The Next GE – Interview #2 With Eric Schleien of The Intelligent Investing Podcast

The Next GE – Interview #2 With Eric Schleien of The Intelligent Investing Podcast

In the first interview I did with Eric Schleien of The Intelligent Investing Podcast in 2016, we talked about more general value investing concepts, mindsets and processes.

In today’s interview, we talk about an investment I made in 2015 that I called ‘The Next GE’.

In the 27 – minute interview linked below, we go over this investment case study style that I recommended in October 2015 exclusively to Press On Research subscribers.

We do this to figure out a couple of things…

  • Why I titled this company’s recommendation issue ‘The Next GE’
  • Why they’re now up 460% as of this writing since I recommended them

Some of the other things we also talk about in the interview are…

  • Valuation
  • How this company compared to its competition
  • Where I found this company
  • How I found this company
  • How you can find extreme value in the small cap OTC and ADR arenas
  • And more

Here is the description of the interview from Eric’s podcast site…

In this interview, Eric Schleien goes through an investment case study Jason Rivera recommended to his subscribers and for the portfolios he manages about a small and obscure company that has almost tripled since 2015.

When he recommended them, he titled the issue The Next GE and in this interview we go over why he thought that.

His podcast has interviews with other great up and coming value investors as well so make sure to listen to them.

You can listen to the interview here if you don’t have iTunes.

Or you can listen here if you do have iTunes.

Make sure to follow Eric on Twitter, and subscribe to his great podcast when listening to either of the above places.

I hope you enjoy and find some great value in the interview.

Oh, and by the way…

If you listen to the interview, you also get a couple of free resources to learn from that I provided exclusively to listeners of this interview.

One I’ve never released before other than to paying subscribers.

I hope you enjoy 🙂 and let me know your thoughts on this company in the comments below once you listen to the interview and download the FREE resources.

P.S. The analysis I did on this – and EVERY company I evaluate – is based on the preliminary analysis template I developed over the last 11 years, and after evaluating thousands of companies. If you’d like a copy of this to do your own preliminary analysis, you can get yours for free here.

P.P.S. I put on a FREE webinar last Thursday teaching The 3 Secrets That Have Helped Me Beat Buffett In The Stock Market, so you can possibly do the same. If you’d like to sign up for FREE to view the replay of the webinar, you can do so here.

Throwback Thursday – 10 Tips To Becoming A World Class Investment Analyst

Throwback Thursday – 10 Tips To Becoming A World Class Investment Analyst

***

This is the fourth post in our new Throwback Thursday’s Series, where we share with you posts from the past blogs to bring you as much value as possible.

I’m reposting this article today because now that we’re at the beginning of a new year I wanted to post this to help you achieve anything you want in 2018.

The things I talk about below can be used to become great at any skill, not just value investing.

Other than some minor edits and updates, this is the same exact post as originally published in 2016.

Oh and sorry about the numbering… It got mixed up in the transfer and I can’t figure out how to fix it.

Jason

***

10 Tips To Becoming A World Class Investment Analyst

***

This post is written in conjunction with Quandl as part of a series on how to become great investment analysts.

Quandl provides access to data and information useful to us as investment analysts.  So if you’re looking for specific data to make your analysis pop make sure to check out their site linked above.

***

Are you sure you want to be great?

No one admits they’re fine being average.  But our actions show otherwise.

Most of us would rather watch TV or random YouTube cat videos instead of working on improving and learning the skills necessary to improve and reach our goals.

The ones who do work towards greatness are often labeled antisocial hermits for not hanging out with friends and partying more…  Especially when young.

This social stigma keeps many of us from doing what we really want to do…

If you want to achieve greatness you must do things different than everyone.

If you want to improve fast you must endure short-term pain.  And sometimes ridicule from peers when you’re not doing what they expect you do to.

If you’re willing to do the work necessary to become a world class investment analyst below are the top ten things you have to do every day.

  1. Be Patient

Are you fine searching through thousands of companies only to invest in a few of them?  Are you fine going months or years without buying a new investment?

If you answer no to either you won’t be a great analyst.

I invest in less than 1 out of every 500 companies I research.  You need to have extreme patience and enjoy the hunt of buried treasure as much as actually finding it.

  1. You need to be an autodidact

Do you rely only on your degrees and certifications to get you by? Do you seek out new and sometimes contradictory information to continue to learn and improve processes?

To be a world class investment analyst you have to love learning, reading, and gaining knowledge on your own.

Degrees and certifications have nothing to do with how great of an investment analyst you are or can become.

If you’re not willing to read and continue learning you won’t become a world class investment analyst.  Because people like me who constantly read, learn, and work to improve will always be ahead of you.

  1. You must have strict and disciplined processes

If you can’t make unemotional decisions based on how your analysis plays out you won’t be great.

You can’t rely on preconceived notions, hearsay, emotion, or what Mr. Market’s doing.  Let your analysis take you where it does.

If you spend 100+ hours researching a company only to find at the end it’s not one you want to invest in don’t invest in it.

Just because you spend a lot of time evaluating a company doesn’t mean you need to invest in it.

If you have strict processes and have the discipline to stick to these processes you’ll invest in a fraction of the companies you research as mentioned above.

Don’t be average be great.  Again, this requires you do things different than everyone else.  Be selective in your investments to produce greater returns.

  1. Practice everything you learn as you learn it

When I started investing I would read everything but not practice anything I learned.  This led to years of wasted time as I had to go back and relearn things as I came across them and needed to know what they meant.

Don’t do this.

And when I say practice I don’t mean the normal practice most people do.  I mean deliberate practice.

  1. You need the fundamentals down pat

If you can’t explain what free cash flow, operating margin, and return on invested capital mean in terms a 6th grader can understand you don’t understand it well enough yourself.

You need to understand the basics better than other analysts to have an advantage over them.

  1. Be selfish with your time

If your friends are doing something you don’t want to do don’t do it.

This sounds easy but it’s not…  Remember the social stigma I talked about above?

If you want to improve fast be selfish with your time and find any spaces of time you have to learn.

As an example if your significant other’s taking forever getting ready to go out, instead of getting mad and anxious about them wasting your time read something.  Even if it’s only for five minutes.

The more you learn the faster you’ll improve.  Knowledge like money compounds over time.

Note on above quote: Most people – including me – can’t reach the 500 pages every day goal because of kids, significant others, family, work, relaxing so you don’t burn out, and life.  But it’s a goal to reach towards.

Read as much as you can every day.

  1. Don’t get complacent

There’s always more to learn.  Always an investment or thought process you can improve.  There are always more companies to look through.  Etc.

“The thing that amazes me about him {Nick Saban} is that he doesn’t let up,” says retired Florida State coach Bobby Bowden. “People start winning, they slack off. But he just keeps jumping on ‘complacency, complacency, complacency.’ Most coaches don’t think like that.”

To learn more about what it takes to be great read my post: Greatness According to Nick Saban.

  1. You need confidence in your abilities

“You need to balance arrogance and humility…when you buy anything, it’s an arrogant act. You are saying the markets are gyrating and somebody wants to sell this to me and I know more than everybody else so I am going to stand here and buy it. I am going to pay an 1/8th more than the next guy wants to pay and buy it. That’s arrogant. And you need the humility to say ‘but I might be wrong.’ And you have to do that on everything.” Seth Klarman

This doesn’t mean being overconfident.

You need to be humble enough to spot and fix any mistakes you make in your analysis that may only come out after you invest in or recommend something.

But if you’re not confident in yourself and judgments you make why should anyone else be?

  1. You can’t be afraid of mistakes.

No matter how great of an investment analyst you are you’re still going to make mistakes.  Investing isn’t something anyone can perfect.  Even Buffett, Munger, Klarman, and the other greats in our business make mistakes.

As investment analysts were doing great things if we’re right four to six times out of 10.  No one is right 10 out of 10 times in this business.  Leave your perfectionism at the door.

You need to be comfortable making mistakes.  And be humble enough to learn from them so you don’t repeat them going forward…  Hopefully.

If you’re stubborn like I am this may be a hard learned long-term lesson you need to work correcting every day.

  1. Be obsessive.

No one starts life as a great investor or thinker.  You need to train yourself to become great.  And the faster you learn the faster you’ll become great.

If you’re obsessive about learning the craft of becoming a world class investment analyst nothing can stop you.

High IQ isn’t necessary in this field.  It will be a hindrance if high IQ comes with overconfidence and not being humble.  So the only thing stopping you from becoming a great analyst is the amount of time you’re willing to put in.

Note the reading of 500 pages quote from Buffett above.

Are you obsessive enough about investing and analyzing businesses to work towards that goal?

Do you love learning, reading, and constant improvement enough in this field to continue to work even on days you don’t want to?

Bonus – Write your analysis down and let others critique your work.

Most of us hate being critiqued.  When we put dozen, hundreds, or thousands of hours into something over days, weeks, or years it’s natural that we don’t want people to point out the flaws in what we’re doing.

Fight this urge…

If you want to become great write your investment analysis down and have others critique it.  A great way to do this is to start a blog.

When I started my blog Value Investing Journey and began getting feedback my improvement as an analyst jumped into hyper speed.

I went from this “analysis” when I started the blog less than four years ago to being told a version of the following on a regular basis:

“If I were to go to anyone else in the entire company to get a second opinion valuing and analyzing an investment… I would go to you first.”

The above quote is what a former colleague told me upon leaving my job.

The company had around 50 employees.  And every other analyst had an MBA.  Decades of experience investing.  And ran or helped run billions of dollars at various hedge funds and firms before joining the investment newsletter we worked for.

I get told a version of the above on a regular basis but I’m not telling you this to brag.

I’m telling you this because if I can achieve this without any formal education and severe health issues while beginning my investment journey imagine what you can achieve with your formal training, degrees, mentors, and certifications.

If you don’t already have a or want to start a blog post articles on places like Seeking Alpha and Guru Focus to get feedback.

If you take this route beware of haters making personal attacks though.  Ignore these people and pay attention to the constructive feedback.

Conclusion

If you paid attention above you’ll notice many of the above tips go together.  And a lot of it revolves around how you choose to spend your time.

The choice is now yours… Are you willing to put in the time to become great?  Or are you fine being average and producing average returns and recommendations?

Time is the only thing keeping you from becoming a world class investment analyst.

So what are you going to do next?

***

Let me know some of your 2018 goals in the comments below.

P.S  If you want to get every post like this in the future please subscribe for free here.

P.P.S. I put on a FREE webinar last Thursday teaching The 3 Secrets That Have Helped Me Beat Buffett In The Stock Market, so you can possibly do the same. If you’d like to sign up for FREE to view the replay of the webinar, you can do so here.

Throwback Thursday – Why P/E Is Useless And How To Calculate EV

Throwback Thursday – Why P/E Is Useless And How To Calculate EV

***

This is the second post in our new Throwback Thursday’s Series where we share posts from the blogs past with you to bring you as much value as possible.

I’m reposting this today about P/E because with the stock market STILL reaching all-time highs on an almost daily basis. It helps to know which metrics are important and which are completely useless.

Other than some minor edits and updates, this is the same exact post as originally published in 2015.

Jason

***

Why P/E Is Useless – And How To Calculate EV

Earlier this week, I posted a 12:49 video case study part 1 on Armanino Foods (AMNF)showing how I analyzed the company on a preliminary basis.  What everything meant and why each metric is important.

But I didn’t explain how to calculate EV/EBIT and EV/FCF when I talked about them in the video.  In this post, I will.  But before I do that, I need to show you why the P/E ratio is useless, and why you should never rely on it as a long-term value investor.

Why I Hate The P/E Ratio

Last week, I got a couple of questions from a Press On Research subscriber. The first question was, why I didn’t use P/E when detailing the company I recommended, and the second question was, how the company could be cheap when it had a P/E of 17.

I won’t detail what I said to the subscriber because I would have to reveal the company and industry it’s in.  But below I will show you the reasons I hate the P/E, and why I never use it in my analysis.

P/E Is Turrible

The P/E ratio is two components.  P is price per share and E is earnings per share.

You find price per share by dividing the total market cap of the company by the number of shares the company has. Earnings per share is net income divided by the total number of shares a company has.

You then divide the price per share by the company’s earnings per share over the last year to find its P/E.  The example below is from Investopedia.com.

For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).

Don’t worry you won’t have to calculate this. All financial sites report P/E ratio for you when you look up the stock ticker. Many investors – including me when I started investing – thought this was the best relative valuation to look at.

But it isn’t…

The P/E ratio is a misleading and dangerous metric. it’s one of the worst metrics to rely on as a long-term value investor.

Why?

Because of debt, cash, and manipulation…

Why P/E Is Useless

Below are examples I made up to illustrate why P/E is a useless metric.

Company 1 Company 2
P/E Ratio 10 20

On a P/E basis company one looks better right? But what happens when you add in important things like cash and debt to the equation?

Company 1 Company 2
P/E Ratio 10 20
P/E stays the same under the below scenario.
Cash and Cash equivalents 0 40
Debt 40 0

Which company would you rather buy now? The company with a lot of net debt or the company with a lot of net cash?

But this isn’t the only reason P/E is misleading…

Earnings Are Easy To Manipulate

The E in the P/E equation is earnings like I showed above. Another reason I don’t like P/E is because earnings are easier to manipulate than EBIT, FCF, and owner’s earnings.

One example is a company “smooths” earnings over time to make it look like the company is earning consistent good profits. Rather than lumpy profits that fluctuate a lot.

This is a huge discussion that goes beyond the scope of this post. But if you want to learn how companies manipulate earnings read this from Investopedia. And read the great book Financial Shenanigans.

But these aren’t the only downfalls of using P/E…

The earnings part of P/E is after all costs, taxes, and expenditures. EBIT, FCF, and OE are all after costs and expenditures but before taxes. Another way companies can manipulate earnings is with the tax rate the company states it has to pay.

If you work hard enough you can make the tax rate whatever you want it to be.  Just ask General Electric (GE).

And because EBIT, FCF, and OE is profit a company makes from its operations. These metrics show a much truer picture of how profitable a company’s operations are. And if a company is operating in a healthy way.

So P/E is not only a terrible metric to rely on with any company that has debt and cash. Which is of course all companies. But it’s also easier to manipulate than other metrics. And it doesn’t show how profitable and healthy a company’s operations are.

This is why I use enterprise value (EV) instead…

So How Do You Calculate Enterprise Value?

I calculate enterprise value as…

  • EV = market cap + preferred shares value (if any) + debt – cash and cash equivalents.

My calculation of EV is the same as the picture above but in easier to understand terms.

Why is EV better than P/E?

Which Metric Is Better?

I love enterprise value when evaluating businesses. It shows the true picture of what a company should be valued at if you were going to buy the whole business.

This is how I evaluate all businesses for investment. If I was able to buy the whole company, what price should I pay for it in total? And per share? EV helps us find this number. And when combined with EBIT, FCF, or OE it’s also a better relative valuation to use than P/E.

So instead of using the flawed P/E you should use EV/EBIT, EV/FCF, or EV/OE to find what a company is worth on a relative basis.

EV replaces P in the P/E equation. And operating margin (EBIT), free cash flow (FCF), or Owner’s Earnings (OE) takes the place of E in the equation.

EBIT, FCF, and OE can all replace earnings in the P/E equation. And all three tell you different things when compared against EV.

EV/EBIT shows you what the company is worth compared to its operating profits.  EV/FCF shows you what the company is worth compared to the free cash it generates from operations. And EV/OE shows you what the company is worth compared to the value you could take out of the company if you owned it.

Let’s keep things simple and only worry about EV/EBIT and EV/FCF today though. I will explain how to calculate owner’s earnings when we get to that point in the case study.

Another name for EBIT is operating margin. But it’s also called operating income or operating earnings. You can find this by going to a company’s income statement under the financials tab on Morningstar. FCF is on the cash flow page under the financials tab on Morningstar.

I use EBIT and FCF because they are harder to manipulate. And show what a company earns from its operations in the case of EBIT. Or in the case of FCF – show how much cash the company has left after paying for things to upgrade and improve the business.

So what does this all mean when continuing the example above?

Why I Love EV/EBIT and EV/FCF

If we were to continue the above example, we would just need the company’s market cap.

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
  • Company 1 EV = 100 + 40 – 0 = 140
  • Company 2 EV = 100 + 0 – 40 = 60

Which Company Would You Rather Own?

Now that we have found EV for the made up businesses above. Let’s take this further and see which company is the better buy now… At least on a relative valuation basis.

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 a lot cheaper when considering EV
EV/EBIT = 14 6
EV/FCF = 14 6

EV above is the estimated price you would have to pay to own the whole company.

Now that we’ve found EV for both businesses we can bring in EBIT and FCF to find EV/EBIT and EV/FCF.

Now that we’ve replaced the terrible P/E ratio with EV/EBIT and EV/FCF.  We’ve got a better look at what the company truly is worth on a relative and intrinsic basis.

This is how business owners evaluate businesses. And we as long-term value investors should consider ourselves business owners.

Which company looks like the better buy now? And what is your favorite relative valuation metric? Let me know in the comments below.

P.S. In making this post I realized I never took the next step and explained the differences between EV and Total Enterprise Value or TEV. We’ll get to this soon.

P.P.S  I’m putting on a live webinar tonight at 6 PM EST where I’ll be teaching you the 3 Secrets That Helped Me Beat Buffett In The Market so you possibly can too.  If you want to sign up to this webinar for FREE, you can do so here.

Preliminary Analysis Case Study #1 Part 4 – Operating Margin And SG&A

Preliminary Analysis Case Study #1 Part 4 – Operating Margin and SG&A

Last week, I announced we were going to begin doing a real-world case study on Constellation Brands – Stock Ticker STZ.

Well, after releasing this post, my team reminded me that there was actually a preliminary analysis my client did before this one. So before we get to the STZ case study, we’re doing to take a detour to talk about Canopy Growth Corp –  Stock Ticker WEED.

I didn’t want to skip this one because there’s a lot of context and talk in this discussion that we don’t necessarily go over in the later training sessions because we’ve already talked about them.

This post is a continuation of the last posts in this ongoing case study.  All other parts are below:

Below is his unedited preliminary analysis for reference – without any of my comments – for you to get a  look at.

Canopy Growth Corp – WEED

***

WEED – Canopy Growth Corp (Canadian Company)

All numbers are in millions of CAD unless noted otherwise.

  • FY Ends March 31st, 2017
  • 3,404 market cap (medium)
  • N/A dividend yield.
  • P/B TTM = 4.92
  • TTM Operating Margin is -39.2 and has somewhat increased over last 2 years.
    • 5 year average OM is N/A
  • Share count has done increased from 77 to 119 from FY16 to FY17. Current TTM is 149m.  Statement of shareholder’s equity??
  • Book value per share has increased from 1.34 to 1.55 from FY16 to FY17. Current TTM is 3.73.
  • Morningstar ROIC TTM is -6.58 and a little higher than the last 2 FY’s
    • 5 year average Morningstar ROIC is N/A
  • TTM ROE is -6.45 and a little higher than the last 2 FY’s
    • 5 year average ROE is N/A
  • TTM FCF/sales is -151 and we can’t tell any pattern. See con note on FCF
    • 5 year average FCF/sales is N/A
  • CCC: No info on the payable period (assume the product is cheap to grow) but DIO exploded on FY2017 to 5,494 days (FY2016 and 2015 avg is about 650 days). Research online says cannabis takes up to ½ year to grow so I would need much more investigation on why inventory takes so long to turnover.
  • EV=3,312
  • EV/EBIT is -73.6
  • EV/FCF is -37.6
  • EBIT/EV (earnings yield) -1.3%
  • FCF/EV (earnings yield) -2.6%

Cons

  • Young company – only about 3 years old after name change (used to be Tweed)
  • Note only balance sheet on Morningstar has FY2015 so we need to look at 10K for data.  We cannot really tell any direction with a 2/3 year old history
  • SG&A & Other are over 163% of Revenue
  • SG&A roughly decreasing and “Other” is increasing
  • Op Income and Margin are (-) but are generally decreasing over time
  • Outstanding shares are significantly increasing over time
  • FCF is increasingly negative as both op cash flow and CapEx are also both increasingly negative
  • Not much experience with Canadian companies
  • Goodwill and intangible assets exploded on FY2017
  • Regulation laws in Canada and USA
  • They bought a lot of companies in FY2016

Pros

  • Cash exploded in FY2017
  • FY2017 Cash & Equiv – Total Liabilities = $39m
  • Book value/share is generally increasing but only for last 3 years
  • Low Debt (also reflected by the ROE and ROIC being similar numbers)
  • Revenue is increasing over time
  • STZ bought about 10% interest in WEED.  Industry took notice and WEED most likely gained some legitimacy with large companies
  • COGS is only 23% of Revenue (doesn’t take much cost to grow product?)
  • High Working Capital Ratio = 9.8 but this high typically suggests either too much inventory or not investing excess cash…

***

So, after going through the beginning’s of this preliminary analysis process in part 1 and 2 last week, here is part 3.

In this video, we talk about operating margin, selling general and administrative costs, and IPO’s.

For some reason, when I talk the audio cuts out so I’ve added narration to the video above for context.

If you have any comments or questions, please post them in the comments section below and I’ll answer them.

I’d also love to see your preliminary analysis as well, so feel free to post these in the comments below.

If you’d like more information about the coaching program this client is in, go to this page.

For reference, he’s in the $ 10,000, year-long program and this is only after 1 month of coaching, doing nine 1-hour training sessions via Skype.

P.S.  This analysis is based on the preliminary analysis template I developed over a number of years, and after evaluating thousands of companies.  If you’d like a copy of this to do your own preliminary analysis, you can get yours for free here.

P.P.S.  I put on a FREE webinar on Thursday teaching The 3 Secrets That Have Helped Me Beat Buffett In The Stock Market, so you can possibly do the same.  If you’d like to sign up for FREE to view the replay of the webinar, you can do so here.

33% Off Everything In the Value Investing Journey Shop Until Tuesday

33% Off Everything In the Value Investing Journey Shop

Value Investing Journey Logo
Value Investing Journey

While I announced the opening of the Value Investing Journey Shop last month, because I’ve been so busy I didn’t announce it to many people.

To make up for that oversight, I’m offering 33% off everything in the Value Investing Journey Shop for the next three days only.

This includes all issues and the All Past Press On Research issues package where you get all past issues for one set price.

This means for the next three days you can pick the individual issues you want most for $65 instead of the regular $97.

And that you can get All the Past Press On Research issues in one package for $628 versus a normal price of $997.

33% off all items in the Value Investing Journey Shop until Tuesday

But only until Tuesday…

I won’t do discounts often – if at all in the future – so if you’ve wanted to see my latest stock recommendation issues at a discount you better buy them now.

As of this writing, each pick is up a combined average of 50.3%.  And these picks are crushing the market.

Below are some of the highlights from all the issues…

  • The average gain for all 12 recommendations is 50.3% as of this writing…  These picks are crushing the stock market since April 2015.
  • As of this writing, the stock market has only produced a 15.8% return.
  • Meaning, my picks since April 2015 have outperformed the stock market by 34.5 percentage points.
  • Two companies I recommended grew from sub $500 million market caps to $1 billion plus market caps as of this writing.
  • One company as of this writing has now surpassed a $2 billion market cap since I recommended them.

So you’re probably wondering what you have to do to get the coupon code.  And the answer to that is nothing…

The coupon code is – 33%OffGrandOpening

The discount won’t show up until you input the code when the item is in your cart as you’re getting ready to check out.  So make sure to put the coupon code in before you hit the payment button or you’ll have to pay full price.

You can go to the Shop here and begin getting your deals now.

And this is the only place to see my most recent stock recommendation issues.

If you have any questions contact me using the Drift App – the blue icon in the bottom right third of the page – to message me through this site and I’ll get back to you right away.

Happy shopping smart value investors.