $7.4/share (gain of +70% from our buy). Did you notice the high volume Wednesday? I intend to buy it back at $6.4 or so. Besides EXPEZ grew to be the top three holding in the portfolio - a little trimming don't hurt.
By the time you read this, I assume you've already had some turkey, yams, stuffings and the works. Unfortunately for me, I could not have any of the above due to my mouth sores. As soon as my mouth gets better, I am getting me a big plate of turkey. I've lost about 4 pounds in last week. I weigh about 136 lbs now. Not good.
Urologist meeting: The doctor has decided to put in a plastic tube in my left kidney. Well, to be precise, the line that connects kidney to the bladder. Although I'll be asleep during the procedure, the idea of small camera and the tubes entering through my penis does disturb me quite a bit. But you know what? You got to do what you got to do. Thanks for the concern.
My thoughts on stock valuation:
Logically my thought process ask three step questions: 1. Purpose of investing 2. Why stocks? 3. Which stock? (all three are very important questions).
1. Purpose: There's only one purpose - to gain maxium profit with minimum risk. Understand that all investments comes with risk, whether you perceive it or not.
2. Why stocks: There are many forms of investments: Bonds. Stocks, Real Estate, Buying a business etc. Over the long term, stocks offer highest relative return on your money with highest liquidity. Buying and running a business may be more profitable but this requires much of your time and expertise. Real estates are nice (especially due to leverage) but it is not liquid and trading costs are very high. Stocks are my main vehicle for investments.
3. Which stock?: Now that we have an eye on stocks in general, which one? This is the ultimate question that I will try to answer. Since most people have no clue as to how to value the stock, let me use an easy example to illustrate this. First, understand that a stock is simply a small portion of an entire business. Thus, you can not value a stock without valuing the entire business itself. Second, realize that the only purpose of a corporation, is to generate profit. To me, profit is profit, I do not particularly care where the profit comes from as long as it is legal. Do you care if the profit comes from selling pizza or computer chips? I don't discreminate money.
Valuation methods: Follow me on this carefully - let's assume you want to buy an apartment for investment purpose. You already own a house to live in, this is simply going to be for an investment purpose. This two bedroom apartment, if you were to buy it and rent it to others, will produce $1,000/month rent income to you. So annually, this investment will produce $12,000 (1,000 x 12 months) of earnings. What are you willing to pay for this apartment (investment)? If you were to pay $120,000 then you just paid 10x earnings (P/E of 10). If someone pays $240,000 for this apartment, then he just paid 20x earnings (P/E of 20). Do you now understand the PE concept? Where ever you live, if you're paying rent, calculate to see how much PE your apartment is going for.
BTW, if you pay 20X earnings for above example, you just invested $240,000 for this apartment while getting $12,000 of annual income, which comes to 5% return on your money. For simplicity, we are not including other expenses of owning an apatment and we are assuming you paid it in cash (no mortgage). 5% in a year? You can almost get that in your bank CD without the hassel of buying a property. Would you really buy this apartment for $240,000 as an investment? Now you know why the prices of real estates will be heading down.
Autually, there are many reasons why I might pay $240,000 for above partment. 1. If I thought that the rent will go up 20% to $1,200/mo. next year and to $1,400 the year after, I don't mind paying 20X current earnings. I am actually paying 14X next year earnings (not bad). 2. The rent might not go up next year, but you happened to know that there will be buyers who are willing to pay maybe $275,000 - $285,000 next year (high demand). 3. You knew that there will be a new shopping mall being built near your apartment within the next few years. There are many more possible reasons as you can see.
Price-to Sales: Now that you know the PE concept, please always look for the PS ratio. This is very simple - if the business generated 1 million in sales last year, while the company is selling for 1 million, then PS ratio is 1X sales. Why is PS ratio relevant? Accounts can easily play with the earnings numbers (legally of course) but no one can fudge the sales numbers (I mean legally). Besides, I never wish to invest in a business that sales are going down. You can simply fire employees to save cost and raise the earnings short term, but you can not suddenly raise sales unless you have a new product or services. I always look at the relative PS numbers.
Historically, stocks commend about 17X-20X PE (on average) and you want no more than 1.5X -2.0X PS unless it is in a special situation where sales are growing much faster than other companies.
Example: RICK
Sales: $26M (06'E) $15M (05'A) $14M (04'A)
EPS: 2006 estimate: $0.50-$0.55 (year ending Dec.)
Bottom line: RICK is now going for about 13X PE and about 1.5X PS. For a company growing this fast, this valuation seem quite fair. RICK's growing curve is just now beginning. As the stock price get higher, they can afford to aquire more businesses, easier. More importantly, almost no institutions have joined RICK yet. Once this company grows to $100 million mark, many will try to jump in. That's when we intend to sell. Hold on tight to your shares.
This series will continue...
Traders: BIDU short was quick and sweet. I still hold half of BIDU shorts. The market is really near the short term top. Trade with down side bias...
P.S: Acetrader sold half of EXPEZ at $7.4/share (gain of +70% from our buy). Did you notice the high volume Wednesday? I intend to buy it back at $6.4 or so. Besides EXPEZ grew to be the top three holding in the portfolio - a little trimming don't hurt.
posted by Jaewoo | 6:39 PM
2 Comments:
Happy thanks giving.
I read your blogs with interest.
Since you have been saying that qqqq should go down to about 40 short term when it was near 43 and now it is 44.75 I just bought 2000 shares of qid at 51.01 and I hope to sell when qqqq is about 40.
I wish you good health and keep on teaching us about stock market.
gus
Gus:
I am sure you agree that the market needs to take a much needed rest. Given its strength (much stronger than I thought) you may need to cover near $41.5 instead of $40. Well, keep a close eye on it. Happy holidays...
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