MSN Money - Invest like a young Warren Buffett - Find hot stocks

MSN Money - Invest like a young Warren Buffett - Find hot stocks: "Invest like a young Warren Buffett"

Terrific article on how to invest like Buffett.
I will attempt to develop a screen on msn that will pick up stock ideas.

Notes from 5 Keys to Value Investing

EV/ EBITDA

Enterprise Value to earnings before interest, tax, depreciation and amortization.

• Not a good valuation tool for companies that have equity stakes in other companies.
• Can be used to compare a public company with private companies.
• Buffett thinks that EBITDA is: "The one figure we regard as utter nonsense..."

Moody's Ten Critical Failings of EBITDA:

• EBITDA ignores changes in working capital and overstates cash flow in periods of working capital growth
• EBITDA can be a misleading measuere of lidquidity
• EBITDA does not consider the amout of required reinvestment - especially for companies with short lived assets
• EBITDA syas nothing about the quality of earnings.
• EBItDA is an inadequate stand-alon measure for comparing acquisition multiples
• EBITDA is not a common denominator for cross-border accounting conventions.
• EBITDA offers limited protection when used in indenture convenants.
• EBITDA can drift from the realm of reality
• EBITDA is not well suited for the anlysis of many industries because it ignores their unique attributes.

Enterprise Value: A measure of a company's value. Calculated as market capitalization plus debt and preferred shares, minus cash and cash equivalents. Taking a company's market value, adding its total debt, and then subtracting the cash. Including a control premium, this is the value that a private or strategic buyer of the enterprise would pay for the company.

Amoritization: The paying off of debt in regular installments over a period of time.

Top-Line Multiples: EV / Revenue and Price / Sales

EV / Revenue - Enterprise Value to revenue is calculated by taking the firm value, which includes the firm's debt and equity, and dividing it by revenues.

Price / Sales - The current equity market value (stock price miltipleied by the shares outstanding divided by the revenues).

EV / R evaluates the entire firm. Price to sales only values the equity protion of a company. These methods of evaluation are not influenced by accounting decisions.

PEG Ratio

Most value investors do not use PEG ratios.

PEG Ratio - P/E ratio / expected growth rate of earnings.

Asset based Tools

Discounted Cash Flows

It takes into account a company's cash flows and the factors affecting its growth rate. This takes the cash flows generated by the company and discounts them back.
The three factors that must be taken into account with DCF are the cash flow, the discount rate, and time.

Free Cash Flow = Net Income + Depreciation + Amortization - Capital Expenditures

Weighted Average Cost of Capital = E/Cap X Ec + D/Cap X Dc X(1 - Tr)

Where:
E = the equity market value of the enterprise
D =the debt market value of the enterprise
Cap = capitalization, which is E + D
Ec = cost of equity, which is the returns shareholders require from the company
Dc = cost of debt, which is the returns lenders require from the company
E/Cap = equity financing as a percentage of capitalization
D/Cap = debt financing as a percentage of capitalization
Tr = the company's tax rate

DCF is not a good tool to evaluate companies undergoing restructuring, or companies that grow through acquisitions. It is also not a good tool for cyclical companies.It is a good tool when the cash flows of the enterprise are not too cyclical, and it can be assumed that they will have realtively the same risk factor in the next 5 to 7 years.

Sum of the parts
carve the company into its parts (GE has many different companies - evaluate them on an individual basis)

Balance Sheet

The balance sheet is divided into two parts that, based on the following equation, must equal each other: assets = liabilities + owners' equity.
Owners' equity, referred to as shareholders' equity in a publicly traded company, is the amount of money initially invested into the company plus any retained earnings, and represents the source of the business's funding.

Current Assets
Three types of assets are included in the balance sheet: current assets, fixed assets and intangible assets. Current assets have a life span of one year or less, meaning they can easily be converted into cash. Such assets are cash and cash equivalents, accounts receivable and inventory. All are short-term, highly liquid assets that can easily be converted into cash and used as currency.

Cash, the most fundamental of current assets, also includes non-restricted bank accounts and checks. Cash equivalents are stocks, and other money market instruments such as U.S. Treasuries that can be quickly changed into money.

Accounts receivable are the short-term obligations owed to the company from clients. Accounts receivable for a company selling a good could expect to receive monthly installments from its clients, while accounts receivable for a company offering a service could be in the form of monthly subscription fees.

Finally, inventory represents the amount of materials currently available for production. If the firm is manufacturing a product, the inventory is divided into three different stages: raw materials, work-in-progress (WIP) and finished goods. Inventory for businesses that sell retail will consist of products purchased from the manufacturer and yet to be sold to the public.

Long-Term Assets
Long-term assets, also known as fixed assets, have a life span of over one year. They can refer to tangible assets such as machinery, computers, buildings and land. Depreciation is calculated and deducted from these types of assets.

Long-term assets can also be intangible assets, such as a website domain, or a patent or copyright. While these assets are not physical in nature, they are often the resources that can make or break a company--the value of a brand name, for instance, should not be underestimated.

Types of Liabilities
On the other side of the balance sheet are the liabilities. These are the financial obligations a company owes to outside clients. Like assets, they can be both current and long-term. Long-term liabilities are debt that has more than a year's maturity.

Current liabilities are typically paid within one year or less, and are therefore paid with current assets. Because current assets pay for current liabilities, the ratio between the two is important: a company should have enough of the former to cover the latter. Current liabilities include such items as dividends payable, accounts payable (what the company owes to suppliers for buying raw materials or retail products on credit), interest payments on long-term debt, and taxes payable.

Owners' Equity
Owners' equity is the initial amount of money invested into a business. If, at the end of the fiscal year, a company decides to reinvest its net earnings (after taxes) into the company, the retained earnings will be restated from the income statement onto the balance sheet here. The sum of the two figures represents a company's total net worth. In order for the balance sheet to balance, total assets on one side have to equal total liabilities plus owners' equity on the other. Here's an example, demonstrating this balance between assets and liabilities plus net worth:

Catalysts

Investors often look at a sales-to-capital ratio as a tool to help analyse such revenue growth prospects. The investor calculates this ratio by taking the sales figure, available on the income statement, and dividing by the firm's capital, fond on the balance sheet. A higher sales/ capital ratio limits the need for the company to plow back cash to finance growth, thereby increasing cash flows and ultimately the value of the enterprise. If this ratio increases, the investment returns on the company's capital also increase.

Working capital - A valuation metric that is calculated as current assets minus current liabilities.

Noncash working capital - this is the difference between the noncash current assets and the nondebt portion of current liabilities. It typically includes inventory and accounts receivable less accounts payable.

Explain This: Why is Marine Products a Good Company?

Marine Products (AMEX: MPX)

In the beginning...

In the beginning Christopher made heaven and earth. Now Christopher is interested in making money. This is the beginning of a dialogue that will lead to the establishment of the "Kwiatkowski Fund". Through sound research and wise decisions the amount of money that will be made by the Kwiatkowski brothers is immeasurable.
If a small town boy from Omaha, Nebraska can make billions and directly affect the movements of the stock market with his every decision, then why can't we?