Balance sheet focused analysis

[SharperDingaan]

To do this well you have to think for yourself - & not blindly follow:

 

A BS is just as at a point in time & essentially useless for analytical purposes; it becomes valuable when you compare over time. Doing a 5 or 7 factor Dupont analysis as at the same date, over a 10 year period - gets rid of a lot of the noise. There will have been 2-3 CEOs over the period, multiple product line changes, 1-2 full commodity cycles, & you will know exactly how & why the firm is generating its current earnings. Baseline trends.

 

Most firms do not have everything on their BS, & do not have to MTM. The unamortized cost of that $5B oil sands plant built 5 years ago is totally useless when there is either significant inflation, or a hot market; replacement &/or acquisition (company or plant) cost is much higher. Market reputation (ie: value of a big 4 US money-bank), off BS derivatives, & legal liabilities are routinely unrecorded because they either cannot be quantified or are too uncertain. Skeletons in the closet.

 

BS ratios themselves are backward looking & not particularly useful for forecast purposes; their usefulness is because debt covenants drive off them.

 

Focus on the knowing how the firm is making its earnings, your best assessment as to what is not on the BS - & whether they are likely getting bigger or smaller  ;)

 

SD

 

[frommi]

A negative EV is tough to find. I have only seen it in a stub situation. You are saying the company has more cash on its book then debt or MC. Thats awesome if it also has positive FCF. I would sell everything and buy it and probably get a personal loan and go on margin as well lol.

Seems like it's time to find a loan: http://finance.yahoo.com/q/ks?s=EDS+Key+Statistics

 

I would be careful with chinese -EV stocks.

[Ham Hockers]

A negative EV is tough to find. I have only seen it in a stub situation. You are saying the company has more cash on its book then debt or MC. Thats awesome if it also has positive FCF. I would sell everything and buy it and probably get a personal loan and go on margin as well lol.

Seems like it's time to find a loan: http://finance.yahoo.com/q/ks?s=EDS+Key+Statistics

 

I would be careful with chinese -EV stocks.

 

isn't this one about to be acquired?

[DoddDisciple]

I read a recent white paper saying that, in aggregate, these Chinese stocks perform at or better than the market. I don't think location alone is enough to say they're a fraud or not. Maybe subject them to an M score, but otherwise, if they meet your criteria for investment, include them.

[Morgan]

A negative EV is tough to find. I have only seen it in a stub situation. You are saying the company has more cash on its book then debt or MC. Thats awesome if it also has positive FCF. I would sell everything and buy it and probably get a personal loan and go on margin as well lol.

Seems like it's time to find a loan: http://finance.yahoo.com/q/ks?s=EDS+Key+Statistics

 

I would be careful with chinese -EV stocks.

 

isn't this one about to be acquired?

 

Its being taken private for U$60M I beleive.

 

Interesitng to note that Mr. Ding is the brother-in-law of the Chairman and CEO. I don't read tons of executive profiles, but that seems like an odd thing to add to the description. 

http://www.ir.xdlong.cn/phoenix.zhtml?c=217204&p=irol-govmanage

 

This is a pretty cool situation on the surface, buy a company for U$60M and get U$85M in net cash (I think from my quick look), but since it is in China you'd have to do some serious due diligence. If you're interested in Chinese Law and all the various shenanigans that can happen, check out Dan Harris' "China Law Blog".

http://www.chinalawblog.com/

[frommi]

I read a recent white paper saying that, in aggregate, these Chinese stocks perform at or better than the market. I don't think location alone is enough to say they're a fraud or not. Maybe subject them to an M score, but otherwise, if they meet your criteria for investment, include them.

 

I exclude them all, because i can`t detect a fraud. But perhaps thats the reason they are so cheap.

[Ham Hockers]

A negative EV is tough to find. I have only seen it in a stub situation. You are saying the company has more cash on its book then debt or MC. Thats awesome if it also has positive FCF. I would sell everything and buy it and probably get a personal loan and go on margin as well lol.

Seems like it's time to find a loan: http://finance.yahoo.com/q/ks?s=EDS+Key+Statistics

 

I would be careful with chinese -EV stocks.

 

isn't this one about to be acquired?

 

Its being taken private for U$60M I beleive.

 

Interesitng to note that Mr. Ding is the brother-in-law of the Chairman and CEO. I don't read tons of executive profiles, but that seems like an odd thing to add to the description. 

http://www.ir.xdlong.cn/phoenix.zhtml?c=217204&p=irol-govmanage

 

This is a pretty cool situation on the surface, buy a company for U$60M and get U$85M in net cash (I think from my quick look), but since it is in China you'd have to do some serious due diligence. If you're interested in Chinese Law and all the various shenanigans that can happen, check out Dan Harris' "China Law Blog".

http://www.chinalawblog.com/

 

It seems like investors are getting screwed. Am I missing something here? If you buy shares now you're going to get taken out at a roughly 5% premium.

[constructive]

I read a recent white paper saying that, in aggregate, these Chinese stocks perform at or better than the market. I don't think location alone is enough to say they're a fraud or not. Maybe subject them to an M score, but otherwise, if they meet your criteria for investment, include them.

 

Link? I think it's pretty clear that US-listed Chinese small caps (especially reverse mergers) have performed horribly.

[constructive]

Looks like it's from this study.

 

http://www.gsb.stanford.edu/news/headlines/charles-lee-chinese-reverse-mergers-performed-better-than-their-reputation-suggested

 

At a glance, looks questionable to me. They seem to have a significant problem with survivor bias (looks like delisted stocks weren't in their sample at a much higher rate than non-delisted stocks). Also, performing better than comparable US reverse mergers is not impressive, since those stocks did very poorly too. Also they only tracked 3 year performance which is problematic since CRMs failed at an increasing rate after 3 years.

[petey2720]

Pretty good thread.  Best part of the thread is this from Myth:

 

"I look at things slightly different. Think like an owner but a passive one. Add up the market cap, minus cash, plus debt (in some cases for me). Thats your Enterprise value. Then take a stab at your normalized free cash flow. Then look at the yield and decide whats a fair price for that. If there is growth you pay a bit more, if its shrinking alot less. If you are certain of the cash flow more, uncertain less."

[JEast]

A biased opinion about Marty Whitman, Martin Shubik, and Fernando Diz's books.

 

I too think the books are very difficult to read and are not for the casual investor, but for the semi-professional to professional investor.  That said, the books are somewhat like 'you get it in 5 hours, or you don't.'  :) 

 

On the other hand, Whitman and Shubik's Aggressive Conservative Investor has been one of the most influential books in my investing career.

 

Cheers

JEast

[Kraven]

A biased opinion about Marty Whitman, Martin Shubik, and Fernando Diz's books.

 

I too think the books are very difficult to read and are not for the casual investor, but for the semi-professional to professional investor.  That said, the books are somewhat like 'you get it in 5 hours, or you don't.'  :) 

 

On the other hand, Whitman and Shubik's Aggressive Conservative Investor has been one of the most influential books in my investing career.

 

Cheers

JEast

 

I would agree. The problem though with the books isn't the ideas, but the writing and organization. The books are complex in my view not because the concepts are advanced but because in order to find them one must peel away layer after layer of stinky onions.

 

I find his focus on the balance sheet to be influential as well and consider it, along with Schloss's ideas, to be extremely beneficial to me. What I dislike is, as I've mentioned before, the weird acronyms which are defined endlessly, the poor organization and writing, and the ranting about subjects in ways which are gratuitous. Whitman clearly enjoys standing on a soapbox.

 

The other annoying thing is his mischaracterization of Graham. For example, he claims that Graham focuses primarily on what market prices will do in the near term. Sometimes he references different editions of Security Analysis which is also odd. He focuses a lot on the 4th and 5th editions which everyone knows are not really Graham's voice any longer, especially the 5th edition which couldn't be less like anything Graham would have written.

 

All this being said, the books are worth reading as there are definitely some key and important ideas in them.