Saturday, October 26, 2013
Tuesday, November 20, 2012
Tuesday, July 24, 2012
Free Cash Flow
There is quite of bit of noise for investors when trying to value companies. Most investors look at measures like PE or they skip to the cash flow statements of a company’s 10K report because of the unreliable nature of earnings. Not all earnings are created equal, ask yourself the question: “Are the earnings pure or are they elevated because of accounting tricks or other gimmicks that are not sustainable for the long run?”
It is critical to evaluate the company’s free cash flow at least quarterly if not more often. Not all earnings are the same, and understanding the important ones and discounting the less important ones will have a direct impact on your investing success.
An example of less reliable earnings would be when a company does not pay all vendors in a particular quarter and as a result the cash flow looks better or if they put off paying taxes for a period of time to improve cash flow in the most recent earnings reports.
Most investors are not savvy enough to know the differences in earnings but they invest anyway usually at their peril. The most important lessons to learn is understanding that stock prices will follow growth in quality earnings and expanding margins often rewarding the stock with increased multiples for every dollar of free cash flow.
Utilizing a strict definition of free cash flow and using it as religious doctrine will keep you out of trouble in the long run. Think of it in these terms, no company wants to pay more taxes than needed so they will take all measures to reduce their taxable income.
Free cash flow is the final amount of money left after everything has been paid. If this is a small or a negative number then the value of the company at least in the short term is overvalued and the market will punish its stock holders with plunging stock prices. On the other hand if the free cash flow is a growing number relative to the price of the stock then the market will reward investors with rising stock prices.
*Information provided in our posts is for sophisticated investors only. All others should contact GeaSphere Advisors for a free portfolio review and risk assessment to determine the proper investments and asset allocation models for their circumstances.
GeaSphere Advisors will often hold positions in stocks or sectors we write about.
Call 401-351-4900
Tuesday, December 28, 2010
Analysis of Fuel Oils Using Statistical Indicator Analysis (SIA)
SIA has proven itself a useful tool to compliment my work on free cash flow, but when analyzing commodities it could be an even more powerful tool, in that commodities have no earnings, no balance sheets and no cash flow statements to analyze, thus the only way to analyze them is through technical analysis or price action (of course Macro-events play a major role as well, but those cannot be quantified).
But what if you are long term investor or want to hedge for your business and want to go beyond the 200 day moving average. Your options are rather limited, because commodities are basically in the realm of the short term trader, so what can you do? Well I analyzed the Fuel Oil Industry using my SIA and came up with some amazing results.
I was able to get data for most of these fuel oils going back to 1986 and if we go forward 3650 trading days we end up with #1 trading day (on the horizontal axis of the chart) beginning in the year 2000. So we have 10 years of concrete SIA data to work with and that should be adequate.
I was able to analyze four different fuels for this article, and they are as follows.
The following is a chart for WTI Crude Oil;
As the chart clearly shows a pretty amazing thing happened with crude oil as it went up to $145.31 on trading day # 2130 (July 3, 2008) and on that day the SIA was $35.37, so Crude Oil was trading at 4.10 times its SIA. In the stock market I usually like to sell at 2.0 times SIA, so this was twice my sell price.
So what would have happened if you bought crude oil on that day and went long? Basically you would have lost -74% on your investment as oil prices fell off a cliff and kept dropping until February 23, 2009 when they broke below the SIA line (Red Line) for exactly one day. That’s right, oil fell below its SIA on February 23rd only and has never been down there again . So my SIA called the bottom in crude oil and the indisputable proof is in the chart before you.
I wrote an article on IBM a few days back, which you can read here;
http://freecashflowanalyst.com/2010/12/26/mycroft-research-analysis-of-international-business-machines-ibm.aspx
And in that article I posted this SIA chart:
As you can see on #8155 the stock broke its SIA for exactly one day as well and then shot up.
Is this a crazy coincidence or am I onto something here? IBM hit its low on November 20, 2008 and Crude Oil hit is low on February 23, 2009, so the dates are far apart from each other, thus the date could not be the reason. IBM has nothing to do with crude oil so, that could not be the reason either.
So what would happen if we put up the charts for the other fuel oils and see what happened with their historical SIA’s. The following may just surprise you as what happened is truly amazing;
Chart of U.S Gasoline prices;
Broke is SIA line for 10 days on December 2, 2008 and never looked back.
New York Heating Oil
Came within $.08 cents of its SIA and then shot up on February 18, 2009.
Texas Propane Spot
Broke below its SIA on February 18, 2009 and stayed around it until March 16, 2009 and never looked back.
So maybe some of these fuel oils are linked to Crude Oil and there is a direct correlation in their prices, but it seems that SIA could be a very useful tool for those doing commodity investing. Of course I have only investigated a few commodities so far, but it is very difficult to get your hands on the long term daily trading data necessary to do this analysis. I have been looking for daily closing prices for spot gold and silver for two days now and they are nowhere to be found. If anyone has access to any daily commodity prices for any commodity going back to at least 1986 all the way to today, I would love to try out my SIA on it and publish the results. So please send them to Mycroft@mycroftresearch.com if you don’t mind.
Before closing I would like to go back to the Crude Oil chart one more time and direct your attention to trading day #418, which was when crude oil broke below its SIA on November 5, 2001 and stayed there until February 22, 2002 and proceeded to go from $20 a barrel to $145.31 for a gain of 626% in just six years. Therefore as I have stated previously, when one buys at par with SIA or at a discount to it, the gains can be substantial and the farther you go away from it the greater the risk becomes. At crude oils current SIA of $44.74 and with my rule of thumb of selling at 2.0 times SIA, it could mean that crude oil would be a sell at $89.48. The historical price to SIA average for crude has been 1.88 times (the mean of 2752 trading days) so selling at a SIA of 2.0 could be a prudent move.
Diclosure; Long IBM, No Position in any of the commodities mentioned in this article.
Disclaimer:
Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
Permalink: freecashflowanalyst.com/2010/12/27/analysis-of-fuel-oils-using-statistical-indicator-analysis-sia.aspx
________________________________________
By Mycroft Psaras
Research Director at GeaSphere
http://www.geasphere.com
877-351-4902
But what if you are long term investor or want to hedge for your business and want to go beyond the 200 day moving average. Your options are rather limited, because commodities are basically in the realm of the short term trader, so what can you do? Well I analyzed the Fuel Oil Industry using my SIA and came up with some amazing results.
I was able to get data for most of these fuel oils going back to 1986 and if we go forward 3650 trading days we end up with #1 trading day (on the horizontal axis of the chart) beginning in the year 2000. So we have 10 years of concrete SIA data to work with and that should be adequate.
I was able to analyze four different fuels for this article, and they are as follows.
The following is a chart for WTI Crude Oil;
As the chart clearly shows a pretty amazing thing happened with crude oil as it went up to $145.31 on trading day # 2130 (July 3, 2008) and on that day the SIA was $35.37, so Crude Oil was trading at 4.10 times its SIA. In the stock market I usually like to sell at 2.0 times SIA, so this was twice my sell price.
So what would have happened if you bought crude oil on that day and went long? Basically you would have lost -74% on your investment as oil prices fell off a cliff and kept dropping until February 23, 2009 when they broke below the SIA line (Red Line) for exactly one day. That’s right, oil fell below its SIA on February 23rd only and has never been down there again . So my SIA called the bottom in crude oil and the indisputable proof is in the chart before you.
I wrote an article on IBM a few days back, which you can read here;
http://freecashflowanalyst.com/2010/12/26/mycroft-research-analysis-of-international-business-machines-ibm.aspx
And in that article I posted this SIA chart:
As you can see on #8155 the stock broke its SIA for exactly one day as well and then shot up.
Is this a crazy coincidence or am I onto something here? IBM hit its low on November 20, 2008 and Crude Oil hit is low on February 23, 2009, so the dates are far apart from each other, thus the date could not be the reason. IBM has nothing to do with crude oil so, that could not be the reason either.
So what would happen if we put up the charts for the other fuel oils and see what happened with their historical SIA’s. The following may just surprise you as what happened is truly amazing;
Chart of U.S Gasoline prices;
Broke is SIA line for 10 days on December 2, 2008 and never looked back.
New York Heating Oil
Came within $.08 cents of its SIA and then shot up on February 18, 2009.
Texas Propane Spot
Broke below its SIA on February 18, 2009 and stayed around it until March 16, 2009 and never looked back.
So maybe some of these fuel oils are linked to Crude Oil and there is a direct correlation in their prices, but it seems that SIA could be a very useful tool for those doing commodity investing. Of course I have only investigated a few commodities so far, but it is very difficult to get your hands on the long term daily trading data necessary to do this analysis. I have been looking for daily closing prices for spot gold and silver for two days now and they are nowhere to be found. If anyone has access to any daily commodity prices for any commodity going back to at least 1986 all the way to today, I would love to try out my SIA on it and publish the results. So please send them to Mycroft@mycroftresearch.com if you don’t mind.
Before closing I would like to go back to the Crude Oil chart one more time and direct your attention to trading day #418, which was when crude oil broke below its SIA on November 5, 2001 and stayed there until February 22, 2002 and proceeded to go from $20 a barrel to $145.31 for a gain of 626% in just six years. Therefore as I have stated previously, when one buys at par with SIA or at a discount to it, the gains can be substantial and the farther you go away from it the greater the risk becomes. At crude oils current SIA of $44.74 and with my rule of thumb of selling at 2.0 times SIA, it could mean that crude oil would be a sell at $89.48. The historical price to SIA average for crude has been 1.88 times (the mean of 2752 trading days) so selling at a SIA of 2.0 could be a prudent move.
Diclosure; Long IBM, No Position in any of the commodities mentioned in this article.
Disclaimer:
Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
Permalink: freecashflowanalyst.com/2010/12/27/analysis-of-fuel-oils-using-statistical-indicator-analysis-sia.aspx
________________________________________
By Mycroft Psaras
Research Director at GeaSphere
http://www.geasphere.com
877-351-4902
Monday, December 27, 2010
GeaSphere Research Analysis of Cisco Systems (CSCO)
The main thrust of this analysis is concentrated in three parts. The first two parts are based on free cash flow (current and historical) and the third is based on historical price action as a gauge of investor sentiment.
The three methods used in this analysis are:
1) Price to Owners Earnings (OE) = Current and future analysis
2) Cumulative Owners Earnings (COE) = Historical analysis of owners earnings
3) Statistical Indicator Analysis (SIA) = Historical price action
For those new to this analysis please link here for an introduction:
OE and COE = http://freecashflowanalyst.com/2010/12/22/-2.aspx
SIA = http://freecashflowanalyst.com/2010/12/24/an-introduction-to-statistical-indicator-analysis-sia.aspx
CapFlow = http://freecashflowanalyst.com/2010/12/22/introduction-to-the-theory-of-capflow.aspx
The main goal of my analysis is first to determine a sell price. With that in mind, we attempt to buy the stock at half its sell price and then hold it for 5 years (provided that no macro- economic negative catalysts force us to sell). Due to the fact that we bought it at par, we can potentially achieve an average annualized return of 15% per year. This may enable us to double our money every 5 years. Occasionally we do find a stock that is not selling at par, but is actually selling at a discount. When this happens, gains are usually higher.
Analysis of Cisco Systems (CSCO)
Cisco Systems is the cover story of the latest issue of Barron’s, so I decided to do a write up on the company as well. The following is a table housing Cisco Systems Owners Earnings data from 1987-2011 (including estimates);
Cisco Systems closing price on December 23rd was $19.69 and its OE per share for 2010 came in at $1.55, which would give us a Price to OE (P/OE) of 12.70. I usually sell stocks that hit 30 times their P/OE, so at 12.70, using 2010 final results, Cisco Systems seems to have a long way to go before it becomes a sell on our P/OE scale, in fact the actual sell price would for P/OE would be $46.50 ($1.55 X 30)
On the COE front Cisco Systems has only been around since 1987 and the first 5 years of operations were quite meaningless from a data point of view. Therefore we only really have about 18 years to work with to determine its COE, which is not really enough data to make a conclusive analysis (I like to at have at least 25 years+ of data to get a more accurate reading). Never the less here is the chart for Cisco System’s COE:
Though the result is only $10.91 from 1987-2010, the trajectory is quite impressive and if we were to add its 2011’s estimate for Owners Earnings per share of $1.45, that would give us a COE of $12.36. Since Cisco Systems already reported their final 2010 numbers (as they close their books early), it is safe to use the $12.36 figure. So since we sell at 2.0 times a company’s COE our COE Sell Price would be $24.72.
Cisco Systems was one of those stocks that was a leader of the pack on the upside during the dot com boom and took a big hit during the dot com bust. Management in 2000 saw that their stock was over valued at the time and used it as currency to buy a multitude of firms. In the last ten years the company has slowed down its pace of accusations considerably and has concentrated all its attention on streamlining all those past purchases into one cohesive mega-firm. John Chambers and his management team have done an amazing job of controlling spending, while at the same time growing cash flow. This is the best of all worlds, when a management is able to do that and their CapFlow, as a result, is one of the best in their industry. Here is the CapFlow chart for Cisco Systems;
In it you can see the wild excessive spending that they did in 2000, finally caught up with them in 2001-2002, but fortunately they were able to learn from this and have evolved into a very conservatively managed company. All this is clearly demonstrated in its CapFlow chart.
As far as SIA goes our current SIA for Cisco Systems is $22.53, so it is trading currently at 0.87 times its SIA. I like to sell at 2.0, so from a strictly SIA point of view Cisco Systems has a sell price of $45.06. It is very rare to find a quality stock like Cisco Systems selling at a 13% discount to its SIA value, but even rarer when you can find such a stock that is also a member of the DJIA 30! I say this because most stocks in that index sell at a premium due to the fact that the DJIA components are so widely held. Cisco Systems is clearly a bargain from an SIA point of view
The following is a chart of Cisco Systems SIA from 2004-today;
So for Cisco Systems we now have three separate sell prices;
1) P/OE = $46.50 (30 times OE per Share)
2) COE = $24.72 (2 times COE)
3) SIA = $45.06 (2 times SIA)
Total = $116.28/3 = $38.76 = Sell Price
Buy Price = $19.38
Conclusion = Cisco Systems is a Very Strong Hold
Disclosure: Long CSCO
Disclaimer:
Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
Permalink: freecashflowanalyst.com/2010/12/27/mycroft-research-analysis-of-cisco-systems-csco.aspx
Permalink http://geasphere.com/pages/geasphereUpdate.aspx?spid=111345&ptype=UPDATE
By Mycroft Psaras
Research Director at Gea Sphere LLC
http://geasphere.com
877-351-4902
The three methods used in this analysis are:
1) Price to Owners Earnings (OE) = Current and future analysis
2) Cumulative Owners Earnings (COE) = Historical analysis of owners earnings
3) Statistical Indicator Analysis (SIA) = Historical price action
For those new to this analysis please link here for an introduction:
OE and COE = http://freecashflowanalyst.com/2010/12/22/-2.aspx
SIA = http://freecashflowanalyst.com/2010/12/24/an-introduction-to-statistical-indicator-analysis-sia.aspx
CapFlow = http://freecashflowanalyst.com/2010/12/22/introduction-to-the-theory-of-capflow.aspx
The main goal of my analysis is first to determine a sell price. With that in mind, we attempt to buy the stock at half its sell price and then hold it for 5 years (provided that no macro- economic negative catalysts force us to sell). Due to the fact that we bought it at par, we can potentially achieve an average annualized return of 15% per year. This may enable us to double our money every 5 years. Occasionally we do find a stock that is not selling at par, but is actually selling at a discount. When this happens, gains are usually higher.
Analysis of Cisco Systems (CSCO)
Cisco Systems is the cover story of the latest issue of Barron’s, so I decided to do a write up on the company as well. The following is a table housing Cisco Systems Owners Earnings data from 1987-2011 (including estimates);
Cisco Systems closing price on December 23rd was $19.69 and its OE per share for 2010 came in at $1.55, which would give us a Price to OE (P/OE) of 12.70. I usually sell stocks that hit 30 times their P/OE, so at 12.70, using 2010 final results, Cisco Systems seems to have a long way to go before it becomes a sell on our P/OE scale, in fact the actual sell price would for P/OE would be $46.50 ($1.55 X 30)
On the COE front Cisco Systems has only been around since 1987 and the first 5 years of operations were quite meaningless from a data point of view. Therefore we only really have about 18 years to work with to determine its COE, which is not really enough data to make a conclusive analysis (I like to at have at least 25 years+ of data to get a more accurate reading). Never the less here is the chart for Cisco System’s COE:
Though the result is only $10.91 from 1987-2010, the trajectory is quite impressive and if we were to add its 2011’s estimate for Owners Earnings per share of $1.45, that would give us a COE of $12.36. Since Cisco Systems already reported their final 2010 numbers (as they close their books early), it is safe to use the $12.36 figure. So since we sell at 2.0 times a company’s COE our COE Sell Price would be $24.72.
Cisco Systems was one of those stocks that was a leader of the pack on the upside during the dot com boom and took a big hit during the dot com bust. Management in 2000 saw that their stock was over valued at the time and used it as currency to buy a multitude of firms. In the last ten years the company has slowed down its pace of accusations considerably and has concentrated all its attention on streamlining all those past purchases into one cohesive mega-firm. John Chambers and his management team have done an amazing job of controlling spending, while at the same time growing cash flow. This is the best of all worlds, when a management is able to do that and their CapFlow, as a result, is one of the best in their industry. Here is the CapFlow chart for Cisco Systems;
In it you can see the wild excessive spending that they did in 2000, finally caught up with them in 2001-2002, but fortunately they were able to learn from this and have evolved into a very conservatively managed company. All this is clearly demonstrated in its CapFlow chart.
As far as SIA goes our current SIA for Cisco Systems is $22.53, so it is trading currently at 0.87 times its SIA. I like to sell at 2.0, so from a strictly SIA point of view Cisco Systems has a sell price of $45.06. It is very rare to find a quality stock like Cisco Systems selling at a 13% discount to its SIA value, but even rarer when you can find such a stock that is also a member of the DJIA 30! I say this because most stocks in that index sell at a premium due to the fact that the DJIA components are so widely held. Cisco Systems is clearly a bargain from an SIA point of view
The following is a chart of Cisco Systems SIA from 2004-today;
So for Cisco Systems we now have three separate sell prices;
1) P/OE = $46.50 (30 times OE per Share)
2) COE = $24.72 (2 times COE)
3) SIA = $45.06 (2 times SIA)
Total = $116.28/3 = $38.76 = Sell Price
Buy Price = $19.38
Conclusion = Cisco Systems is a Very Strong Hold
Disclosure: Long CSCO
Disclaimer:
Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
Permalink: freecashflowanalyst.com/2010/12/27/mycroft-research-analysis-of-cisco-systems-csco.aspx
Permalink http://geasphere.com/pages/geasphereUpdate.aspx?spid=111345&ptype=UPDATE
By Mycroft Psaras
Research Director at Gea Sphere LLC
http://geasphere.com
877-351-4902
Sunday, December 26, 2010
Research Analysis of Exxon Mobil (XOM)
In my last three articles I introduced the various methods that I use to analyze a company for potential purchase. The main thrust of this analysis is concentrated in three parts. The first two parts are based on free cash flow (current and historical) and the third is based on historical price action as a gauge of investor sentiment.
The three methods used in this analysis are:
1) Price to Owners Earnings (OE) = Current and future analysis
2) Cumulative Owners Earnings (COE) = Historical analysis of owners earnings
3) Statistical Indicator Analysis (SIA) = Historical price action
For those new to this analysis please link here for an introduction:
OE and COE = http://freecashflowanalyst.com/2010/12/22/-2.aspx
SIA = http://freecashflowanalyst.com/2010/12/24/an-introduction-to-statistical-indicator-analysis-sia.aspx
CapFlow = http://freecashflowanalyst.com/2010/12/22/introduction-to-the-theory-of-capflow.aspx
The main goal of my analysis is first to determine a sell price. With that in mind, we attempt to buy the stock at half its sell price and then hold it for 5 years (provided that no macro- economic negative catalysts force us to sell). Due to the fact that we bought it at par, we can potentially achieve an average annualized return of 15% per year. This may enable us to double our money every 5 years. Occasionally we do find a stock that is not selling at par, but is actually selling at a discount. When this happens, gains are usually higher, as exemplified by our investment in AAR Corp (AIR).
Analysis of Exxon Mobil
Oil prices have been rising recently and I thought that this would be a good time to see how Exxon Mobil (XOM) stacks up to our analysis. The following is the table housing XOM’s Owners Earnings data;
XOM’s closing price on December 23rd was $73.20 and its OE per share for 2009 came in at $1.84, which would give us a Price to OE of 39.78. I usually sell stocks that hit 30 times their P/OE, especially when OE per share fell off the cliff like it did in XOM’s case, dropping from $7.70 to $1.84 in just one year. If this happened in a tech company or pharmaceutical firm, I would have run away from the stock as fast as I could but with oil stocks you have a commodity based company and thus you have to factor cyclicality into your model.
The way you do that is look to future OE and we do this by estimating 2010 OE.
Before we do that though we will mention that the current COE for XOM is $50.55, which clearly shows that XOM has no problem generating OE over time and since we like to sell at 2.0 times a company’s COE we get $101.10 as our COE sell price;
In fact, XOM has 5.04 Billion shares outstanding and thus has generated $254.77 billion in OE from 1973 to 2009 and since they are projected to generate another $8.40 OE per share in the next two years, they should pump out another $42.74 billion in OE over the next two years. These are amazing numbers but then again everything is relative as XOM has a market capitalization of $369 billion currently.
If we use our estimate of $3.65 for OE in 2010 we have a forward Price to OE of 20.05. Our sell parameter for P/OE is 30, so our sell price here is $109.50.
As far as SIA goes our current SIA for XOM is $44.91, so it is trading currently at 1.63 times its SIA. I like to sell at 2.0, so SIA ranks XOM with a sell price of $89.82.
The following is a chart of Exxon Mobil’s SIA from 1984-today and in the last 26 years it has never hit its SIA line (Red Line) for the simple reason that it is one of the most widely held stocks in the world, is extremely well managed and is also the poster boy for "Economies of Scale."
So we now have three separate sell prices;
1) P/OE = $109.50
2) COE = $101.10
3) SIA = $ 89.82
Total = $300.42/3 = $100.14 = Sell Price
Buy Price = $50.07
Conclusion = XOM is a Strong Hold
Disclosure: Long AIR, No Position in XOM
Disclaimer:
Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
By Mycroft Psaras
GeaSphere Research Director
http://geasphere.com
877-351-4902
The three methods used in this analysis are:
1) Price to Owners Earnings (OE) = Current and future analysis
2) Cumulative Owners Earnings (COE) = Historical analysis of owners earnings
3) Statistical Indicator Analysis (SIA) = Historical price action
For those new to this analysis please link here for an introduction:
OE and COE = http://freecashflowanalyst.com/2010/12/22/-2.aspx
SIA = http://freecashflowanalyst.com/2010/12/24/an-introduction-to-statistical-indicator-analysis-sia.aspx
CapFlow = http://freecashflowanalyst.com/2010/12/22/introduction-to-the-theory-of-capflow.aspx
The main goal of my analysis is first to determine a sell price. With that in mind, we attempt to buy the stock at half its sell price and then hold it for 5 years (provided that no macro- economic negative catalysts force us to sell). Due to the fact that we bought it at par, we can potentially achieve an average annualized return of 15% per year. This may enable us to double our money every 5 years. Occasionally we do find a stock that is not selling at par, but is actually selling at a discount. When this happens, gains are usually higher, as exemplified by our investment in AAR Corp (AIR).
Analysis of Exxon Mobil
Oil prices have been rising recently and I thought that this would be a good time to see how Exxon Mobil (XOM) stacks up to our analysis. The following is the table housing XOM’s Owners Earnings data;
XOM’s closing price on December 23rd was $73.20 and its OE per share for 2009 came in at $1.84, which would give us a Price to OE of 39.78. I usually sell stocks that hit 30 times their P/OE, especially when OE per share fell off the cliff like it did in XOM’s case, dropping from $7.70 to $1.84 in just one year. If this happened in a tech company or pharmaceutical firm, I would have run away from the stock as fast as I could but with oil stocks you have a commodity based company and thus you have to factor cyclicality into your model.
The way you do that is look to future OE and we do this by estimating 2010 OE.
Before we do that though we will mention that the current COE for XOM is $50.55, which clearly shows that XOM has no problem generating OE over time and since we like to sell at 2.0 times a company’s COE we get $101.10 as our COE sell price;
In fact, XOM has 5.04 Billion shares outstanding and thus has generated $254.77 billion in OE from 1973 to 2009 and since they are projected to generate another $8.40 OE per share in the next two years, they should pump out another $42.74 billion in OE over the next two years. These are amazing numbers but then again everything is relative as XOM has a market capitalization of $369 billion currently.
If we use our estimate of $3.65 for OE in 2010 we have a forward Price to OE of 20.05. Our sell parameter for P/OE is 30, so our sell price here is $109.50.
As far as SIA goes our current SIA for XOM is $44.91, so it is trading currently at 1.63 times its SIA. I like to sell at 2.0, so SIA ranks XOM with a sell price of $89.82.
The following is a chart of Exxon Mobil’s SIA from 1984-today and in the last 26 years it has never hit its SIA line (Red Line) for the simple reason that it is one of the most widely held stocks in the world, is extremely well managed and is also the poster boy for "Economies of Scale."
So we now have three separate sell prices;
1) P/OE = $109.50
2) COE = $101.10
3) SIA = $ 89.82
Total = $300.42/3 = $100.14 = Sell Price
Buy Price = $50.07
Conclusion = XOM is a Strong Hold
Disclosure: Long AIR, No Position in XOM
Disclaimer:
Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
By Mycroft Psaras
GeaSphere Research Director
http://geasphere.com
877-351-4902
Saturday, December 25, 2010
GeaSphere
Research Analysis of Exxon Mobil (XOM)
In my last three articles I introduced the various methods that I use to analyze a company for potential purchase. The main thrust of this analysis is concentrated in three parts. The first two parts are based on free cash flow (current and historical) and the third is based on historical price action as a gauge of investor sentiment.
The three methods used in this analysis are:
1) Price to Owners Earnings (OE) = Current and future analysis
2) Cumulative Owners Earnings (COE) = Historical analysis of owners earnings
3) Statistical Indicator Analysis (SIA) = Historical price action
For those new to this analysis please link here for an introduction:
OE and COE = http://freecashflowanalyst.com/2010/12/22/-2.aspx
SIA = http://freecashflowanalyst.com/2010/12/24/an-introduction-to-statistical-indicator-analysis-sia.aspx
CapFlow = http://freecashflowanalyst.com/2010/12/22/introduction-to-the-theory-of-capflow.aspx
The main goal of my analysis is first to determine a sell price. With that in mind, we attempt to buy the stock at half its sell price and then hold it for 5 years (provided that no macro- economic negative catalysts force us to sell). Due to the fact that we bought it at par, we can potentially achieve an average annualized return of 15% per year. This may enable us to double our money every 5 years. Occasionally we do find a stock that is not selling at par, but is actually selling at a discount. When this happens, gains are usually higher, as exemplified by our investment in AAR Corp (AIR).
Analysis of Exxon Mobil
Oil prices have been rising recently and I thought that this would be a good time to see how Exxon Mobil (XOM) stacks up to our analysis. The following is the table housing XOM’s Owners Earnings data;
XOM’s closing price on December 23rd was $73.20 and its OE per share for 2009 came in at $1.84, which would give us a Price to OE of 39.78. I usually sell stocks that hit 30 times their P/OE, especially when OE per share fell off the cliff like it did in XOM’s case, dropping from $7.70 to $1.84 in just one year. If this happened in a tech company or pharmaceutical firm, I would have run away from the stock as fast as I could but with oil stocks you have a commodity based company and thus you have to factor cyclicality into your model.
The way you do that is look to future OE and we do this by estimating 2010 OE.
Before we do that though we will mention that the current COE for XOM is $50.55, which clearly shows that XOM has no problem generating OE over time and since we like to sell at 2.0 times a company’s COE we get $101.10 as our COE sell price;
In fact, XOM has 5.04 Billion shares outstanding and thus has generated $254.77 billion in OE from 1973 to 2009 and since they are projected to generate another $8.40 OE per share in the next two years, they should pump out another $42.74 billion in OE over the next two years. These are amazing numbers but then again everything is relative as XOM has a market capitalization of $369 billion currently.
If we use our estimate of $3.65 for OE in 2010 we have a forward Price to OE of 20.05. Our sell parameter for P/OE is 30, so our sell price here is $109.50.
As far as SIA goes our current SIA for XOM is $44.91, so it is trading currently at 1.63 times its SIA. I like to sell at 2.0, so SIA ranks XOM with a sell price of $89.82.
The following is a chart of Exxon Mobil’s SIA from 1984-today and in the last 26 years it has never hit its SIA line (Red Line) for the simple reason that it is one of the most widely held stocks in the world, is extremely well managed and is also the poster boy for "Economies of Scale."
So we now have three separate sell prices;
1) P/OE = $109.50
2) COE = $101.10
3) SIA = $ 89.82
Total = $300.42/3 = $100.14 = Sell Price
Buy Price = $50.07
Conclusion = XOM is a Strong Hold
Disclosure: Long AIR, No Position in XOM
Disclaimer:
Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
By Mycroft Psaras
GeaSphere Research Director
http://geasphere.com
877-351-4902GeaSphere
In my last three articles I introduced the various methods that I use to analyze a company for potential purchase. The main thrust of this analysis is concentrated in three parts. The first two parts are based on free cash flow (current and historical) and the third is based on historical price action as a gauge of investor sentiment.
The three methods used in this analysis are:
1) Price to Owners Earnings (OE) = Current and future analysis
2) Cumulative Owners Earnings (COE) = Historical analysis of owners earnings
3) Statistical Indicator Analysis (SIA) = Historical price action
For those new to this analysis please link here for an introduction:
OE and COE = http://freecashflowanalyst.com/2010/12/22/-2.aspx
SIA = http://freecashflowanalyst.com/2010/12/24/an-introduction-to-statistical-indicator-analysis-sia.aspx
CapFlow = http://freecashflowanalyst.com/2010/12/22/introduction-to-the-theory-of-capflow.aspx
The main goal of my analysis is first to determine a sell price. With that in mind, we attempt to buy the stock at half its sell price and then hold it for 5 years (provided that no macro- economic negative catalysts force us to sell). Due to the fact that we bought it at par, we can potentially achieve an average annualized return of 15% per year. This may enable us to double our money every 5 years. Occasionally we do find a stock that is not selling at par, but is actually selling at a discount. When this happens, gains are usually higher, as exemplified by our investment in AAR Corp (AIR).
Analysis of Exxon Mobil
Oil prices have been rising recently and I thought that this would be a good time to see how Exxon Mobil (XOM) stacks up to our analysis. The following is the table housing XOM’s Owners Earnings data;
XOM’s closing price on December 23rd was $73.20 and its OE per share for 2009 came in at $1.84, which would give us a Price to OE of 39.78. I usually sell stocks that hit 30 times their P/OE, especially when OE per share fell off the cliff like it did in XOM’s case, dropping from $7.70 to $1.84 in just one year. If this happened in a tech company or pharmaceutical firm, I would have run away from the stock as fast as I could but with oil stocks you have a commodity based company and thus you have to factor cyclicality into your model.
The way you do that is look to future OE and we do this by estimating 2010 OE.
Before we do that though we will mention that the current COE for XOM is $50.55, which clearly shows that XOM has no problem generating OE over time and since we like to sell at 2.0 times a company’s COE we get $101.10 as our COE sell price;
In fact, XOM has 5.04 Billion shares outstanding and thus has generated $254.77 billion in OE from 1973 to 2009 and since they are projected to generate another $8.40 OE per share in the next two years, they should pump out another $42.74 billion in OE over the next two years. These are amazing numbers but then again everything is relative as XOM has a market capitalization of $369 billion currently.
If we use our estimate of $3.65 for OE in 2010 we have a forward Price to OE of 20.05. Our sell parameter for P/OE is 30, so our sell price here is $109.50.
As far as SIA goes our current SIA for XOM is $44.91, so it is trading currently at 1.63 times its SIA. I like to sell at 2.0, so SIA ranks XOM with a sell price of $89.82.
The following is a chart of Exxon Mobil’s SIA from 1984-today and in the last 26 years it has never hit its SIA line (Red Line) for the simple reason that it is one of the most widely held stocks in the world, is extremely well managed and is also the poster boy for "Economies of Scale."
So we now have three separate sell prices;
1) P/OE = $109.50
2) COE = $101.10
3) SIA = $ 89.82
Total = $300.42/3 = $100.14 = Sell Price
Buy Price = $50.07
Conclusion = XOM is a Strong Hold
Disclosure: Long AIR, No Position in XOM
Disclaimer:
Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
By Mycroft Psaras
GeaSphere Research Director
http://geasphere.com
877-351-4902GeaSphere
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