New pages added

Posted on September 8, 2010 by Adib Motiwala

Just a quick post to let the readers know that I have added a few pages on the blog. These can be found on the top bar of the blog

Stock Analysis: Will contain all the posts that discuss analysis specific to any stock. This is just an easy way to get to those posts

Lessons from great investors: Links to videos, lectures, letters from great investors. A good way to learn about investing is to learn from the masters who have been there and done it.

Favorite websites: These are some of the websites that I use to read other people’s research, generate new ideas or screen for ideas.

Videos: I posted a video on this page and then provided links to some other videos from here.

Good articles: This is the newest page. My thought is to collect some good articles that will have provide good general concepts about investing and would be worth re-reading again.

Posted in Uncategorized | Comments Off on New pages added

Generate dividends for your stocks – Option Strategies For The Value Investor Part II

Posted on September 1, 2010 by Adib Motiwala

In a previous article, I presented an option strategy – Selling Cash Covered Put Options. This could be used to generate extra income while you wait for the stock to come down to your desired purchase price.

In this article, I present another conservative option strategy that can be used to generate extra income from your existing stock holdings. The strategy is simply to sell a covered call on your stock. Let’s first look at what a call option is and then see the strategy in action with an example.

Continue reading  the article here

Posted in Option Strategy | 1 Comment

Automate your Google Search via Google Alerts

Posted on August 23, 2010 by Adib Motiwala

Google search is used extensively by everyone for almost anything. Some trivial examples include Search for a book, research company news, look up a person. Now, it would be good if there was a way to receive the Google Search results via email rather than having to search for them. Well, there is such a way. The service is called Google Alerts available at http://www.google.com/alerts

Google Alerts are email updates of the latest relevant Google results (web, news, etc.) based on your choice of query or topic.

Enter the topic you wish to monitor, then click preview to see the type of results you’ll receive. Some handy uses of Google Alerts include:

  • monitoring a developing news story
  • keeping current on a competitor or industry
  • keeping tabs on stocks of companies you own or want to research.

To try it out, goto http://www.google.com/alerts

  1. Type in search terms ( say Gamestop )
  2. Select the source of results (News, Blogs, Video, Discussions or everything)
  3. Select frequency ( as it happens, once a day, once a week)
  4. Number of results ( 20 or 50)
  5. Email address to get the alert

I find this especially useful to keep up with the companies I own and am researching further. I have set my alerts to daily and every day I get an email that contains links to some news stories about the company. Some of it is repetitive stuff, however there are times I find interesting stuff that I was not aware of.

Google Alerts is another good service from Google. In my previous articles, I demonstrated the use of Google Docs to create a spreadsheet to track your portfolio and watch list stocks.

Posted in Useful resources | Comments Off on Automate your Google Search via Google Alerts

Look-through earnings and portfolio tracking using Google Docs

Posted on August 20, 2010 by Adib Motiwala

In my previous article titled “Using Google Docs to track your watchlist stocks“, I introduced how Google docs (spreadsheets) can be used to get current stock prices and various other parameters to manage a watch list of stocks.  In this article I talk about the concept of ‘look-through earnings’ made popular by Warren Buffett and present you a Google spreadsheet that automates the calculations.

Warren Buffett talked about the concept of ‘Look-through earnings’ in his share holder letters. In his 1991 letter, he showed how he computed the look-through earnings. Here is an extract from that letter “We also believe that investors can benefit by focusing on their own look-through earnings. To calculate these, they should determine the underlying earnings attributable to the shares they hold in their portfolio and total these. The goal of each investor should be to create a portfolio (in effect, a “company”) that will deliver him or her the highest possible look-through earnings a decade or so from now. An approach of this kind will force the investor to think about long-term business prospects rather than short-term stock market prospects, a perspective likely to improve results.”

Read the rest of the article here

Posted in Portfolio Management, value investing, Warren Buffett, Zeke Ashton | Comments Off on Look-through earnings and portfolio tracking using Google Docs

Altman Z score – Predictor of bankruptcy

Posted on August 16, 2010 by Adib Motiwala

Wikipedia says “The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman, who was, at the time, an Assistant Professor of Finance at New York University. The formula may be used to predict the probability that a firm will go into bankruptcy within two years. Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies. The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company.”

The original Z-score formula was as follows: Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5.

  • T1 = Working Capital / Total Assets. Measures liquid assets in relation to the size of the company.
  • T2 = Retained Earnings / Total Assets. Measures profitability that reflects the company’s age and earning power.
  • T3 = Earnings Before Interest and Taxes / Total Assets. Measures operating efficiency apart from tax and leveraging factors. It recognizes operating earnings as being important to long-term viability.
  • T4 = Market Value of Equity / Book Value of Total Liabilities. Adds market dimension that can show up security price fluctuation as a possible red flag.
  • T5 = Sales/ Total Assets. Standard measure for sales turnover (varies greatly from industry to industry).
  • Zones of Discrimination:
  • Z > 2.99 -“Safe” Zone
  • 1.8 < Z < 2.99 -“Grey” Zone
  • Z < 1.80 -“Distress” Zone

There is also a revised Z score for non-manufacturing firms

Z-score estimated for Non-Manufacturer Industrials & Emerging Market Credits

  • T1 = (Current Assets-Current Liabilities) / Total Assets
  • T2 = Retained Earnings / Total Assets
  • T3 = Earnings Before Interest and Taxes / Total Assets
  • T4 = Book Value of Equity / Total Liabilities

Z-Score Bankruptcy Model:

Z = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4

Zones of Discrimination:

  • Z > 2.6 -“Safe” Zone
  • 1.1 < Z < 2. 6 -“Grey” Zone
  • Z < 1.1 -“Distress” Zone

Old School Value has a spreadsheet for calculating Z score for any company by typing in a ticker.

Posted in screener | 3 Comments

Piotroski score – Find financially strong companies

Posted on August 16, 2010 by Adib Motiwala

University of Chicago Professor Piotroski created a nine criteria stock scoring system for evaluating a companies financial strength that could be determined from the financial statements. One point was awarded for each test that a stock passed. Piotroski classed any stocks that scored eight or nine points as being the strongest stocks. His findings were that these strong stocks as a group outperformed a portfolio of all value stocks by 7.5% annually over a 20-year test period. Piotroski also found that weak stocks, scoring two points or fewer, were five times more likely to either go bankrupt or delist due to financial problems.

Score one point if a stock passes each test and zero if it doesn’t. The maximum score is 9.

  1. Net Income: Bottom line. Score 1 if last year net income is positive.
  2. Operating Cash Flow: A better earnings gauge. Score 1 if last year cash flow is positive.
  3. Return On Assets: Measures Profitability. Score 1 if last year ROA exceeds prior-year ROA.
  4. Quality of Earnings: Warns of Accounting Tricks. Score 1 if last year operating cash flow exceeds net income.
  5. Long-Term Debt vs. Assets: Is Debt decreasing? Score 1 if the ratio of long-term debt to assets is down from the year-ago value. (If LTD is zero but assets are increasing, score 1 anyway.)
  6. Current Ratio:  Measures increasing working capital. Score 1 if CR has increased from the prior year.
  7. Shares Outstanding: A Measure of potential dilution. Score 1 if the number of shares outstanding is no greater than the year-ago figure.
  8. Gross Margin: A measure of improving competitive position. Score 1 if full-year GM exceeds the prior-year GM.
  9. Asset Turnover: Measures productivity. Score 1 if the percentage increase in sales exceeds the percentage increase in total assets.

OldSchoolValue has a spreadsheet to compute the Piotroski score as well as a screener. Yesterday, I wrote about TJX companies as one of the three value ideas from thevalueguys.com. TJX has as Piotroski score of 8.

Posted in screener | 1 Comment

A model to check earnings manipulation

Posted on August 16, 2010 by Adib Motiwala

Professor Messod Beneish at Indiana University created a mathematical model that uses financial ratios and eight variables to identify whether a company has manipulated its earnings.. In many ways it is similar to the Altman Z score, but optimised to detect earnings manipulation rather than bankruptcy. Here is the orginal full paper and here is an excellent article on the model.

The eight variables are:

1. DSRI – Days’ sales in receivable index
2. GMI – Gross margin index
3. AQI – Asset quality index
4. SGI – Sales growth index
5. DEPI – Depreciation index
6. SGAI – Sales and general and administrative expenses index
7. LVGI – Leverage index
8. TATA – Total accruals to total assets

Once calculated, the eight variables are combined together to achieve an M-Score for the company. An M-Score of less than -2.22 suggests that the company will not be a manipulator. An M-Score of greater than -2.22 signals that the company is likely to be a manipulator.

Jae at Old School value has created a spreadsheet to calculate the M score for a company. Check out his article to download the sheet.

Posted in screener, Useful resources | 1 Comment

Using Google Docs To Track Your Watchlist Stocks

Posted on August 15, 2010 by Adib Motiwala

Google Docs has made it very easy to track your portfolio and stocks online. They provide a simple way to retrieve the latest stock price, P/E ratio, Market cap and other attributes.

You need a Google account to use this. Visit [docs.google.com] and create a new spreadsheet.

Lets look at one simple example
To insert the current price of Google stock:

=GoogleFinance("GOOG", "price")

Continue reading the rest of the article here

Posted in Portfolio Management | 3 Comments

3 Value Ideas from TheValueGuys.com

Posted on August 15, 2010 by Adib Motiwala

Val at TheValueGuys.com podcasts a show every week where he picks three companies from the weeks Value Line. Val has an excellent show and I use the show to learn more about the companies he presents. It can be a good source of Value Ideas and I highly recommend it. Here is an article I wrote about the show.

I am presenting a summary of the show and briefly analyzing the companies he presented. I have only looked at the financials briefly for these companies. Please perform your own due diligence and cross check all the facts and numbers presented below.

Oxford Industries (OXM): $20.44

Carter (CRI): $23.3

TJX Companies (TJX): $40.9

Please continue reading the rest of the article here.

Disclaimer: No positions.

Posted in Stock analysis, Useful resources, value line | Tagged , , | Comments Off on 3 Value Ideas from TheValueGuys.com

Netflix shares worth $140 or $90?

Posted on August 12, 2010 by Adib Motiwala

Netflix stock hit an all time high of $133.8 in trading today. Netflix stock has been on a tear since late 2008 from a low of $18 or so.

Netflix recently announced a content agreement with Epix which will allow Netflix to offer streaming movies to its subscibers. Netflix will pay $1 billion over 5 years for the content licensing.

“EPIX™ and Netflix, Inc. [Nasdaq: NFLX] today announced an agreement through which Netflix members can instantly watch an array of new releases and library titles from EPIX streamed over the Internet from Netflix. Movies from the multi-year deal will begin streaming from Netflix on September 1 and include movies from Paramount, Lionsgate and MGM.

EPIX has subscription pay TV rights to new releases and movies from the libraries of its partners and will make these movies available to Netflix 90 days after their premium pay TV and subscription on demand debuts. Historically, the rights to distribute these films are pre-sold to pay TV for as long as nine years after their theatrical release.

For Netflix, the agreement is a significant step in building the company’s streaming offer, adding many popular movie titles from some of the world’s leading studios. It adds meaningfully to a growing library of movies and TV shows that can be watched instantly on TVs via a range of leading consumer electronic devices capable of streaming from Netflix and on computers.”

Two Sell Side research companies differ in their opinion on Netflix. Continue reading the rest of the article…

Disclaimer: I had a short position in NFLX at the time of writing. I have since then closed the position.

Posted in Stock analysis | Tagged | Comments Off on Netflix shares worth $140 or $90?