Armanino Foods (AMNF) Case Study Part 2 – Digging Into Financials

Armanino Foods (AMNF) Case Study Part 2 – Digging Into Financials

It’s been a bit of a winding road since part one of this case study was posted on May 5th…

Since then we’ve talked about: Why the P/E Ratio Is Useless and How to Calculate EV.  Explained Earnings Yield and why it’s important.   Answered the important question How Do You Find Stock Opportunities.   Showed How To Value And Evaluate Insurance Companies.  And showed How Not To Be A One-Legged Person In An Asskicking Contest.

I did this because we don’t just need to know what everything means.  We need to know why everything is important too.

Knowing why gives us a deeper understanding of the concepts used to value and evaluate companies.  And lets us start forming our investment philosophy.  So if you missed anything above make sure to check them out.

And now that we understand all the concepts talked about in the first part of this case study, it’s time to continue.  And this time we start to dig into the financials.

Starting The Real Analysis

Since Armanino passed my preliminary test and looks like it may be a good company to invest in.  It’s time to get into the real meat of the analysis and dig into the financials.

The financials I use at this point are the most recent quarterly report.  Most recent annual report, if different from the most recent quarter report.  And the most recent proxy if available.

You can find this info at either Morningstar or the company’s website.

If you’re following along you’ll notice Armanino Foods most “recent” proxy report is from 2004.  This is useless information 11 years later.

Sometimes OTC companies like AMNF won’t have up to date info available.  If you can’t find the information you want you’ll need to contact the company to see if they will send it to you. But in this case AMNF’s proxy is in its annual report so we don’t have to dig for it.

To get AMNF’s most recent annual and quarterly report you need to go to the company website page linked to above.

For some reason Morningstar doesn’t have Armanino’s updated financials.  This is something else you need to watch out for too when dealing with OTC companies.

For example,  I started reading AMNF’s 2013 annual earlier today because I thought it was updated on Morningstar.  Double check you have the most recent information.

Below is a link to the unedited notes I took while reading Armanino Foods most recent financial reports.

AMNF Financial Notes

What stood out to you from Armanino’s financial reports?  Do you still consider them a possible investment after reading its most recent financials?  Let me know in the comments below.

In the next few days I will add my notes to the ones above and tell you what I think of the financials.  But I will release these exclusively to Press On Research and Value Investing Journey subscribers.

To subscribe to both you can do so at the links above or below.


Don’t forget, if you want to receive two free gifts that will help you evaluate companies faster.  Get all future blog posts. Get future case study information first.  And be entered to win a hard copy of: The Snowball – Warren Buffett and the Business of Life and a $50 AMEX gift card. Sign up for the Value Investing Journey newsletter here.


How Do You Value And Evaluate Insurance Companies?

How Do You Value And Evaluate Insurance Companies?

Someone asked on LinkedIn: How Do You Value And Evaluate Insurance Companies? My answer is below

First off there is no such thing as determining a perfect value for any company, let alone companies as complex as insurance companies.

Second there are huge differences in valuing life and P&C insurance companies. The main difference comes in the long-range – and possible huge underpricing in long-term life insurance policies – that can have negative effects for years.

But the following links are some of the best things I’ve learned from on how to get a range of values and help you evaluate insurance companies.

Let me know if you have further questions.

How To Value Float, A Book Recommendation, And Other Thoughts

Unico American Corporation $UNAM: A Company I Would Love To Own Outright

Notes From Phone Conversation With the CFO of Unico American Corp

The Float Of The Companies I Own

Some Questions For You About Insurance Companies

Evaluating insurance companies is a lot different from evaluating most companies.  And the info above will help you learn how to evaluate them.

Did I miss anything?  And do you have any other questions about insurance companies?  If so, let me know in the comments below.

Don’t Be A One-Legged Person In An Asskicking Contest – My Answer To Why Valuation Is Important

Don’t Be A One-Legged Person In An Asskicking Contest

My Answer To Why Valuation Is Important

Last week I asked your thoughts on valuation.  If you think it’s important?  Why or why not?  I asked this because I’ve seen a lot of discussion on the topic in recent weeks.  This post is my answer to that question.

Asking if valuation is important to deep value investors like us is like asking if we follow the teachings of Ben Graham and Warren Buffett.  The answer of course is yes.  But why is valuation important?

Once we understand how to do valuation most of us never think about this question again. And it’s important to understand why.

To show why valuation is important let’s continue with an example from the earlier post.  Why The P/E Ratio Is Useless – And How To Calculate EV.

Why Valuation Is Important

Below is an example of two company’s made up for the example.

Company 1 Company 2
Market Cap 100 100
P/E Ratio 10 20
P/E stays the same under the below scenario.
Cash and Cash equivalents 0 40
Debt 40 0
EV = 140 60
EBIT = 10 10
FCF = 10 10
Company 2 is cheaper when considering EV
EV/EBIT = 14 6
EV/FCF = 14 6

P/E, EV/EBIT, and EV/FCF are all relative valuations.  Companies that have lower relative valuation multiples are cheaper than others.  And companies that are cheaper are better to buy.  Why is this?

To find out why lets invert both EV/EBIT and EV/FCF to find each companies earnings yield.  I explain earnings yield in the following section.

Earnings Yield Estimates Expected Rate Of Return

For those who don’t watch the short video above I’ll paraphrase. Earnings yield is the estimated return you should expect to earn in one year on an investment.

The higher this number is the better. This is because the higher this number is the more a company is undervalued.

Company 1 above has an earnings yield of only 7.1%. Not good enough. I look for earnings yields above 10%.

Company 2 above has an earnings yield of 16.7%. 2.35 times company ones earnings yield. And above the 10% I look for when considering an investment.

This means you should earn 2.35 times more if you invest in company two instead of company one. But this isn’t all…

By doing the work above with EV and earnings yield, not only do you see that company 2 will get you a higher return. But doing a bit more work allows you to see that company 2 is a less risky investment.

Company 2 is safer because it has no debt, while having a lot of cash. The saying that the more you risk the more you gain is a fallacy. This “advice” needs to die because it leads many investors into unnecessary danger.

But these aren’t the only concepts you need to consider when evaluating an opportunity.

EBay And Amazon Businesses

Many of you who’ve followed this blog for a while know that I also run an EBay and Amazon reselling business.  The example below is something I found and sold last year.

I use the concepts talked about in this article every day.  And you can use them whether you’re analyzing a stock.  Or buying something to sell in your business.

Let’s say we have two of the same Giorgio Armani jeans.  Same size, color, condition, everything.  And both are real Giorgio Armani jeans.

Each pair of jeans looks brand new but does not have the tags on them still.  These jeans sell for more than $100 brand new.  But for this example let’s use $100 because it’s an even number.

So both pairs of jeans are the same and sell brand new for the same amount.  But what if I said you could buy one of the pairs for $80 and the other pair for $2.  Which would you buy?

The one that’s selling for $2 of course.

But if you had an EBay and Amazon business how would this change things?  You would need to keep thinking…

One pair we bought for $80 and the other we bought for $2. We can resell both for $100. This means we have the potential to make $20 on one pair and $98 on the other.

The pair we bought for $80 and sold for $100 gives us a 20% return. Not bad. But the pair we bought for $2 gets us a return of 4900%. Or a 49 bagger in a short amount of time. We’ll get back to the time aspect later… This is a spectacular return. And is why valuation is so important.

All else remaining equal, the cheaper a company is the higher return you should expect in the long-term.

This is why it’s important to value businesses. Without doing valuation you can’t know if you’re getting a good deal. Or taking unnecessary risks with your capital.

In the above example is risking your $80 to make a $20 profit worth your time? Or would you rather buy the $2 pair of jeans and get a 4900% return on the same item while risking far less money on a safer investment?

But there’s still more…

You also need to think about the amount of time it will take for your investment thesis to play out. And consider what you can’t invest in while you invest in this opportunity.

This last concept is opportunity cost.

The Opportunity Cost of Investing

As investors we have to consider several choices every time we think about buying an investment.

  • Is the investment safe?
  • Am I getting a high enough return compared to the capital I’m risking?
  • Am I getting a high enough return for the amount of time I expect to hold this investment?
  • Do I already own another company that would be a better investment?
  • If I invest in this company now, am I comfortable holding it for the long-term? Another – possibly better- company may come along and I need to be comfortable losing out on that opportunity.

These are just a few of the many things you need to consider when investing. But for now I want to concentrate on the last bullet point.  It’s the concept called opportunity cost.

DEFINITION of ‘Opportunity Cost’

1. The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.

2. The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment – say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% – 2%).

Below is a video from giving a real world example of opportunity cost.

The example of choosing between two jobs is too simple.  But it’s a good starting point.

The thoughts I would’ve added to help me decide which is a better job would be: Which job would I be happier at?  Which one has more room for advancement?  How many hours do I have to work at each?  Etc.

When considering an investment you need to consider more than just valuation.

For example: Which one is safer?  Which one is offering a higher return?  Which one do I have more capital tied up in and for how long?  Which company has higher profits and cash flow compared to valuation?  Am I willing to pay up for a better company?  And much more.

This is how you begin to analyze the opportunity cost of an investment.  And get closer to a decision.

But without valuation you’re only considering part of the equation.  And without valuation you’ll have to rely on gut instinct and emotion.  Two things that will kill you when making investment decisions.

Don’t Be A One-Legged Person In An Asskicking Contest

Yes I know when picking businesses and stocks to invest in not everything is equal like in the examples above.  But this is why you need many tools in your mental toolbox while evaluating things.

And if you don’t consider valuation, opportunity cost, and the other concepts in this article, you’re missing some of the best mental investment tools.  Or as Charlie Munger says:

If you don’t have the proper mental tools then you go through a long life like a one-legged man in an asskicking contest.”

To learn more about mental models.  And start adding tools to your mental tool box so you don’t go through life like a one-legged person in an asskicking contest, go to the earlier post. Car Wash Psychology, Mental Models, and The Power of Habit.

What do you think about valuation?  And did I miss anything in my explanation?  Let me know in the comments below.


Don’t forget, if you want to receive two free gifts that will help you evaluate companies faster.  Get all future blog posts. Get future case study information first.  And be entered to win a hard copy of: The Snowball – Warren Buffett and the Business of Life and a $50 AMEX gift card. Sign up for the Value Investing Journey newsletter here.

Lionel Messi Is A Failure

Famous Failures

This post is a continuation of my Famous Failures series.  To view earlier posts in this series go to this link.

The aim of Famous Failures is to show that all successful people are failures.  And that to become great we have to fail, learn, and keep moving forward.

Lionel Messi Is A Failure

In case you don’t know the picture above is of the best football player in the world. Lionel Messi.  The Michael Jordan of soccer.

Leo Messi

The above screen capture is from this video on Famous Failures.  It’s about the best footballer in the world – and my favorite player – Lionel Messi.

Below is an excerpt from this article detailing some of the adversity he faced growing up.

But Messi is no stranger to adversity. Born with an outstanding, audacious talent, nature, almost as if re-dressing the balance, denied him the growth hormone that would permit him to grow the same as most other children.

Messi said: “When I was 11 years old they discovered that I had a growth hormone deficiency and I had to start a treatment to help me to grow.

Every night I had to stick a needle into my legs, night after night after night, every day of the week, and this over a period of three years.”

“I was so small, they said that when I went onto the pitch, or when I went to school, I was always the smallest of all. It was like this until I finished the treatment and I then started to grow properly”.

A team cut him when he was 11 due to health issues.  But he chose to work and go after his dream of playing for FC Barcelona.  In time he became the best football player in the world.  And one of the best of all time.  The info below is from Wikipedia.

He’s won 22 team championships in eight different competitions.  Has won dozens of awards including being the world’s best player a record four straight times.  And holds – and is still breaking – dozens of records around the world.


For more information on Lionel Messi read: Lionel Messi Is The Best Footballer The World Has Ever Seen.

But to really understand his greatness you need to watch him.  Below is a 6:22 video showing some of the reasons why many think he’s the best football player ever.

And to think, none of us would ever have known anything about Lionel Messi if he gave up when he first failed.

Dream big… Imagine what you can do if you keep pushing forward instead of quitting when you fail.

What do you think of Lionel Messi?  Do you admire him and the way he plays football?  Do you think he’s a failure for not winning a World Cup yet?  Or are you wrong and think Cristiano Ronaldo is a better player?

Let me know in the comments below.


Why Is Valuation Important?

Why Is Valuation Important?

Over the past few weeks I’ve seen a ton of people asking “why valuation is important?”

I’ve seen others answers, but I want to hear from you…  Do you think valuation is important?  Why or why not?

In the short  57 second video below I start a conversation about valuation.  Next week I’ll post my thoughts on this.  And then get back into the case study.

Let me know what you think in the comments below.