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StockCentral :: Community
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Join in on the discussion with other like-minded investors in our community forums. Learn about the fundamental investing methodology and participate in educational workshops in the Investing forums, stay up-to-date on StockCentral news and make suggestions to the StockCentral team in Central Square, and discuss your favorite stock or recent market news in our A-Z ticker-based forums.
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Mark Robertson
Rochester Hills, Michigan
www.manifestinvesting.com
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| 12/09/2006 10:29 AM |
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Armin said: "Your SSG for WAG
projected Hi and Lo PEs of 31.5 and 21.5. How did you
determine those
numbers and is that how you usually determine projected Hi and Lo PEs?
I know that 31.5 + 21.5 / 2 = 26.5 which is VL’s projected PE. But what method did you
use to derive 31.5 and 21.5?
Thanks for the questions, Armin -- let's take them one at a time. (And we're not wearing
shorts back here in Michigan, thanks for rubbing it in. Wendy and I love to visit San Diego.)
Yes, I'm gonna generally stick to the Value Line P/E unless something "moves me off" that
estimate of 26.5x. And yes, in this case the average of my high and low P/Es for an SSG
are gonna average out to 26.5x.
What I generally do for any stock is to take the Value Line average P/E (or my conditioned
estimate) and divide it by three. (26.5x/3 is approximately 9) I take the "9" and add it to
26.5x to generate the high P/E forecast for Section 4A, or 26.5x + 9x = 35.5x.
Likewise we subtract 9 from 26.5x to generate a low P/E forecast for Section 4B(a), or 17.5x.
But they're different in this case? Yes ... good eye and thanks for asking. This is an
adjustment to reflect the stability of P/E ratios over the years for the stock. Using 3 as the
divisor is the "default approach" that I use. Note that this generates a low price that is 50%
of the high -- something that is consistent with the average fluctuation between high and
low prices for "all" stocks over a 52-week period.
But Walgreen isn't just any stock and the P/E volatility is historically lower. For more stable
companies, I'll switch the divisor to "4" or "5". For Walgreen, I chose 5. So 26.5/5 is
roughly 5 ... so my high becomes 26.5x + 5x = 31.5x ... and the low, 21.5x.
Good question.
Mark Robertson
www.manifestinvesting.com |
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Mark Robertson
Rochester Hills, Michigan
www.manifestinvesting.com
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| 12/09/2006 10:44 AM |
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Armin said: "You accept VL’s
projected PE of 26.5, but do not accept VL’s projected
sales growth of
13.4%. Instead, you used 12.0%. Why do you think VL’s projected
rate
for sales is too high, but not its projected PE?
The best way to tackle this one is probably with a picture. The following image is
a closer look at the trend for actual P/E ratios for the last five years. The trend line is
provided courtesy of Excel. The most recent P/E on the chart is clear indication of
"a disturbance in the force" and we'll talk about this more in our Discussion segment.
But the answer to your question is I basically close one eye and squint at the chart.
Seriously, I note that the P/E has trended from 30x to 28x over the last five years -- and
I'd not be surprised to see it continue down towards 26x in the next five years ... so Value
Line's 26.5x is good enough for me.
The adjustment from 13.4% to 12% is not all that material. It doesn't really affect things
that much. As we'll see in the next Q&A, the same can't be said for the profitability forecast.
NOTE: The spreadsheet graphic shown here is generated with a Manifest Investing Equity
Analysis Guide (or EAGLE) -- a tool that we use in combination with our SSGs. I'll see if I
can get Joe Craig to let us post one here (150 kb) but it's too big for the attachment size
limit right now. You can also create a trial account and explore our EAGLEs at ManifestInvesting.com.
Mark Robertson
www.manifestinvesting.com
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Mark Robertson
Rochester Hills, Michigan
www.manifestinvesting.com
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| 12/09/2006 11:11 AM |
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Armin said: "You note that VL’s
Earnings Predictability is 100 and say “It doesn't get any better than
that”. Soooo, why didn’t you use VL’s projected EPS of 17.0% instead of
12.4%?"
Wow. A "great question trifecta." And this one's deep.
And the answer is one of those, "It is what it is" answers. We lean heavily on expected income statements
(or preferred procedure) at MANIFEST. In other words, the EPS growth rate is a "result" based on the
assumptions made for sales growth, margin forecasts and estimates for future share totals. And in the
case of Walgreen, it's the margin forecast that "falls apart" on closer examination. To see this, we turn
to the net margin (after tax, or net income divided by sales) trend and take a closer look using either
Section 2A or the following image from our Equity Analysis Guide for Walgreen:
The Value Line analyst has estimated that the net profit margin will reach 4.3% in 3-5 years. And Andre
Costanza could be right. I hope so as a Walgreen shareholder. The graphic actually provides some
basis for Andre's exuberant forecast. After all, if the historical trend continues for another five years,
well ... something "north" of 4.0% seems feasible enough. But I'm terribly uncomfortable with a forecast
that is materially higher than the all-time high net margin achieved (3.7%, 2004). In retail -- even when
we're talking about medical stuff -- an increase of 0.5-0.7 percentage points is massive.
So we read and explore the reasons -- but my instinct is that it's gonna be a war out there. My personal
belief is that Walgreen will be challenged to maintain their present levels of profitability.
The result of this "instinct" is the resulting EPS forecast at the end of our 5-year time horizon, an EPS
growth rate of 11.7% or approximately 12%. Yes, I know the analyst consensus is 15%. I hope
they're right.
And finally ... a word about using the Annual Rates box on the VL company reports for anything. I rarely
use the figures in the Annual Rates box for anything -- including the 17% that you cite. Why?
Because their method of calculation is very vulnerable to significant disruptions from mergers, acquisitions
and divestitures. When the data array fails to account for continuing operations -- and it doesn't -- we can
be given a compromised forecast. It's a subject for another day, but EPS growth calculations and published
estimates can be quite the quagmire. Grain of salt is good advice and learning to use expected income
statements is even better.
Thanks, Armin.
Mark Robertson
www.manifestinvesting.com |
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Mark Robertson
Rochester Hills, Michigan
www.manifestinvesting.com
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| 12/09/2006 12:17 PM |
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We can get by ... with a little help from our friends.
When Diligence Meets Discussion
I'm not going to have a lot to say in this session. Those of you applauding ...
Santa is watching and he's making a list.
But I have to point to an awesome resource at your fingertips and some of
those wonderful people around us. I could literally name hundreds of volunteer
educators that I've had the privilege of working with over the last several years.
Their names range from "A" (Adams) to "Z" (Zeenkov) and although I'll mention
just a couple here as we continue our study of Walgreen -- the greetings of the
season go out to all of you. You know who you are.
There's no denying it. StockCentral is embryonic. But I want to invite you to
take a closer look at the potential.
The following image is from the Walgreen (WAG) ticker-based discussion folder.
We've been wondering about the impact of the recent Wal-Mart announcement about selling
generic prescriptions for $3 or $4. How does this affect Walgreen and CVS?
Speaking of CVS ... what does the Caremark acquisition portend?
For a closer look, I'd encourage you to visit the reports filed here by Ann Cuneaz and
Lynn Ostrem. Lynn provides a StockWatcher report for her Crow River investment club and
Ann follows with her tracking spreadsheet for Walgreen. Take a look and see if it
triggers any ideas for you. They describe the Wal-Mart and CVS/Caremark situations in
their reports to their club partners. These are clearly "best practice" examples.
Ann and Lynn rank as two of the most outstanding teachers that I've ever had the privilege
to work with. I'd highly recommend that if you ever get the opportunity -- attend one of
their classes. You won't be disappointed.
Best practice examples ... and there's more where that comes from -- this embodies the
promise of StockCentral for those who choose to participate and contribute. And the best
thing is that resources like Ann and Lynn are delivered right to your desktop whenever you
need a dose of diligence or further discussion.
We'll cover (gulp) Decisions and "Doing It" in the next sessions.
Mark Robertson
www.manifestinvesting.com
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Rajiv Roy
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| 12/09/2006 3:52 PM |
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Hi Armin,
Good to see you here. Envy your San Diego weather. But after the brutal summer here in Plano, I will take the cooling.
Since there are a number of questions some may be better for Mark to respond to and I assume some were directed at me. I will attempt to answer each one, one at a time. But lets resolve the High PE question first.
My mistake on that. I lowered the High PE from 31.5 to 26.5 to match the PAR. Currently stockfundas is only reporting Total Return which if left unchanged would have been 17.7% at a current price of 43.63.
So I am going to switch the SSG back to High PE of 31.5 and the Total Return will be back to 17.7%; PAR will be same as Mark's at 13.8%.
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Rajiv
www.stockfundas.com
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ERIC RESWEBER
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| 12/10/2006 9:44 AM |
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Armin said: "Your SSG for WAG projected Hi and Lo PEs of 31.5 and 21.5. How did you
determine those numbers and is that how you usually determine projected Hi and Lo PEs?
I know that 31.5 + 21.5 / 2 = 26.5 which is VL’s projected PE. But what method did you
use to derive 31.5 and 21.5?
Mark said: Yes, I'm gonna generally stick to the Value Line P/E unless something "moves me off" that estimate of 26.5x. And yes, in this case the average of my high and low P/Es for an SSG are gonna average out to 26.5x.
Mark,
Thanks for doing this workshop. I was going to ask the same question that Armin asked about how you chose your high and low P/E's.
Since you rely so much on Value Line, I was wondering if you think this idea has any value. I've just started doing this as a check on my future high and low P/E judgements.
I take the high and low price projections from the box in the upper left corner of the Value Line page and divide those by the projected earnings per share from the column on the right. So far the result seems to be pretty much in line with what I was coming up with otherwise.
Thanks again, Mark.
Eric
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Ginger Muenster
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| 12/10/2006 10:15 AM |
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I have just gotten time to read all the great information presented here - from everyone.
It is so nice to "talk", read, study and learn, and then "talk" some more. I am usually a lurker, but just had to let everyone know what a great benefit this is.
If only I could get the other members of my stock club to at least look at this stuff.
Thanks again.
Ginger |
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Joe Craig
Ellicott City, MD
StockCentral Administrator
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| 12/10/2006 10:24 AM |
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It's good to have you here, Ginger! Drop a note from time to time. Or ... use the ticker forums to tell us what your club is studying, buying, etc.
If you'll also upload your SSG files, that might be a good start in getting some discussion going ... and that could help your club. It might even help to motivate others in you club to participate.
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Joe |
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Michael Higgs
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| 12/10/2006 9:16 PM |
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Carol Clemens wrote on 12/06/2006 6:03 PM: Mark--
In the screening tool you used to derive your list for this discussion, did you or didn't you include yield? Dividend growth is becoming
more of a consideration for me as retirment is imminent. Couldn't tell from your summary. Am delighted to see you here at this
forum!
Carol ClemensCarol, I only look at stocks with sustainable growing dividends and have done so for the past 25 years. For the US portion of my portfolio, I work from two universes  Source. [/quote] |
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Karen OBoyle
Denver, Colorado
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| 12/10/2006 9:35 PM |
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While we're talking due diligence here - I'm wondering if anyone is concerned about the Accounts Receivable numbers for WAG.
It nearly doubled from the end of 2004 to May of '05 according to VL. Sales increased 12.3% but Accounts Receivable increased by 47% - this could mean a problem with collections? |
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Karen OBoyle |
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Mark Robertson
Rochester Hills, Michigan
www.manifestinvesting.com
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| 12/11/2006 3:27 PM |
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Good question, Karen. (And I'd noticed the same thing and planned to mention it...)
I've asked the question of Walgreen investor relations and we'll see what we find out.
Mark Robertson
www.manifestinvesting.com |
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Mark Robertson
Rochester Hills, Michigan
www.manifestinvesting.com
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| 12/11/2006 3:44 PM |
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Eric,
Thanks for the kind words. It's GREAT to "hear" from you.
To answer your question, yes I think running that "check/audit" makes a
lot of sense. Value Line builds their price forecasts based on
price-to-cash flow, so it actually serves as a second opinion or
checkpoint -- using a different multiple for the basis.
Keep in mind that the 3-5 year forecast for Value Line can result in a much different time span than our 5-year time horizons.
In the case of Walgreen, it'd be the average future price ($90) divided
by $3.35, or 26.9x -- pretty consistent with the 26.5x chosen.
Mark Robertson
www.manifestinvesting.com
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Mark Robertson
Rochester Hills, Michigan
www.manifestinvesting.com
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| 12/11/2006 7:13 PM |
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It's all about the big picture.
"Knowing what you're trying to do before you do it. Turning knobs at random isn't
enlightening any more than throwing paint at a wall blindfolded will let you paint a
nice picture." -- Steve Albini
The Discipline of Decisions
My most recent exposures to the world of art suggest that trying the blindfolded thing
could lead to a collectible worth thousands, if not millions. But I digress. (grin)
It really is about the "big picture" when it comes to long-term investing. And we
measure the big picture by the returns that we achieve. And with that in mind, we
can talk about how the results of our Walgreen stock study would fit within a specific
portfolio.
Yes, I know we've made it common acceptable practice to engage in the myth of
believing that we can do Buy-Sell-Hold on a single stock.
And if you live for 6 PM and your daily dose of Cramer and lightning, then what I have
to say is probably going to sting a little.
I don't believe that it's very meaningful to bark buy, sell or hold based on the return
expectations that we build for a single company. And although George Nicholson
built the NAIC tools with a fairly powerful "inward focus" complete with buy zones and
the like, I really do believe if he were here today he'd frame the evaluation differently.
What's your expected return? Is the quality OK? How would buying (or selling) that
stock affect the total portfolio?
In other words, what are the BEFORE and AFTER portfolio conditions?
At Manifest Investing, we use dashboards as we perform this assessment for any stock.
Here's another look at the portfolio we mentioned in the Q&A with Steve Sathue:
The "BEFORE" Portfolio. A little more PAR would be a good thing.
We've decided that Walgreen has a projected annual return (PAR) of 18.7% according to the Value
Line analyst and the screening results that we shared. We've also concluded that Walgreen's quality
is exceptional. Yes, we also decided that 18.7% may be a little ambitious -- based on the VL
analyst's profitability forecast. But for purposes of discussion here, we'll run with 18.7%.
The relevant question becomes, "Would investing the $5000 in Walgreen improve this portfolio?"
We measure improvement by the impact on the big picture, the overall projected return for the
portfolio. With WAG at $43.63, we can buy 100 shares of Walgreen.
What would the dashboard (portfolio) look like if we did buy 100 shares of Walgreen?
The AFTER portfolio. Yes, a little more PAR is a good thing. A little more would be even better.
We see here that the overall PAR has been increased to 12.9% with the addition of the Walgreen
shares. Is this enough? That depends on your big picture. If you're risk averse and wake up
in a pool of cold sweat at 3 AM after every investment you make ... then it's probably too much.
I'd recommend even higher-quality stocks with bigger dividend yields and suggest aiming for a
little lower overall portfolio PAR.
For most of us, we aim for a five percentage point advantage to the general stock market. With
the median projected return for all stocks at 9.4% right now -- this would entail targeting a
minimum portfolio PAR of 14.4%. For this portfolio, that would mean that there's more work to
be done. Does a stock study on Western Union confirm the return expectations at 7.5%?
If so, a search for replacement candidates that would continue to increase the portfolio PAR is
still in order. Look closely at the BEFORE and AFTER dashboards -- those of you with eagle
eyes will notice that FactSet's fundamentals appear to have changed between the time I did
the original screen capture (just a few days ago) and today. And you'd be right. During the past
weekend's update, the VL analyst increased the growth forecast and raised the projected average
P/E from 24x to 25x for FactSet Research -- a couple of moves that are probably getting closer
to the expectations of most of the FactSet watchers gathered here.
Patience and discipline are still in effect and they matter. They matter a lot.
Our experience with the dashboards and the guidance provided for buying and selling seems to
make a whole lot more sense to many long-time investors and subscribers at Manifest Investing.
We truly believe that the challenge of selling decisions is made a whole lot easier when we
keep the big picture in mind along the way -- making each decision in the context of the total
portfolio.
Mark Robertson
www.manifestinvesting.com
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Brian Kiley
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| 12/17/2006 8:55 AM |
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Mark,
What a great workshop: Sleep-at-night investing. It was last year on Thanksgiving week-end that I discovered NAIC (BI). Being conservative it took several months before I made my first stock investment using the George Nicholson method of investing.
There has been so much support for a beginner such as I. It is workshops like this that can help those that are just starting out. The learning has been a great experience for me, and since I started making some purchases of stock it has become rewarding.
You mentioned when you came to our office to help with our 401K program that investing can be addictive. I find myself trying to get others involved in taking charge of their investments.
Would like to thank you and all the others that you spoke of from A to Z that have helped us beginners. Through this investing community I have gained enough understanding to invest with confidence. There are many of us that read these workshop forums and we learn from the workshops even though we are not participating in the workshop.
Keep up the good work.
Brian Kiley
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