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I find that I can eliminate most companies from consideration with just a handful of metrics. The metrics are:

  • The growth of the company’s sales.
  • The growth of the company’s earnings per share of stock outstanding.
  • The growth of the company’s market value compared to its earnings.
  • The growth of the company’s earnings before taking into account interest and taxes.
  • The value of the company compared to its earnings as compared to other similar companies.
  • The productivity of the company employees relative to industry averages.

I explain how to find these metrics in my book, “The Confident Investor” which is for sale in paperback format or ebook format wherever books are sold.

There are other metrics that are important but for one reason or another I do not actively analyze them. For the most part, I find that these other important metrics tend to be reflected directly into one of the above values or in the price of the stock.

Dividend Rate or Dividend Yield – The dividend that a company pays is almost always completely reflected in the price of the stock. If the company raises the dividend then the stock price goes up a similar amount. If the divided is cut, it drops (sometimes even farther than it should). Also, I have seen too many investors stay with a company that pays a high dividend as the stock price drops 25% because of poor performance of the fundamentals of the company. This is penny-wise and pound foolish.  Finally, in my opinion, dividends mean the company cannot figure out a great way to use the cash to grow their business and reduce costs. Companies that are 3rd or 4th in market share that issue dividends show a lack of management effectiveness.

Beta – I really don’t think this matters too much. My system makes money when stocks go up and down. If a stock goes consistently up then I make more money.

Forward P/E – This number is a guess on what the price and earnings will be in the future. I would rather look at what the company’s management has accomplished in the past than on a guess for the future.

Return on Equity, Assets, or Capital – I actually do look at these values before I pull the trigger on a new investment.  I want to see a good return here but I may not change my mind. I also don’t really care what the ROE/A/C is 3 or 4 years ago.  Most of the metrics that I track, I want to improve over 10 years.

Debt to Equity – I casually look at this number but I have never disqualified a company because of it. I am far more worried about consistent growth of revenue and profit. If revenue and profit are growing at 10% or better over 10 years then this value will almost always be fine.

Revenue / Share – This number gets covered fairly adequately in watching the revenue top line. Dividing revenue by shares outstanding is a management game and not really relevant for analyzing the health of the company. As the management team buys back shares this gets reflected in the stock price which is the most important metric.

Institutional Ownership – I am not sure why anyone would buy or not buy a stock based on this number.  What does it matter? If the number is really high that means that professional and trained money managers like the company. If the number is lower than it is usually because the company has a good brand name and individual investors buy it because they think it is cool. Either way, it is rarely the fault of the company as to this number.

Free Cash Flow – A lot of people look at this number. It is important. Of all the metrics that I don’t put on my scorecard, I think this is the most valuable. However, since it is based on EBIT and profit to some degree I feel that it sufficiently is reflected in the metrics that I specifically cover.  Also, I am not convinced that FCF needs to increase consistently over time like the metrics that I monitor. I will occasionally not invest in a company that has poor FCF but passes my other metrics.

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Company name Choice Hotels International, Inc.
Stock ticker CHH
Live stock price [stckqut]CHH[/stckqut]
P/E compared to competitors Good

MANAGEMENT EXECUTION

Employee productivity Good
Sales growth Poor
EPS growth Fair
P/E growth Poor
EBIT growth Poor

ANALYSIS

Confident Investor Rating Poor
Target stock price (TWCA growth scenario) $22.57
Target stock price (averages with growth) $26.15
Target stock price (averages with no growth) $26.55
Target stock price (manual assumptions) $23.84

The following company description is from Google Finance: http://www.google.com/finance?q=chh

Choice Hotels International, Inc. is a hotel franchisor. As of December 31, 2011, the Company had franchise agreements representing 6,178 open hotels and 490 hotels under construction, awaiting conversion or approved for development in 49 states, the District of Columbia and over 35 countries and territories outside the United States under the brand names: Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Suburban Extended Stay Hotel, Cambria Suites and Ascend Collection. The Company’s domestic operations are conducted solely through direct franchising relationships, while its international franchise operations are conducted through a combination of direct franchising and master franchising relationships. The Company operates primarily as a hotel franchisor offering 11 brands.

 

Confident Investor comments: At this price and at this time, I do not think that a Confident Investor can confidently invest in this stock.

 

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Company name AutoZone, Inc.
Stock ticker AZO
Live stock price [stckqut]AZO[/stckqut]
P/E compared to competitors Fair

MANAGEMENT EXECUTION

Employee productivity Fair
Sales growth Poor
EPS growth Good
P/E growth Fair
EBIT growth Fair

ANALYSIS

Confident Investor Rating Fair
Target stock price (TWCA growth scenario) $329.76
Target stock price (averages with growth) $440.89
Target stock price (averages with no growth) $370.78
Target stock price (manual assumptions) $340.2

The following company description is from Google Finance: http://www.google.com/finance?q=azo

AutoZone, Inc. (AutoZone) is a retailer and a distributor of automotive replacement parts and accessories in the United States. As of August 25, 2012, AutoZone operated 4,685 stores in the United States, including Puerto Rico, and 321 in Mexico. The Company operates in two segments: Auto Parts Stores and Other. The Auto Parts Stores segment is a retailer and distributor of automotive parts and accessories through the Company’s 5,006 stores in the United States, Puerto Rico, and Mexico. The Other category reflects business activities that are not separately reportable, including ALLDATA which produces, sells and maintains diagnostic and repair information software used in the automotive repair industry, and e-Commerce, which includes direct sales to customers through www.autozone.com. During the fiscal year ended August 25, 2012 (fiscal 2012), the Company opened 193 stores and relocated 10 stores.

 

 

Confident Investor comments: At this time, I think that a Confident Investor can cautiously invest in this stock as long as the price is correct. Most of the fundamentals of this company are good but there are some concerns.

 

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KrantCents had a short article recently discussing the goal of having a savings goal. It was a great article and I suggest that you click over and read it here.

People often ask me how to get started in investing. My first question always is, “Can you afford it?”

The reality is that you need to have at least 3 months of income saved in a very safe and accessible account before you invest any money. All of your investment money needs to be above and beyond that savings level. In tough times where your job may be at risk then you may actually want to increase this amount to 6 months.

Obviously, 3 months of your income is 25% of your annual take home pay. This means it will take 2.5 years to set aside this level of savings if you save 10% of every paycheck. Your interest during this time is negligible since your account will be very conservative and therefore not giving a great yield (it is unfortunate that savings accounts approach 0% in this economy).

So click over to KrantCents to learn how to set a savings goal and set that goal for 25% of your annual pay so that you can start investing in your future.

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Company name Ann Inc
Stock ticker ANN
Live stock price [stckqut]ANN[/stckqut]
P/E compared to competitors Good

MANAGEMENT EXECUTION

Employee productivity Fair
Sales growth Poor
EPS growth Good
P/E growth Poor
EBIT growth Good

ANALYSIS

Confident Investor Rating Fair
Target stock price (TWCA growth scenario) $38.12
Target stock price (averages with growth) $39.7
Target stock price (averages with no growth) $24.62
Target stock price (manual assumptions) $37.06

The following company description is from Google Finance: http://www.google.com/finance?q=ann

ANN INC., through its wholly owned subsidiaries, is a specialty retailer of women’s apparel, shoes and accessories sold primarily under the Ann Taylor and LOFT brands. The Company’s Ann Taylor and LOFT brands offers a range of career and casual separates, dresses, tops, weekend wear, shoes and accessories. It offers updated past season sellers from the Ann Taylor and LOFT merchandise collections at its Ann Taylor Factory and LOFT Outlet stores, respectively, and the clients can also shop online at www.anntaylor.com and www.LOFT.com (together, Online Stores), or by phone at 1-800-DIAL-ANN and 1-888-LOFT-444. As of January 28, 2012, it operated 953 retail stores in 46 states, the District of Columbia and Puerto Rico, consisted of 280 Ann Taylor stores, 500 LOFT stores, 99 Ann Taylor Factory stores and 74 LOFT Outlet stores.

 

Confident Investor comments: At this time, I think that a Confident Investor can cautiously invest in this stock as long as the price is correct. Most of the fundamentals of this company are good but there are some concerns.