Dallas Better Investing 2013_final_v2

8/14/2019 Dallas Better Investing 2013_final_v2

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BEFORE THE BREAK: Mindset

The Elevator of Value, Growth and

Momentum BetterInvesting

FLAG Ratings

AFTER BREAK: Value Value with Catalysts

AGENDA

(and boy do I have one!)


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Mental traps

Anchoring, Recency, Confirmation Biases

Memory (short)

Until 2000, 1973-74 was last collapse (not 87)

NO ONE TODAY HAS INVESTED IN A DEPRESSION

FUTURE IS INHERENTLY UNKNOWABLE

Prepare for it

MIND


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CURRENT SECULAR BEAR

MARKET: Overdue for bear

cycle

56 month bull

39 usual duration


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THE CAPITALISM

DISTRIBUTION

Blackstar Funds pathbreaking study

Individual Stock Returns 1983-2007

Longest bull market


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Russell 3000 Up 900% 1983-2007, YET:

39% unprofitable

64% underperformedthe index19% declined by 75% or more

75% added little to no return

MOST STOCKS UNDERPERFORM


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25% accounted for

100% of the gains


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odds stronglyagainst

you


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SO?

Show mewhere Im going to die,

so I dont go there!


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THE ELEVATOR OF

VALUE, GROWTH, andMOMENTUM


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THE DILEMMA


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DOWN IS BORING


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So its an easy choice


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Where are all these fun people going?


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To profits, skittles and beer!


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Whoopsies! Went a littletoo far


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HOW DOES BORING LOOK NOW?


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POSITIVE

5 YEAR OUTLOOK

CONSISTENT PROCESS

REPEATABLE PROCESS

SMALL AND MID CAPS MAY OFFER GREATER

POTENTIAL FOR APPRECIATION (small investor

advantage)

BetterInvesting


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PROJECTED GROWTH RATE FOR

EARNINGS PER SHARE

EPS is the result of an accountants rendering

for taxes

Same as sales, reversion to the mean


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P = price or market capitalization

Shares * price = market capitalization

It is NOT what the business is worth

Ignores debt and cash

PROJECTED HIGH and LOW P/E


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What will a buyeryou, another company, or

a private equity firmactually BUY?

EV = market cap + debtcash

Two identical businesses, two identical market

caps

One has $1B in debt, $1M in cash

Other has $1B in cash, no debt

ENTERPRISE VALUE isthe value of the

ENTERPRISE!


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Again, accountants rendering for taxes

Free cash flow (market cap/free cash flow)

EBITDA (EV/EBITDA) BOTH ON YAHOO FINANCE! (will have to

calculate market cap/FCF)

E of P/E FLAWED


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PROJECTED LOW PRICE

If all the inputs are suspect, this is too


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PROBLEM WITH ANALYST ESTIMATES

Most sell-side analysts dont read SEC filings,

base their models on what management

spoon feeds them

Spend their time looking to do deals


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In Action: COACH (NYSE: COH)


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COACH (14 YRS):

GROWTH, THEN MOMENTUM

COACH ( Y S) O U S


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COACH (5 YRS): MOMENTUM ENDS;

MEAN REVERSION


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COACH: TWO YEARS

Growth Investors Leaving


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COACH: ONE YEAR


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Buyers bought for growth

Buyers bought for stock momentum

Momentum buyers sold

Growth slowing, growth investors selling

WHO WANTS THE STOCK? LOOK OUT BELOW!

At some point, a value

Where is Coach on the elevator?

OO ?


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Sept issue (8 wks ending July 1)

30 (buy)-21(sell) (8th most active)

Oct issue (ending Aug 1)

21 (buy)-8(sell) (15th most active)

Nov issue (Sept 1)

not listed in 40 most active stocks

WANT PROOF?


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FORENSIC ACCOUNTING ETF

(ticker: FLAG)


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PRINCIPLES

Revenue

Cash Flow

Earnings Quality Expectations

Valuation

Shareholder Yield

4 TOP PREDICTORS OF


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1. Aggressive REVENUE

Recognition

2. Aggressive INVENTORYMgmt.

3. CASH FLOW Warnings

4. Serial ACQUISITIONS

4 TOP PREDICTORS OFTROUBLE AHEAD


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WANTS TO KEEP

POWER

STOCK OPTIONS WORTH $$$$

STOCK PRICE UP

JOB

WHY MGMT. DO THIS?

:


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REVENUES

EPS (earnings per share)

. :WALL STREET WANTS


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Management will do everything it can do

manipulate revenues and EPS

Beat by a penny is a giveaway

Miss by a penny is a bigger giveaway

Relying on sales and EPS is fraught with

danger

Therefore

REVENUES:


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What is it?

Borrows from future Works, until it doesnt

REVENUES:STUFFING THE CHANNEL


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Longer to get paid

Poor customer credit Extended payment terms

Ex.: Deckers

DAYS SALES OUTSTANDING


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45FreeStockCharts.com reprinted by permission


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LOOKS LIKE CASH, BUT CANT LAST

accounts receivable

inventory

accounts payable

lots of stock-based compensation

CASH FLOW WARNINGS

FLAG ANALYSIS:


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Low Scoring, #1,000 of #1,000 as of Sept. 3

Fourth highest on BI website of buy to sell

FLAG ANALYSIS:3D Systems (NYSE: DDD)


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Q&A


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WHAT TO BUY?


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1. Share price < asset value/share

2. Low EV/EBITDA, market cap/FCF (TB uses P/E)

3. Insider purchases4. Significant stock price drop

5. Small market cap

TWEEDY BROWNE

(mean reversion works FOR you here)

*(c) 1992, revised 2009

INDICATORS


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5151 November 2, 2013


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5252 November 2, 2013


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If you buy the same securities as other people, you

will have the same results as other people. It is

impossible to produce a superior performanceunless you do something different from the

majority. To buy when others are despondently

selling and to sell when others are greedily buying

requires the greatest fortitude and pays the

greatest reward. - Sir John Templeton

CONTRARIAN


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P S


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Transocean (RIG) appears on

website as new study stock,

undervalued

Just wrote on the subject

Google Jacobs Fool Rig Operators

P.S.


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And then

SPECIAL SITUATIONS:


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value with catalyst

(Mostly) not screenable

NOTE: Book forthcoming in 6-12 months: sign up

at deljacobs.com.

SPECIAL SITUATIONS:

CORPORATE ACTIONS


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Spinoffs

Buybacks/Leveraged Recaps

Debt paydown virtuous cycle

Out of Bankruptcy

Turnarounds

EXAMPLES


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Spinoff

Debt paydown virtuouscycle

Turnaround

CINCINNATI BELL (NYSE: CBB)


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LONG:FORENSIC ACCOUNTING ETF

(TICKER: FLAG)

SHORT:RANGER ACTIVE BEAR ETF

(TICKER: HDGE) Choose 0%-10% depending on market risk Market Risk? Shiller CAPE

BOOK=WHAT, THIS=HOW


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Go from

this


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To This!


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HI MOM!Sunset and LaBrea,

Los Angeles, CA


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Mental traps: Kahneman, Thinking Fast and

Slow

Special Situations: Greenblatt, You Can Be a

Stock Market Genius

Forthcoming edition and commentary on 1966 SS

path breaker

Value:Tweedy Brown Study John Hussmansweekly column

More Resources
http://www.deljacobs.com/


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Twitter: @DELJACOBSCOM

@TOMJACOBSINVEST

Visit www.DELJACOBS.com
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Dallas Better Investing 2013_final_v2