Investing megathread extravaganza

[DaFace]

A place to talk about investing stuff.

[DRU]

Originally Posted by Rain Man

Y'know, I was wondering how American stock markets can trade shares in companies that participate in illegal activity. If banks can't take their money, it seems like people shouldn't be able to invest in them.

Can you buy shares of an individual marijuana company?

"During a gold rush, don't mine for the gold. Sell the picks and shovels to the miners."

I'm long on KSHB - Kush Bottles Inc. Curious to hear other opinions on this.

Kush sells packaging products for Marijuana. All these new businesses opening up for both medical and recreational weed have to package it in very specific, approved packaging types. They are taking a two-fold approach with patents on packaging itself, but also the unique ability to add custom branding to such packaging. They are very small cap growth...technically a penny stock trading at $2.10 right now.

They have been able to use their stock to acquire companies that would have potentially competed with them. This shows these companies believe in the growth opportunities of Kush as a whole...opting to become shareholders instead of requiring large cash acquisitions. Of course, this allows Kush to use that cash for more patents, more acquisitions, inventory, and general growth.

This can be seen on their balance sheet where they've doubled their cash on hand nearly 5 times in the past 3 years (8/2013 - 8/2016). Cash from Q1 to Q2 2017 dropped a little bit, but you can see that the cash went into inventory, receivables, and some of it did go towards the acquisitions. Equity went from $9m to $43m on the balance sheet from Q1 to Q2 primarily due to acquisitions. This can be a little bit misleading because much of that equity number goes into the "Goodwill" line on the balance sheet. The point remains, they are building a big moat around themselves by acquiring all these companies.

Their income statements show they've doubled their sales/revenue numbers a little more than 3 times in 3 years, and look to be doubling again this year (if not more). Operating expenses have actually fallen as revenue has grown (based on percentage) and the company is now officially profitable.

They're pretty interesting to me, and it could be something for the more risky portion of your portfolio that could be a home run.

XXII - 22nd Century Group Inc. is another one I was interested in. I put $1k into them about a year ago and after a 64% gain I saw they started to drop so I went ahead and took my profit and got out. Their big thing is that they hold patents in low nicotine tobacco. Well, just last week the FDA announced they're going to start requiring lower nicotine counts in tobacco, and most cigarette stocks took a big hit because of that. XXII has gone up about 50% since then, and are up 168% since I bought them last year...but of course I got out too early...and didn't have much in to begin with. If only...

[DRU]

Let's break-down Facebook. I'm curious to hear thoughts on this from others.

Typically, I would want to see 10+ years of history in order to consider a healthy investment in a company. Facebook hasn't been public that long, so we don't have that data, but here are their growth numbers for the past 5 years.



Of course, those numbers are huge, and they won't be able to sustain such big numbers as they continue to grow. Currently, the "Analyst Consensus" growth rate is 27%. I'm going to be more conservative with this valuation and go with a 23% growth rate.

Current EPS is $4.62. At a growth rate of 23% that means it would take 3.13 years to double once. (The Rule of 72 makes this easy - 72 / 23 = 3.13).

So, what we want to do at this point is figure out what FB would be trading for in 10 years. This will help us put a value on the business today. Well, if they're going to double every 3.13 years, that means they'll double 3.19 times in 10 years (10 / 3.13 = 3.19).

Now that we know that, we can figure our future EPS by doubling the current EPS 3.19 times. 4.62 * 2 = 9.24, and that's one double. 9.24 * 2 = 18.48, and that's two doubles. 18.48 * 2 = 36.96, and that's three doubles. So to make things easy and stay conservative, we can stop there and reasonably assume that FB will have an EPS of $36.96 ten years from now.

So now to figure our future market price per share we need to figure out a future P/E. Again, with limited history behind FB this isn't as predictable as I would typically like, but if you look at the history of most big businesses you'll find that it's very common for the P/E in 10 years to be double the current growth rate. Again, we went with a growth rate of 23%, so we can assume a future P/E of 46. That's sort of up there, so once again, to be conservative I'll back that down to 40.

So now we have a future EPS of 36.96 and a future P/E of 40. This gives us a 10 year future market price of $1,478.40 / share.

Now, let's assume we want to earn 15% / year on this investment, which is an aggressive stance and makes what we're doing here very conservative. If we work backwards from the 1478.40/share price we can find the price we should buy at today if we want to earn 15% per year compounded. To do this we can simply divide 1478.40 by 4. This works because math is cool, and you can study why that works elsewhere if you're interested.

So, 1478.40 / 4 = 369.60. This means that based on our valuation, if we want to earn 15% / year on Facebook for 10 years, we need to buy at $369.60 or lower. This is our "intrinsic value", or what the company is actually worth today....to us...given our goal of 15% / year.

Of course, this would assume that everything goes as planned, and it continues to grow at the rates we expect, etc. How often does that happen? Hardly ever, right? So now we apply the Benjamin Graham / Warren Buffet "Margin of Safety" of 50%. So we simply chop our intrinsic value in half. 369.60 / 2 = $184.80.

So in theory, if we can buy FB at $184.80 / share, we're getting it for half off...a 50% discount on its current value...which already assumes a 15% compounded interest rate. So we've been extremely conservative with our calculations (we backed off the analyst consensus growth rate, we backed off the future P/E, we applied a 15% earnings in our calculations, and a 50% margin of safety.)

Finally, we can look at today's market price...and we see FB is currently trading at $169.62 quite a bit below our extremely conservative calculations.

The only thing going against it is that we don't have 10+ years of history to go by, so the numbers aren't quite as predictable as they would be otherwise. Again, though, that's why we went extra conservative.

So based on all of this, FB seems like a screaming BUY right now. Like, fill up the dump trucks with as much as you can. That said, I'm new to all of this, so I'm interested in hearing thoughts about how I broke this down and general opinions on my conclusion..??

[Nightfyre]

I doubt that Facebook can maintain bottom line growth of 23% for ten years. At some point they hit one of any number of growth obstacles, such as market saturation, regulatory risk, and social media competition or even obsolescence. Furthermore, assuming they will maintain a PE of 40 is not remotely conservative from where I am sitting. The higher PE is indicative that the market is pricing the stock for significant future growth. Anything that impinges on their growth will inevitably decrease the multiplier.

The problem with your valuation methodology is that it depends on projecting long term earnings growth and extrapolating that projection by multiple factors to take a guess at a future value. If your assumption is only a little off, your whole value takes a hit.

You can conduct sensitivity testing on your model by shocking the underlying assumption, which would be better than picking an arbitrary percentage at the end. What happens if bottom line growth is only 12% instead of 23%?

[Nightfyre]

Additionally, why use the rule of 72 when you can just take EPS*(1+net profit growth) ^10

You can create a spreadsheet to do all this in like thirty seconds plus easily allow you to change or have a spectrum of different earnings growth rates.

[DRU]

Originally Posted by Nightfyre

I doubt that Facebook can maintain bottom line growth of 23% for ten years. At some point they hit one of any number of growth obstacles, such as market saturation, regulatory risk, and social media competition or even obsolescence. Furthermore, assuming they will maintain a PE of 40 is not remotely conservative from where I am sitting. The higher PE is indicative that the market is pricing the stock for significant future growth. Anything that impinges on their growth will inevitably decrease the multiplier.

The problem with your valuation methodology is that it depends on projecting long term earnings growth and extrapolating that projection by multiple factors to take a guess at a future value. If your assumption is only a little off, your whole value takes a hit.

You can conduct sensitivity testing on your model by shocking the underlying assumption, which would be better than picking an arbitrary percentage at the end. What happens if bottom line growth is only 12% instead of 23%?

Yeah, that's why I would typically want to see 10 years of consistent growth history, so the projections could be more predictable. In this case you're right...probably too many assumptions involved, even with the margin of safety in place.

Interesting feedback. Thanks.

[DRU]

Originally Posted by Nightfyre

Additionally, why use the rule of 72 when you can just take EPS*(1+net profit growth) ^10

You can create a spreadsheet to do all this in like thirty seconds plus easily allow you to change or have a spectrum of different earnings growth rates.

Just makes it quick to run numbers in your head when reviewing financial statements. I typically look for growth rates of 10% or higher in ROIC, ROE, EPS, Sales, BVPS, and and OCPS combined with minimal debt. I look at 10 year, 7 year, 5 year, 3 year, 1 year. If I see 10% or higher in all of these areas and it's not dropping significantly, then I look to dig deeper with more accurate numbers in Excel or other tools. So again, rule of 72 makes this quick to calculate in your head while scanning statements.

The idea is if ROIC and ROE are 10% or higher consistently for 10/7/5/3/1 year, then management of that company is probably pretty solid and looking out for shareholders.

If EPS, Sales, BVPS, and OCPS are 10% or higher consistently for 10/7/5/3/1, then that's a good sign the company has a strong moat in place.

So the valuation model depends on those things being true, which makes the future valuation more predictable, which of course is what the whole thing is based on.

So again, in this case I think there's just not enough history behind it, and I should not get greedy and stick to the model. Thanks again.

[Buck]

I bought my first stocks today and so far I've made 14 cents.

Actually it cost me $6.95 so I'm down $6.81 I guess.

[Buck]

Why is the TD Ameritrade website so bad? Like nothing is loading for me.

[Rain Man]

Originally Posted by Buck

I bought my first stocks today and so far I've made 14 cents.

Actually it cost me $6.95 so I'm down $6.81 I guess.

Yeah, but isn't the 14 cents exciting? It's money that you made a pure capitalist.

[Buehler445]

Originally Posted by Buck

I bought my first stocks today and so far I've made 14 cents.

Actually it cost me $6.95 so I'm down $6.81 I guess.

You still have the equity in those stocks so your net value is +$.14

[Rain Man]

Originally Posted by Buehler445

You still have the equity in those stocks so your net value is +$.14

I believe he's referring to trading fees, which are nothing but Wall Street taking his hard-earned money for executing an automated transaction that takes 1/1000th of a second.

[lewdog]

Originally Posted by Buck

Why is the TD Ameritrade website so bad? Like nothing is loading for me.

Works fine for me.

It has quite a few tabs you have to navigate to find what you sometimes want. The search function is pretty good though.

I find tracking stocks on the Watchlist to be very user friendly and helps me keep organized about stocks I've wanted to watch.

[DaFace]

Originally Posted by Buck

I bought my first stocks today and so far I've made 14 cents.

Actually it cost me $6.95 so I'm down $6.81 I guess.

Obligatory "index funds are better than stocks unless you really know what you're doing" reply. (And even if you know what you're doing, index funds are still probably better than what you're doing.)

[scho63]

Originally Posted by Buck

I bought my first stocks today and so far I've made 14 cents.

Actually it cost me $6.95 so I'm down $6.81 I guess.

They say when the average joe jumps into the stock market it's time to get out. Good luck!

[philfree]

I've had money in the market for years in various forms but I just purchased my first stocks 10 days ago. This financial adviser also purchased some stuff he recommended but I picked four different stocks that he put in my portfolio.